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 THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended: September 30, 2009




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




For the
transition period from ____________ to _____________




Commission
File Number:   333-83125




YUHE INTERNATIONAL,
INC.


(Exact
name of Registrant as Specified in its Charter)




Nevada
                    
                    33-0215298(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (I.R.S.
      Employer Identification.
No.)




301
Hailong Street


Hanting
District, Weifang, Shandong Province


The
People’s Republic of China


(Address
of principal executive offices)




86
536 736 3688


(Registrant’s
Telephone Number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months or
for such shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90
days.




Yes 
 ̈   No x




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 (§232.405 of this
chapter) 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 “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one)




Large
accelerated filer  ̈
 Accelerated filer  ̈
  Non-accelerated filer   ̈


Smaller
reporting company x




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




Yes 
o  
No  x




The
number of shares outstanding of each of the issuer’s classes of common equity,
as of September 30, 2009 is as follows:




Class of Securities
                    
                    Shares OutstandingCommon
      Stock, $0.001 par value
                    
                    15,722,180









TABLE
OF CONTENTS




PagePART
      I FINANCIAL INFORMATIONItem
      1.
                Condensed
      Financial Statements
                3Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                4Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                18Item
      4T.
                Controls
      and Procedures
                18PART
      II OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                20Item
      1A.
                Risk
      Factors
                20Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds.
                20Item
      3.
                Defaults
      Upon Senior Securities
                21Item
      4.
                Submission
      of Matters to a Vote of Securities Holders
                21Item
      5.
                Other
      Information
                21Item
      6.
                Index
      to Exhibits
                22Signatures
                
                23Certifications
                
                24




2




PART
I


FINANCIAL
INFORMATION




ITEM
1. CONDENSED FINANCIAL STATEMENTS.




Index
to Financial Statements




PageFinancial
      StatementsCondensed
      Consolidated Financial Statements for the Period from January 1, 2008 to
      January 31, 2008 for Weifang Yuhe Poultry Co., Ltd.
                  
                  F-1
      - F-23Condensed
      Consolidated Financial Statements for the Three and Nine Months Ended
      September 30, 2009 and 2008 for Yuhe International, Inc.
                  
                  F-24
      - F-52Unaudited
      Pro Forma Consolidated Financial Statements for Yuhe International,
      Inc.
                  
                  F-53
      - F-55




3




WEIFANG
YUHE POULTRY CO., LTD


CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS




FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008


(Stated
in US dollars)


F-1




WEIFANG
YUHE POULTRY CO., LTD


CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS




FOR THE PERIOD FROM JANUARY 1,
2008 TO JANUARY 31, 2008


(Stated
in US dollars)




PageCondensed
      Consolidated Balance Sheet - unaudited
                  
                  F-3
      to F-4Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) -
      unaudited
                  
                  F-5Condensed
      Consolidated Statements of Changes in Stockholders’ Equity -
      unaudited
                  
                  F-6Condensed
      Consolidated Statements of Cash Flows - unaudited
                  
                  F-7
      to F-8Notes
      to Condensed Consolidated Financial Statements - unaudited
                  
                  F-9
      to F-23


F-2




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED BALANCE SHEET - unaudited




AS
AT JANUARY 31, 2008




(Stated
in US Dollars)




ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                1,051,106Accounts
      receivable
                
                
                1,475Inventories
                
                
                4,624,425Advances
      to suppliers
                
                
                305,013Total
      current assets
                
                $
                5,982,019Deposits
      paid
                
                
                1,084,265Other
      receivables, net
                
                
                3,001,699Unlisted
      investments
                
                
                279,738Plant
      and equipment, net
                
                
                15,323,245Intangible
      assets, net
                
                
                2,832,869Due
      from related companies
                
                
                3,775,469Due
      from directors
                
                
                233,037Deferred
      expenses
                
                
                602,918Total
      assets
                
                $
                33,115,259LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                4,800,664Current
      portion of long-term loans
                
                
                4,383,951Loans
      payable
                
                
                1,770,862Payroll
      and payroll related liabilities
                
                
                545,565Accrued
      expenses
                
                
                473,020Advances
      from customers
                
                
                209,694Tax
      payables
                
                
                125,645Due
      to related companies
                
                
                320,913Total
      current liabilities
                
                $
                12,630,315




See
accompanying notes to condensed consolidated financial statements




F-3




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED BALANCE SHEET – unaudited (Continued)




AS
AT JANUARY 31, 2008




(Stated
in US Dollars)




Long-term
      liabilitiesLong-term
      loans
                
                $
                6,165,365Total
      liabilities
                
                $
                18,795,680Commitments
      and contingencies
                
                $
                -Minority
      interests
                
                $
                278,766STOCKHOLDERS’
      EQUITYRegistered
      capital
                
                $
                3,019,003Additional
      paid-in capital
                
                
                7,009,523Retained
      earnings
                
                
                3,058,878Accumulated
      other comprehensive income
                
                
                953,409$
                14,040,813Total
      liabilities and stockholders’ equity
                
                $
                33,115,259




See
accompanying notes to condensed consolidated financial statements




F-4




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND




COMPREHENSIVE
INCOME (LOSS) – unaudited




FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008




(Stated
in US Dollars)




Net
      revenues
                
                $
                1,491,329Cost
      of revenues
                
                
                (1,337,438
                )Gross
      profit
                
                $
                153,891Operating
      expenses:Selling
      expenses
                
                
                (28,997
                )General
      and administrative expenses
                
                
                (122,695
                )Bad
      debts recovery
                
                
                219,893Total
      operating income
                
                
                68,201Income
      from operations
                
                $
                222,092Non-operating
      (expenses) income:Other
      income
                
                
                5,604Interest
      income
                
                
                5Interest
      expenses
                
                
                (86,167
                )Total
      other (expenses)
                
                
                (80,558
                )Income
      before income taxes
                
                $
                141,534Income
      taxes
                
                
                -Net
      income before minority interests
                
                $
                141,534Minority
      interests (earnings)
                
                
                (73,398
                )Net
      income
                
                $
                68,136Other
      comprehensive income
                
                
                -Foreign
      currency translation adjustment
                
                
                201,390Comprehensive
      income
                
                $
                269,526




See
accompanying notes to condensed consolidated financial statements




F-5




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY –
unaudited




FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008




(Stated
in US Dollars)




AccumulatedAdditional
                        
                        
                        
                        
                        
                        OtherRegistered
                        
                        
                        paid-in
                        
                        
                        Retained
                        
                        
                        Comprehensivecapital
                        
                        
                        capital
                        
                        
                        earnings
                        
                        
                        Income
                        
                        
                        TotalBalance,
      January 1, 2008
                        
                        $
                        482,713
                        
                        
                        $
                        7,009,523
                        
                        
                        $
                        2,990,742
                        
                        
                        $
                        752,019
                        
                        
                        $
                        11,243,997Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        68,136
                        
                        
                        
                        -
                        
                        
                        
                        68,136Injection
      of additional capital from Bright Stand (Note
12)
                        
                        
                        2,536,290
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,536,290Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        201,390
                        
                        
                        
                        201,390Balance,
      January 31, 2008
                        
                        $
                        3,019,003
                        
                        
                        $
                        7,009,523
                        
                        
                        $
                        3,058,878
                        
                        
                        $
                        953,409
                        
                        
                        $
                        14,040,813




See
accompanying notes to condensed consolidated financial
statements


F-6




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS




FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008 – unaudited




(Stated
in US Dollars)




Cash
      flows from operating activitiesNet
      income
                
                $
                68,136Adjustments
      to reconcile net income to net cash used in operating
      activitiesDepreciation
                
                
                121,213Amortization
                
                
                5,200Minority
      interests
                
                
                73,398Change
      in assets and liabilitiesAdvances
      to suppliers
                
                
                212,910Prepaid
      expenses
                
                
                64,556Deposits
      paid
                
                
                111,147Inventories
                
                
                (607,144
                )Deferred
      expenses
                
                
                (41,232
                )Accounts
      payable
                
                
                (768,683
                )Payroll
      and payroll related liabilities
                
                
                (304,784
                )Accrued
      expenses
                
                
                104,606Advances
      from customers
                
                
                15,465Other
      tax payables
                
                
                (9,266
                )Net
      cash used in operating activities
                
                $
                (954,478
                )Cash
      flows from investing activitiesDeposits
      paid and acquisition of property, plant & equipment
                
                $
                (206,700
                )Decrease
      in other receivables
                
                
                (238,310
                )Advances
      from related parties receivables
                
                
                2,321,943Net
      cash provided by investing activities
                
                $
                1,876,933


F-7




WEIFANG
YUHE POULTRY CO., LTD




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited (Continued)




FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008




(Stated
in US Dollars)




Cash
      flows from financing activitiesRepayments
      of loan payables
                
                $
                (1,555,807
                )Proceeds
      from capital contributions
                
                
                2,536,290Repayment
      to related parties
                
                
                (900,140
                )Net
      cash provided by financing activities
                
                $
                80,343Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                853Increase
      in cash and cash equivalents
                
                
                1,003,651Cash
      and cash equivalents-beginning of period
                
                
                47,455Cash
      and cash equivalents-end of period
                
                $
                1,051,106Supplementary
      cash flow information:Interest
      paid in cash
                
                $
                180




See
accompanying notes to condensed consolidated financial statements




F-8




WEIFANG
YUHE POULTRY CO., LTD




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(Stated
in US Dollars)




1.      Organization
and principal activities




Weifang
Yuhe Poultry Co., Ltd, “the Company”, was established in Weifang, Shandong of
the People’s Republic of China, the PRC, as a limited company on March 8, 1996.
The Company currently operates through itself and one subsidiary located in
Mainland China: Weifang Taihong Feed Co., Ltd., “Taihong”.




Taihong
was established in Weifang, Shandong of the People’s Republic of China, the PRC,
as a limited company on May 26, 2003. Pursuant to a group reorganization on
September 14, 2007, the Company became the holding company of
Taihong.




The
Company and its subsidiary (hereinafter, collectively referred to as “the
Group”) are engaged in the business of chick and feed production.




2.      Summary
of significant accounting policies




(a)     Method
of Accounting




The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company's functional currency is the Chinese Renminbi; however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).




(b)     Principles of
consolidation




The
consolidated financial statements are presented in US Dollars and include the
accounts of the Company, Taihong, a subsidiary which the company has a 56.25%
ownership. All significant inter-company balances and transactions are
eliminated in consolidation.




The
Company acquired its subsidiary on September 14, 2007 through a reorganization
between entities under common control. Accordingly, the transaction was
accounted for similar to a pooling of interests in accordance with SFAS 141
“Business Combination” Appendix D and is presented as if it had occurred at the
beginning of the first period presented. The following table depicts the
identity of the subsidiary:




Name of Company
                        
                        Place & date of
                          Incorporation
                        
                        Attributable Equity
                          Interest %
                        
                        
                        Registered
                          CapitalWeifang
      Taihong Feed Co., Ltd.
                        
                        PRC/
                          May
      26 2003
                        
                        
                        56.25
                        
                        
                        $
                        965,379
                        
                        (RMB8,000,000)




(c)     Use
of estimates




The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
could differ materially from those estimates.




F-9




WEIFANG
YUHE POULTRY CO., LTD




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(Stated
in US Dollars)




2.      Summary
of significant accounting policies (Continued)




(d)     Economic and
political risks




The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.




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




(e)     Plant
and equipment




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




Buildings
              20
      yearsMachinery
              10
      yearsVehicle
              5
      yearsFurniture
      and equipment
              3
      years




The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.




(f)      Intangible
assets




Intangible
assets represent land use rights in the PRC. Land use rights are carried at cost
and amortized on a straight-line basis over the period of rights of 50 years
commencing from the date of acquisition of equitable interest. According to the
laws of the PRC, the government owns all of the land in the PRC. Companies or
individual are authorized to possess and use the land only through land usage
rights approved by the PRC government.




F-10




WEIFANG
YUHE POULTRY CO., LTD




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(Stated
in US Dollars)




2.      Summary of significant accounting policies
(Continued)




(g)     Guarantee
Expense




The
Company accounts for its liability for product guaranteed in accordance with
FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” Under FIN 45, the aggregate changes in the liability for accruals
related to product warranties issued during the reporting period must be charged
to expense as incurred.




The
Company guarantees a 98% survival rate of its product by delivering additional
2% of the product. The guarantee expires seven days after delivery. If the
survival rate falls below 96%, the Company provides additional guarantee
compensation to customers. Based on historical experience, the likelihood that
survival rate falls below 96% is remote and therefore no accrued guarantee
liability was recorded at period end. The Company records guarantee expense as
incurred. There was no guarantee expense for the period from January 1, 2008 to
January 31, 2008.




(h)     Accounting
for the impairment of long-lived assets




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




If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During the reporting
periods, there was no impairment loss.




(i)      Inventories




Inventories
consisting of raw materials, work in progress and finished goods are stated at
lower of cost or net realizable value. The cost of inventories is determined
using weighted average cost method, and includes expenditure incurred in
acquiring the inventories and bringing them to their existing location and
condition. Net realizable value is the estimated selling price in the ordinary
course of business less any applicable selling expenses. Finished goods are
comprised of direct materials, direct labor and an appropriate proportion
of overhead. At each balance sheet date, inventories that are worth less
than cost are written down to their net realizable value, and the difference is
charged to the cost of revenues of that period.




(j)      Trade
receivables




Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Management
adopted an allowance policy which provides an allowance equivalent to 30% gross
amount of accounts receivables due over 6 months and 60% of gross amount of
accounts receivables due over 1 year. Full provision will be made for accounts
receivables due over 2 years. Bad debts are written off as incurred. It is a
common industry practice in the PRC that customers pay in advance before
delivery of the products. As a result, the Company maintains a low level of
trade receivables.


F-11




WEIFANG
YUHE POULTRY CO., LTD




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(Stated
in US Dollars)




2.      Summary
of significant accounting policies (Continued)




(k)     Cash and
cash equivalents




The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America. Cash deposits in PRC banks are not insured by
any government agency or entity.




(l)      Revenue
recognition




Revenue
from sales of the Company's products is recognized when the significant risks
and rewards of ownership have been transferred to the third-party distributor
and larger producers at the time when the products are delivered to and accepted
by them, the sales price is fixed or determinable as stated in the sales
contract, and collection is reasonably assured.




(m)    Cost of
revenues




Cost of
revenues consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower of cost or market is
also recorded in cost of revenues.




(n)    Advertising




The Group
expensed all advertising costs as incurred. There was no advertising expenses
for the period from January 1, 2008 to January 31, 2008.




(o)    Retirement
benefit plans




The
employees of the Group are members of a state-managed retirement benefit plan
operated by the government of the PRC. The Group is required to contribute a
specified percentage of payroll costs to the retirement benefit scheme to fund
the benefits. The only obligation of the Group with respect to the retirement
benefit plan is to make the specified contributions.




Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement benefit expenses for the period from January 1, 2008 to
January 31, 2008 were $5,843.




F-12


WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 2.
              Summary
      of significant accounting policies
(Continued)
 
 (p)
              Income
      tax
 
 The
Company accounts for income taxes using an asset and liability approach and
allows for recognition of deferred tax benefits in future years. Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
 
 The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 25%. However, the
Company is a poultry company, and in accordance with the relevant regulations
regarding the favorable tax treatment for an outstanding poultry company, the
Company is entitled to a tax free treatment until January 31, 2008.
 
 The
corporate income tax for the subsidiary, Weifang Taihong Feed Co., Ltd is
25%.
 
 (q)
              Shipping
      and handling fees
 
 Shipping
and handling fees are expensed when incurred. Shipping and handling charges
included in the selling expenses for the period from January 1, 2008 to January
31, 2008 was $5,330.
 
 (r)
              Minority
      interests
 
 Minority
interests refer to the 43.75% investment by third parties in the equity of
Taihong and are not held by the Company.
 
 (s)
              Foreign
      currency translation
 
 The
accompanying financial statements are presented in United States dollars. The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
 
 January
      31, 2008Balance
      sheet
                    RMB 
      7.20180 to US$1.00Statement
      of income and comprehensive income
                    RMB 
      7.25883 to US$1.00
 
 The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
  F-13
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 2.
              Summary
      of significant accounting policies
(Continued)
 
 (t)
              Comprehensive
      income
 
 Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of comprehensive income is the
foreign currency translation adjustment.
 
 (u)
              Fair
      value of financial instruments
 
 SFAS No.
107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”)
requires entities to disclose the fair values of financial instruments except
when it is not practicable to do so. Under SFAS No. 107, it is not practicable
to make this disclosure when the costs of formulating the estimated values
exceed the benefit when considering how meaningful the information would be to
financial statement users.
 
 The fair
values of all assets and liabilities do not differ materially from their
carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes during
the period for January 1, 2008 to January 31, 2008.
 
 (v)
              Recent
      accounting pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No.
141R”). SFAS No. 141R amends SFAS 141 and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. It is effective
for fiscal years beginning on or after December 15, 2008 and will be applied
prospectively. The Company is currently evaluating the impact of adopting SFAS
No. 141R on its consolidated financial statements.
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that ownership
interests in subsidiaries held by parties other than the parent, and the amount
of consolidated net income, be clearly identified, labeled, and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. It is effective for fiscal years
beginning on or after December 15, 2008 and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements shall be applied prospectively. The Company is currently
evaluating the impact of adopting SFAS No. 160 on its consolidated financial
statements.
  F-14
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 3.
              Inventories
 
 Inventories
consist of the following:
 
 Raw
      materials
                  
                  $
                  706,405Work
      in progress
                  
                  
                  3,870,136Finished
      goods
                  
                  
                  47,884$
                  4,624,425
 
 4.
              Other
      receivables, net
 
 Other
receivables, net consist of the following:
  Loan
      receivables
                  
                  $
                  3,234,413Other
      receivables
                  
                  
                  230,459Less:
      Allowances
                  
                  
                  (436,173
                  )$
                  3,001,699
 
 Other
receivables are unsecured, interest free and have no fixed repayment
date.
 
 Recovery
of bad debts of other receivable for the period ended January 31 2008 included
in other income $61,368.
 
 Allowance
is made when collection of the full amount is no longer probable. Management
reviews and adjusts this allowance periodically based on historical experience,
current economic climate as well as its evaluation of the collectibility of
outstanding accounts. The Group evaluates the credit risks of its customers
utilizing historical data and estimates of future performance.
  F-15
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 5.
              Unlisted
      investments
 
 Unlisted
investments at January 31, 2008 are the 3% investments in Hanting Rural Credit
Cooperative, “Hanting”. It is stated at cost because the Group does not have
significant influence or control over this investment. The management of the
Company has reviewed the investment in Hanting for any impairment and determined
there is no indication that the carrying amount of Hanting may not be
recoverable.
 
 6.
              Plant
      and equipments, net
 
 Plant and
equipment consists of the following:
  At
      costBuildings
                  
                  $
                  9,849,070Machinery
                  
                  
                  5,408,153Motor
      vehicles
                  
                  
                  432,291Furniture
      and equipment
                  
                  
                  276,570$
                  15,966,084Less:
      accumulated depreciation
                  
                  
                  (5,063,219
                  )Construction
      in progress
                  
                  
                  4,420,380$
                  15,323,245
 
 Depreciation
expenses included in the cost of sales during the period from January 1, 2008 to
January 31, 2008 was $83,448, and included in the general and administrative
expenses for the period ended January 31, 2008 was $37,765.
 
 As of
January 31, 2008, buildings and machinery of the Group were pledged as
collateral under certain loan arrangements.
 
 There was
no interest capitalized for the construction in progress during the period from
January 1, 2008 to January 31, 2008.
  F-16
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 7.
              Intangible
      assets, net
 
 Intangible
assets consist of the following:
  Land
      use rights, at cost
                  
                  $
                  3,117,798Less:
      accumulated amortization
                  
                  
                  284,929$
                  2,832,869
 
 As of
January 31, 2008, land use rights of the Group were pledged as collateral under
certain loan arrangements.
 
 Amortization
expense included in the cost of revenues during the period from January 1, 2008
to January 31, 2008 was $5,200.
 
 8.
              Due
      from related companies
  Hefeng
      Green Agriculture Co., Ltd, “Hefeng Green ”  - Mr. Gao
      Zhentao, a director of the Company is also a director of Hefeng
      Green
                        
                        $
                        72,263Shandong
      Yuhe Food Group Co., Ltd, “Yuhe Group” - Mr. Gao Zhentao, a
      director of the Company is also a directorof Yuhe
    Group
                        
                        
                        3,653,930Shandong
      Yuhe New Agriculture Academy of Sciences, “Shandong Yuhe” - Mr. Gao
      Zhentao, a director of the Company is also a director of
      Shandong Yuhe
                        
                        
                        49,251Weifang
      Jiaweike Food Co., Ltd, “Weifang Jiaweike” - Mr. Gao Zhentao, a
      director of the Company is also a director of Weifang
      Jiaweike
                        
                        
                        25$
                        3,775,469
 
 The
amounts due from related companies are unsecured, interest free and have no
fixed repayment date.
  F-17
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 9.
              Due
      from directors
 
 Details
of due from directors are as follows:
  Mr.
      Tan Yi
                  
                  $
                  79,491Mr.
      Gao Zhenbo
                  
                  
                  78,091Mr.
      Gao Zhentao
                  
                  
                  75,455$
                  233,037
 
 The
amounts due from directors are unsecured, interest free and have no fixed
repayment date.
 
 10.
              Loan
      payable
 
 Loans
payable are loans from unrelated companies for temporary fund for operation
purposes. They are unsecured, interest free and have no fixed repayment
date.
 
 11.
              Due
      to related companies
  Weifang
      Hexing Breeding Co., Ltd, "Weifang Hexing" - Mr. Gao Zhentao, a
      director of the Company is also a director of Weifang
      Hexing
                    
                    $
                    301,965Shandong
      Yuhe Food Group Co., Ltd, "Yuhe Group" - Mr. Gao
      Zhentao, a director of the Company is also a director Yuhe
      Group
                    
                    
                    18,948$
                    320,913
 
 The
amounts due to related companies are unsecured, interest free and have no fixed
repayment date. These loans are used for working capital purposes.
 
 Bright
Stand is the legal and accounting acquirer of the Group. Bright Stand becomes
the sole shareholder of the company after January 31, 2008 business
combination.
  F-18
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 12.
              Registered
      capital
 
 As of
January 31, 2008, capital contributions paid-up amounted to $3,019,003 (RMB
22,224,004).
 
 Prior to
the effective closing date of the acquisition transaction as discussed in Note
19, Bright Stand International Limited contributed $2,536,290 additional capital
to the Company for working capital purposes.
 
 13.
              Long-term
      liabilities
 
 The
long-term liabilities are denominated in Chinese Renminbi and are presented in
US dollars as follows:
  Loans
      from Nansun Rural Credit, interest rate at 9.22% to 10.51% per
      annum, due from Nov 28, 08 to May 17, 10
                    
                    $
                    8,350,383Loans
      from Shuangyang Rural Credit, interest rate at 9.33% per annum, due
      on Oct 12, 08
                    
                    
                    904,625Loans
      from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 9.22%
      to 13.31% per annum, due from Nov 28, 08 to Jan 10,
09
                    
                    
                    1,015,963Loans
      from Hanting Rural Credit Cooperative, interest rate at 8.19% per annum,
      due from Nov 8, 09
                    
                    
                    278,34510,549,316Less:
      current portion of long-term  liabilities
                    
                    
                    (4,383,951
                    )6,165,365
 
 Future
maturities of long-term loans as at January 31, 2008 are as
follows:
  Remainder
      of 2008
                  
                  $
                  4,383,9512009
                  
                  
                  2,686,0402010
                  
                  
                  3,479,326$
                  10,549,317
  F-19
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 14.
              Income
      tax
 
 The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 25%. However, the
Company is an agricultural company, and in accordance with the relevant
regulations regarding the tax exemption, the Company is tax-exempt as long as it
is registered as an agricultural entity.
 
 Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is 25%.
 
 The Group
uses the asset and liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. There are no material timing differences and
therefore no deferred tax asset or liability at January 31, 2008
 
 The
provision for income taxes consists of the following:
  Current
      taxPRC
                  
                  $
                  -Deferral
      tax provision
                  
                  
                  -$
                  -
 
 All of
the Group’s income (loss) before income taxes is from PRC sources. Actual income
tax expenses reported in the consolidated statements of income and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 25% to income (loss) before income taxes during the period from January
1, 2008 to January 31, 2008 for the following reasons:
  Income
      before income taxes
                  
                  $
                  141,534Computed
      “expected” income tax expense at 25%
                  
                  $
                  35,384Tax
      effect on net taxable temporary differences
                  
                  
                  (41,942
                  )Effect
      of cumulative tax losses and tax holiday
                  
                  
                  6,558$
                  -
  F-20
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 15.
              Related
      parties transactions
 
 The
following material transactions with related parties during the years were in
the opinion of the directors, carried out in the ordinary course of business and
on normal commercial terms:
  Sales
      of goods to a related company
                  
                  $
                  695,851
 
 Sales to
Weifang Hexing Breeding Co., Ltd, a related company, during the period from
January 1, 2008 to January 31, 2008.
 
 During
2008, Weifang Jiaweike Food Co., Ltd. was disposed of to the Weifang Hexing
Breeding Co., Ltd, a related company where Mr. Gao Zhentao, a director of
the Company is also the director. (note 5)
 
 16.
              Significant
      concentrations and risk
 
 (a)
              Customer
      Concentrations
 
 The Group
has the following concentrations of business with each customer constituting
greater than 10% of the Company’s gross sales:
  Wang
      Jianbo
                    
                    
                    24.89
                    %Wei
      Yunchao
                    
                    
                    22.10
                    %Li
      Yubo
                    
                    
                    18.03
                    %
 
 The Group
has not experienced any significant difficulty in collecting its accounts
receivable in the past and is not aware of any financial difficulties being
experienced by its major customers.
 
 The Group
has the following concentrations of business with each supplier constituting
greater than 10% of the Company’s gross purchases:
  Ma
      Suping
                      
                      
                      15.94
                      %Lu
      Xingzhong
                      
                      
                      10.20
                      %
 
 (b)
              Credit
      Risk
 
 Financial
instruments that potentially subject the Group to significant concentration of
credit risk consist primarily of cash and cash equivalents. As of January 31,
2008, substantially all of the Group’s cash and cash equivalents were held by
major financial institutions located in the PRC, which management believes are
of high credit quality.
  F-21
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 16.
              Significant
      concentrations and risk (Continued)
 
 (c)
              Group’s
      operations are in China
 
 All of
the Group’s products are produced in China. The Group’s operations are subject
to various political, economic, and other risks and uncertainties inherent in
China. Among other risks, the Group’s operations are subject to the risks of
transfer of funds; domestic and international customs and tariffs; changing
taxation policies; foreign exchange restrictions; and political conditions
and governmental regulations.
 
 17.
              Business
      and geographical segments
 
 The
Company’s operations are classified into two principal reportable segments that
provide different products or services.  Weifang is engaged in the business
of chick while Taihong is engaged in the business of feed production, in which
most of the product were used internally.  Separate management of each
segment is required because each business unit is subject to different
production and technology strategies.
 
 Reportable
Segments
  Production
                          of chick
                        
                        
                        Production
                          of feeds
                        
                        
                        TotalExternal
      revenue
                        
                        
                        1,443,425
                        
                        
                        
                        47,904
                        
                        
                        
                        1,491,329Intersegment
      revenue
                        
                        
                        
                        
                        
                        
                        737,602
                        
                        
                        
                        737,602Interest
      income
                        
                        
                        5
                        
                        
                        
                        -
                        
                        
                        
                        5Interest
      expense
                        
                        
                        (34,819
                        )
                        
                        
                        (51,348
                        )
                        
                        
                        (86,167
                        )Depreciation
      and amortization
                        
                        
                        116,071
                        
                        
                        
                        10,342
                        
                        
                        
                        126,413Net
      profit (loss) after tax
                        
                        
                        (26,232
                        )
                        
                        
                        167,766
                        
                        
                        
                        141,534AssetsExpenditures
      for long-lived assets
                        
                        
                        206,176
                        
                        
                        
                        524
                        
                        
                        
                        206,700
 
 Note:
Intersegment revenue of $737,602 was eliminated in
consolidation.
  F-22
 
 WEIFANG
YUHE POULTRY CO., LTD
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Stated
in US Dollars)
 
 18.
              Commitments
      and contingencies
 
 Operating
Leases - In the normal course of business, the Company leases the land
for hen house under operating lease agreements. The Company rents land,
primarily for the feeding of the chickens. The operating lease agreements
generally contain renewal options that may be exercised at the Company's
discretion after the completion of the base rental terms. The Company was
obligated under operating leases requiring minimum rentals as
follows:
  Up
      to January 31,2008
                  
                  $
                  134,3192009
                  
                  
                  146,5302010
                  
                  
                  135,0492011
                  
                  
                  77,6482012
                  
                  
                  77,648Thereafter
                  
                  
                  1,444,031Total
      minimum lease payments
                  
                  $
                  2,015,225
 
 During
the period for January 1, 2008 to January 31, 2008, rent expenses amounted to
$22,432 was recorded as cost of sales.
 
 19.
              Subsequent
      Events
 
 In
January 31, 2008, Bright Stand International Limited, Bright Stand, a company
incorporated in the British Virgin Islands, acquired 100% equity ownership
of the Company and 43.75% equity ownership of Taihong for cash
consideration equal to the appraised fair market value of the Company in the
amount of $11,306,522, or RMB 81,450,000, and $312,530, or RMB 2,244,000.
As a result, the Company and Taihong became wholly-owned subsidiaries
of Bright Stand.
  F-23
 
 YUHE
INTERNATIONAL, INC.
 
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
  F-24
 
 YUHE
INTERNATIONAL, INC.
 
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
 Index to
condensed consolidated financial statements
 
 PageCondensed
      Consolidated Balance Sheets – unaudited
                  
                  F-26Condensed
      Consolidated Statements of Income and Comprehensive Income –
      unaudited
                  
                  F-27Condensed
      Consolidated Statements of Cash Flows – unaudited
                  
                  F-28
      - F-29Notes
      to Unaudited Condensed Consolidated Financial Statements
                  
                  F-30
      - F-52
  F-25


YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED BALANCE SHEETS


(Stated
in US Dollars)




September 30,
                                            
                                            
                                            December 31,2009
                                            
                                            
                                            2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            22,036,550
                                            
                                            
                                            $
                                            13,412,205Accounts
      receivable, net of allowances of $18,847 and $18,845
                                            
                                            
                                            919
                                            
                                            
                                            
                                            902Prepaid
      expenses
                                            
                                            
                                            11,622
                                            
                                            
                                            
                                            -Inventories
                                            
                                            
                                            5,985,164
                                            
                                            
                                            
                                            6,644,961Advances
      to suppliers
                                            
                                            
                                            1,485,248
                                            
                                            
                                            
                                            661,138Total
      current assets
                                            
                                            
                                            29,519,503
                                            
                                            
                                            
                                            20,719,206Plant
      and equipment, net
                                            
                                            
                                            26,584,622
                                            
                                            
                                            
                                            27,112,276Deposits
      paid for acquisition of long term assets
                                            
                                            
                                            10,109,322
                                            
                                            
                                            
                                            6,092,359Notes
      receivable, net and other receivable, net
                                            
                                            
                                            125,636
                                            
                                            
                                            
                                            74,720Unlisted
      investments held for sale
                                            
                                            
                                            300,154
                                            
                                            
                                            
                                            299,427Intangible
      assets, net
                                            
                                            
                                            2,867,637
                                            
                                            
                                            
                                            2,909,752Due
      from related companies
                                            
                                            
                                            2,770,165
                                            
                                            
                                            
                                            3,706,589Deferred
      expenses
                                            
                                            
                                            554,922
                                            
                                            
                                            
                                            604,973Total
      assets
                                            
                                            $
                                            72,831,961
                                            
                                            
                                            $
                                            61,519,302LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                            
                                            $
                                            5,204,642
                                            
                                            
                                            $
                                            4,606,055Current
      portion of long term loans
                                            
                                            
                                            8,336,258
                                            
                                            
                                            
                                            1,356,832Other
      payables
                                            
                                            
                                            1,405,067
                                            
                                            
                                            
                                            937,535Accrued
      expenses and payroll related liabilities
                                            
                                            
                                            2,202,367
                                            
                                            
                                            
                                            2,125,587Advances
      from customers
                                            
                                            
                                            1,208,451
                                            
                                            
                                            
                                            673,528Loan
      from director
                                            
                                            
                                            292,500
                                            
                                            
                                            
                                            291,792Other
      liabilities
                                            
                                            
                                            295,053
                                            
                                            
                                            
                                            285,132Due
      to related companies
                                            
                                            
                                            5,612
                                            
                                            
                                            
                                            210,633Total
      current liabilities
                                            
                                            
                                            18,949,950
                                            
                                            
                                            
                                            10,487,094Non-current
      liabilitiesLong-term
      loans
                                            
                                            
                                            2,457,002
                                            
                                            
                                            
                                            9,410,289Total
      liabilities
                                            
                                            
                                            21,406,952
                                            
                                            
                                            
                                            19,897,383Commitments
      and contingenciesStockholders'
      EquityCommon
      stock at $.001 par value; 500,000,000 shares authorized, 15,722,180 shares
      issued and outstanding
                                            
                                            
                                            15,722
                                            
                                            
                                            
                                            15,722Additional
      paid-in capital
                                            
                                            
                                            30,489,143
                                            
                                            
                                            
                                            29,944,016Retained
      earnings
                                            
                                            
                                            19,676,639
                                            
                                            
                                            
                                            10,522,673Accumulated
      other comprehensive income
                                            
                                            
                                            1,243,505
                                            
                                            
                                            
                                            1,139,508Total
      stockholders’ equity
                                            
                                            
                                            51,425,009
                                            
                                            
                                            
                                            41,621,919Total
      liabilities and stockholders’ equity
                                            
                                            $
                                            72,831,961
                                            
                                            
                                            $
                                            61,519,302




See
accompanying notes to unaudited condensed consolidated financial
statements


F-26


YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME-
(UNAUDITED)


(Stated
in US Dollars)





For The Nine Months Ended
                                                  
                                                  
                                                  For The Three Months
                                                    EndedSeptember 30
                                                  
                                                  
                                                  September 302009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2008Net
      revenue
                                                  
                                                  $
                                                  33,956,993
                                                  
                                                  
                                                  $
                                                  16,318,263
                                                  
                                                  
                                                  $
                                                  13,208,230
                                                  
                                                  
                                                  $
                                                  9,609,781Cost
      of revenue
                                                  
                                                  
                                                  (21,926,699
                                                  )
                                                  
                                                  
                                                  (11,732,602
                                                  )
                                                  
                                                  
                                                  (8,042,920
                                                  )
                                                  
                                                  
                                                  (7,089,355
                                                  )Gross
      profit
                                                  
                                                  
                                                  12,030,294
                                                  
                                                  
                                                  
                                                  4,585,661
                                                  
                                                  
                                                  
                                                  5,165,310
                                                  
                                                  
                                                  
                                                  2,520,426Operating
      ExpensesSelling
      expenses
                                                  
                                                  
                                                  (315,372
                                                  )
                                                  
                                                  
                                                  (280,489
                                                  )
                                                  
                                                  
                                                  (113,776
                                                  )
                                                  
                                                  
                                                  (135,658
                                                  )General
      and administrative expenses
                                                  
                                                  
                                                  (2,163,639
                                                  )
                                                  
                                                  
                                                  (1,500,458
                                                  )
                                                  
                                                  
                                                  (784,402
                                                  )
                                                  
                                                  
                                                  (781,247
                                                  )Total
      operating expenses
                                                  
                                                  
                                                  (2,479,011
                                                  )
                                                  
                                                  
                                                  (1,780,947
                                                  )
                                                  
                                                  
                                                  (898,178
                                                  )
                                                  
                                                  
                                                  (916,905
                                                  )Income
      from operations
                                                  
                                                  
                                                  9,551,283
                                                  
                                                  
                                                  
                                                  2,804,714
                                                  
                                                  
                                                  
                                                  4,267,132
                                                  
                                                  
                                                  
                                                  1,603,521Non-operating
      income (expenses)Bad
      debts recovery
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  641,103
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  554,188Interest
      income
                                                  
                                                  
                                                  182
                                                  
                                                  
                                                  
                                                  4,518
                                                  
                                                  
                                                  
                                                  41
                                                  
                                                  
                                                  
                                                  63Other
      income
                                                  
                                                  
                                                  5,126
                                                  
                                                  
                                                  
                                                  98,962
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  93,062(Loss)
      gain on disposal of fixed assets
                                                  
                                                  
                                                  26,697
                                                  
                                                  
                                                  
                                                  87,588
                                                  
                                                  
                                                  
                                                  (1,081
                                                  )
                                                  
                                                  
                                                  -Investment
      income
                                                  
                                                  
                                                  15,509
                                                  
                                                  
                                                  
                                                  6,074
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Interest
      expenses
                                                  
                                                  
                                                  (441,236
                                                  )
                                                  
                                                  
                                                  (763,168
                                                  )
                                                  
                                                  
                                                  (115,809
                                                  )
                                                  
                                                  
                                                  (320,048
                                                  )Other
      expenses
                                                  
                                                  
                                                  (3,595
                                                  )
                                                  
                                                  
                                                  (56,342
                                                  )
                                                  
                                                  
                                                  (3,130
                                                  )
                                                  
                                                  
                                                  -Total
      other (expenses)
                                                  
                                                  
                                                  (397,317
                                                  )
                                                  
                                                  
                                                  18,735
                                                  
                                                  
                                                  
                                                  (119,979
                                                  )
                                                  
                                                  
                                                  327,265Net
      income before income taxes
                                                  
                                                  
                                                  9,153,966
                                                  
                                                  
                                                  
                                                  2,823,449
                                                  
                                                  
                                                  
                                                  4,147,153
                                                  
                                                  
                                                  
                                                  1,930,786Income
      taxes
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Net
      income
                                                  
                                                  $
                                                  9,153,966
                                                  
                                                  
                                                  $
                                                  2,823,449
                                                  
                                                  
                                                  $
                                                  4,147,153
                                                  
                                                  
                                                  $
                                                  1,930,786Other
      comprehensive incomeForeign
      currency translation
                                                  
                                                  
                                                  103,997
                                                  
                                                  
                                                  
                                                  1,142,354
                                                  
                                                  
                                                  
                                                  51,919
                                                  
                                                  
                                                  
                                                  73,604Comprehensive
      income
                                                  
                                                  $
                                                  9,257,963
                                                  
                                                  
                                                  $
                                                  3,965,803
                                                  
                                                  
                                                  $
                                                  4,199,072
                                                  
                                                  
                                                  $
                                                  2,004,390Earnings
      per shareBasic
                                                  
                                                  $
                                                  0.58
                                                  
                                                  
                                                  $
                                                  0.21
                                                  
                                                  
                                                  $
                                                  0.26
                                                  
                                                  
                                                  $
                                                  0.12Diluted
                                                  
                                                  $
                                                  0.57
                                                  
                                                  
                                                  $
                                                  0.20
                                                  
                                                  
                                                  $
                                                  0.26
                                                  
                                                  
                                                  $
                                                  0.12Weighted
      average shares outstandingBasic
                                                  
                                                  
                                                  15,722,180
                                                  
                                                  
                                                  
                                                  13,750,966
                                                  
                                                  
                                                  
                                                  15,722,180
                                                  
                                                  
                                                  
                                                  15,543,330Diluted
                                                  
                                                  
                                                  15,931,379
                                                  
                                                  
                                                  
                                                  13,985,255
                                                  
                                                  
                                                  
                                                  15,931,379
                                                  
                                                  
                                                  
                                                  15,989,256





See
accompanying notes to unaudited condensed consolidated financial
statements


F-27


YUHE
INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS - (UNAUDITED)


(Stated
in US Dollars)




For The Nine Months EndedSeptember 302009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      9,153,966
                      
                      
                      $
                      2,823,449Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Stock
      based compensation
                      
                      
                      545,127
                      
                      
                      
                      217,653Depreciation
                      
                      
                      1,556,610
                      
                      
                      
                      996,126Amortization
                      
                      
                      49,144
                      
                      
                      
                      42,853Bad
      debts recovery
                      
                      
                      -
                      
                      
                      
                      (641,103
                      )Gain
      on disposal of fixed assets
                      
                      
                      (26,697
                      )
                      
                      
                      (87,588
                      )Income
      from unlisted investment
                      
                      
                      -
                      
                      
                      
                      (6,074
                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (15
                      )
                      
                      
                      (25
                      )Prepaid
      expenses
                      
                      
                      (11,622
                      )
                      
                      
                      -Inventories
                      
                      
                      676,030
                      
                      
                      
                      (4,011,259
                      )Advances
      to suppliers
                      
                      
                      (868,859
                      )
                      
                      
                      (1,067,073
                      )Deferred
      expenses
                      
                      
                      51,488
                      
                      
                      
                      (17,183
                      )Accounts
      payable
                      
                      
                      586,255
                      
                      
                      
                      (331,343
                      )Other
      payables
                      
                      
                      464,785
                      
                      
                      
                      (386,548
                      )Accrued
      expenses
                      
                      
                      248,356
                      
                      
                      
                      (433,797
                      )Payroll
      and payroll related liabilities
                      
                      
                      (176,201
                      )
                      
                      
                      52,590Advances
      from customers
                      
                      
                      533,066
                      
                      
                      
                      (178,218
                      )Other
      taxes payable
                      
                      
                      9,223
                      
                      
                      
                      9,386Net
      cash provided by (used in) operating activities
                      
                      
                      12,790,656
                      
                      
                      
                      (3,018,154
                      )Cash
      flows from investing activitiesDeposit
      paid and acquisition of property, plant and equipment
                      
                      
                      (4,944,105
                      )
                      
                      
                      (11,053,497
                      )Advance
      to notes receivable
                      
                      
                      (25,282
                      )
                      
                      
                      (3,432,603
                      )Proceeds
      from disposal of fixed assets
                      
                      
                      27,778
                      
                      
                      
                      118,216Acquisition
      of subsidiaries
                      
                      
                      -
                      
                      
                      
                      (10,567,946
                      )Proceeds
      from notes receivable
                      
                      
                      -
                      
                      
                      
                      4,329,857Proceeds
      from related parties receivables
                      
                      
                      -
                      
                      
                      
                      67,216Advance
      to related companies
                      
                      
                      944,874
                      
                      
                      
                      -Net
      cash (used in) investing activities
                      
                      
                      (3,996,735
                      )
                      
                      
                      (20,538,757
                      )Cash
      flows from financing activitiesProceeds
      from loan payable
                      
                      
                      -
                      
                      
                      
                      1,300,726Repayment
      of loan payable
                      
                      
                      -
                      
                      
                      
                      (1,099,842
                      )Proceeds
      from related party payable
                      
                      
                      360,094
                      
                      
                      
                      1,106,240Repayment
      of related party payable
                      
                      
                      (570,506
                      )
                      
                      
                      (30,311
                      )Capital
      contribution by shareholder
                      
                      
                      -
                      
                      
                      
                      12,149,750Proceeds
      from common stock sale - net of offering costs
                      
                      
                      -
                      
                      
                      
                      15,359,523Net
      cash flows (used in) provided by financing activities:
                      
                      
                      (210,412
                      )
                      
                      
                      28,786,086




(Continued)


F-28


YUHE
INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS - (UNAUDITED)


(Stated
in US Dollars)




(Continued)




Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                40,836
                
                
                
                140,328Net
      increase in cash
                
                
                8,624,345
                
                
                
                5,369,503Cash-
      beginning of period
                
                
                13,412,205
                
                
                
                1,050,168Cash-
      end of period
                
                $
                22,036,550
                
                
                $
                6,419,671Cash
      paid during the period for:Interest
      paid
                
                $
                1,101,194
                
                
                $
                1,079,117Supplemental
      disclosure of non cash activities:Transfer
      of construction in progress to fixed assets
                
                $
                1,831,131
                
                
                $
                -Accrual
      on construction in progress
                
                $
                -
                
                
                $
                304,524




See
accompanying notes to unaudited condensed consolidated financial
statements


F-29




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.
            Basis
      of presentation




The
interim condensed consolidated financial statements included herein, presented
in accordance with United States generally accepted accounting principles and
stated in US dollars, have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These statements reflect all adjustments, consisting
of normal recurring adjustments, which, in the opinion of management, are
necessary for fair presentation of the information contained therein. It is
suggested that these interim condensed consolidated financial statements be read
in conjunction with the financial statements of the Company for the year ended
December 31, 2008 and notes thereto included in the Form 10K of Yuhe
International, Inc. (Formerly known as First Growth Investors, Inc.) filed on
March 31, 2009. The Company follows the same accounting policies in the
preparation of interim reports.




Results
of operations for the interim periods are not indicative of annual
results.




2.
            Organization
      and Basis of Preparation of Financial
Statements




Yuhe
International, Inc.




Yuhe
International, Inc., formerly known as First Growth Investors, Inc., “Yuhe” or
“the Company” was originally organized under the laws of the State of Nevada on
September 9, 1997. The Company was not presently engaged in any business
activities and had no operations, income producing assets or significant
operating capital. At December 31, 2007, the Company was at development stage
until its business combination with Bright Stand on March 12, 2008.




F-30


YUHE
INTERNATIONAL, INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


2.
              Organization
      and Basis of Preparation of Financial Statements -
    continued




On March
12, 2008, the Company completed a reverse acquisition transaction with Bright
Stand International Limited, “Bright Stand”, and Kunio Yamamoto, a Japanese
person and the sole former shareholder of Bright Stand.




This
share exchange transaction resulted in Bright Stand’s former shareholder
obtaining a majority voting interest in the Company. Generally accepted
accounting principles require that the company whose shareholders retain the
majority interest in a combined business be treated as the acquirer for
accounting purposes, resulting in a reverse acquisition with Bright Stand as the
accounting acquirer and Yuhe International Inc. as the acquired party.
Accordingly, the share exchange transaction has been accounted for as a
recapitalization of the Company. The equity section of the accompanying
financial statements has been restated to reflect the recapitalization of the
Company due to the reverse acquisition as of the first day of the first period
presented. The assets and liabilities acquired that, for accounting purposes,
were deemed to have been acquired by Bright Stand were not
significant.




Bright
Stand International Limited, “Bright Stand”




On August
3, 2007, Bright Stand International Limited, “Bright Stand” was incorporated
with limited liability in the British Virgin Islands. On January 31, 2008,
Bright Stand International Limited completed the acquisition (note 4) of 100%
common stock of Weifang Yuhe Poultry Co., Limited “PRC Yuhe” and 43.75% of
Weifang Taihong Feed Co., Ltd., “Taihong”. As a result, Bright Stand owned 100%
of PRC Yuhe and owned 43.75% direct interest of Taihong and 56.25% indirect
interest of Taihong through PRC Yuhe. PRC Yuhe and Taihong became the
wholly-owned subsidiaries of Bright Stand.




Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”




Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”, was established in Weifang, Shandong of the
People’s Republic of China, the “PRC”, as a limited company on March 8, 1996.
PRC Yuhe is a supplier of day-old chickens raised for meat production, or
broilers, in the People’s Republic of China.


F-31




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


2.
            Organization
      and Basis of Preparation of Financial Statements -
    continued




Weifang
Taihong Feed Co., Ltd., “Taihong”




Weifang
Taihong Feed Co., Ltd. was established in Weifang, Shandong of the People’s
Republic of China, the “PRC”, as a limited company on May 26, 2003. Taihong is a
feed stock company whose primary purpose is to supply feed stock for PRC Yuhe’s
breeder chickens.




The
Company’s operations are conducted through its subsidiaries in the People’s
Republic of China, PRC Yuhe, and Taihong. The Company and its subsidiary,
hereinafter, collectively referred to as “the Group”, are engaged in the
business of chick and feed production.




3.
            Principles
      of consolidation




The
condensed consolidated financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America,
include the assets, liabilities, revenues, expenses and cash flows of the
Company and all its subsidiaries. This basis of accounting differs in certain
material respects from that used for the preparation of the books and records of
the Company’s principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in the PRC, “PRC GAAP”, the
accounting standards used in the place of their domicile.  The accompanying
condensed consolidated financial statements reflect necessary adjustments not
recorded in the books and records of the Company’s subsidiaries to present them
in conformity with generally accepted accounting principles in the United States
of America.




The
condensed consolidated financial statements of the Company include the accounts
of Yuhe International, Inc, Bright Stand International Limited, Weifang Yuhe
Poultry Co., Ltd and Weifang Taihong Feed Co., Ltd. after the date of
acquisitions. All significant intercompany accounts, transactions and cash flows
are eliminated on consolidation.




The
accompanying financial statements are presented in United States dollars. The
functional currency of the Company and Bright Stand is US$ and the functional
currency of PRC Yuhe and Taihong is Renminbi (RMB).  The financial
statements of PRC Yuhe and Taihong are translated into United States dollars
from RMB at year-end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions
occurred.




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


F-32


YUHE
INTERNATIONAL, INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


4.
            Basic
      and diluted earnings per share




The
Company reports basic earnings per share in accordance with FASB ASC 260,
“Earnings Per Share”. Basic earnings per share are computed using the weighted
average number of shares outstanding during the periods presented. The weighted
average number of shares of the Company represents the common stock outstanding
during the reporting periods.




Diluted
earning per share is based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.




5.
            Recent
      accounting pronouncements




In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB ASC 810,” which changes
how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the other entity’s
purpose and design and the reporting entity’s ability to direct the activities
of the other entity that most significantly impact the other entity’s economic
performance. FASB ASC 810 will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. A reporting entity
will be required to disclose how its involvement with a variable interest entity
affects the reporting entity’s financial statements. FASB ASC 810 is effective
for fiscal years beginning after November 15, 2009, and interim periods within
those fiscal years.


F-33




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




5.
            Recent
      accounting pronouncements –
continued




Management
is currently evaluating the requirements of FASB ASC 810 and the impact on the
Company’s condensed consolidated financial statements.




No other
new accounting pronouncements, applicable to the Company, have been
issued.




6.
            Reclassification




Certain
reclassifications have been made to December 31, 2008 comparative condensed
consolidated balance sheet to conform to the current period presentation. These
reclassifications had no effect on previously reported results of operations or
financial position.




Reclassification
have been made to advances to suppliers and deposits paid for acquisition of
long term assets in condensed consolidated balance sheet for December 31, 2008
to conform to the September 30, 2009 condensed consolidated balance sheet
presentation.




7.
            Acquisition
      of subsidiaries




On
January 31, 2008, Bright Stand acquired 100% common stock of Weifang
Yuhe Poultry Co., Limited for $11,306,522, (RMB 81,450,000) and 43.75% of
Weifang Taihong Feed Co., Ltd for $312,530, (RMB 2,244,000) and total
amount was $11,619,052.




The
following table presents the unaudited results of operations of the Company as
if the Yuhe acquisitions had been consummated as of January 1, 2008 and the
results are shown for the nine months ended Sept 30, 2008 includes certain pro
forma adjustments, including depreciation and amortization on the assets
acquired, and other adjustments.


F-34


YUHE
INTERNATIONAL, INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


7.
            Acquisition
      of subsidiaries – continued




For The Nine
                    Months Ended
                    September 30,2008(Pro
      forma)Revenues
                  
                  $
                  17,809,592Net
      income
                  
                  $
                  2,964,983Earnings
      per shareBasic
                  
                  $
                  0.22Diluted
                  
                  $
                  0.21Weighted
      average shares outstandingBasic
                  
                  
                  13,750,966Diluted
                  
                  
                  13,985,255




F-35


YUHE
INTERNATIONAL, INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


8.
            Inventories




Inventories
consist of the following:




September 30
                    
                    
                    December 312009
                    
                    
                    2008(unaudited)Raw
      materials
                    
                    $
                    4,484,618
                    
                    
                    $
                    5,281,429Work
      in progress
                    
                    
                    1,500,546
                    
                    
                    
                    1,272,217Finished
      goods
                    
                    
                    -
                    
                    
                    
                    91,315$
                    5,985,164
                    
                    
                    $
                    6,644,961




9.
            Unlisted
      investments




Unlisted
investments at September 30, 2009 represent the 3% investments in Hanting Rural
Credit Cooperative, “Hanting” recorded at cost.  For the nine months
and three months period ended September 30, 2009, the Company recorded $15,509
and $0, respectively as income from unlisted investment for dividends received
from Hanting.  For the nine months and three months period ended
September 30, 2008, the Company recorded $6,074 and $0 as income from unlisted
investment for dividends received from Hanting.  Management of the
Company has reviewed the investment in Hanting for impairment and determined
there is no indication that the carrying amount of Hanting may not be
recoverable.


F-36




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


10.
            Plant
      and equipment, net




Plant and
equipment consists of the following:





September 30,
                
                
                December 31,2009
                
                
                2008(unaudited)At
      costBuildings
                
                $
                16,237,234
                
                
                $
                14,951,197Machinery
                
                
                5,859,475
                
                
                
                5,064,593Motor
      vehicles
                
                
                120,077
                
                
                
                119,786Furniture
      and equipment
                
                
                228,004
                
                
                
                82,81522,444,790
                
                
                
                20,218,391Less:
      accumulated depreciation
                
                
                (3,231,270
                )
                
                
                (1,678,071
                )19,213,520
                
                
                
                18,540,320Construction
      in progress
                
                $
                7,371,102
                
                
                $
                8,571,95626,584,622
                
                
                
                27,112,276




During
the nine months ended September 30, 2009, depreciation expenses amounted to
$1,556,610 among which $1,404,526 and $152,084 were recorded as cost of sales
and administrative expense, respectively.




During
the nine months ended September 30, 2008, depreciation expenses amounted to
$996,126 among which $810,418 and $185,708 were recorded as cost of sales and
administrative expense, respectively.




During
the three months ended September 30, 2009, depreciation expenses amounted to
$529,145 among which $480,122 and $49,023 were recorded as cost of sales and
administrative expense, respectively.




During
the three months ended September 30, 2008, depreciation expenses amounted to
$374,216 among which $322,336 and $51,880 were recorded as cost of sales and
administrative expense, respectively.




Capitalized
interest expense included in construction in progress totaled $425,079 and
$123,021 for the nine and three months ended September 30, 2009, and $437,221
for the year ended December 31, 2008, respectively.




As of
September 30, 2009, buildings and machinery of the Company with net book value
of $6,601,015 were pledged as collateral under certain loan
arrangements.


F-37




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


11.
            Intangible
      assets, net




Intangible
assets consist of the following:




September 30,
                
                
                December 31,2009
                
                
                2008(unaudited)Land
      use rights, at cost
                
                $
                2,976,924
                
                
                $
                2,969,714Less:
      accumulated amortization
                
                
                (109,287
                )
                
                
                (59,962
                )$
                2,867,637
                
                
                $
                2,909,752




As of
September 30, 2009, land use rights of the Company were pledged as collateral
under certain loan arrangements.




During
the nine months ended September 30, 2009 and 2008, amortization expenses
included in the cost of sales were $49,144 and $42,853
respectively.




During
the three months ended September 30, 2009 and 2008, amortization expenses
included in the cost of sales were $16,385 and $16,356
respectively.


The
estimated aggregate amortization expenses for the land use right for the five
succeeding years are as follows:




YearRemainder
      of 2009
                  
                  $
                  16,3932010
                  
                  
                  65,5722011
                  
                  
                  65,5722012
                  
                  
                  65,5722013
                  
                  
                  65,572thereafter
                  
                  
                  2,588,956$
                  2,867,637




F-38




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


12.
            Due
      to related companies




September 30,
                
                
                December 31,2009
                
                
                2008(unaudited)Weifang
      Hexing Breeding Co., Ltd. "Weifang Hexing" - Gao Zhentao, a director of
      the Company is also a director of Weifang Hexing
                
                $
                -
                
                
                $
                185,885Others
                
                
                5,612
                
                
                
                24,748$
                5,612
                
                
                $
                210,633




The
amounts due to related companies are unsecured, interest free and have no fixed
repayment date.  These loans are used for working capital
purposes.




13.
            Due
      from related companies




September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008(unaudited)Hexing
      Green Agriculture Co., Ltd., "Hexing Green", - Mr. Gao Zhentao, a director
      of the Company is also a director of Hexing Green
                      
                      $
                      -
                      
                      
                      $
                      75,754Shandong
      Yuhe Food Co., Ltd, "Yuhe Food"- Mr. Gao Zhentao, a director of the
      Company is also a director of Yuhe Food
                      
                      
                      2,770,165
                      
                      
                      
                      3,580,553Shandong
      Yuhe New Agriculture of Sciences, "Shandong Yuhe"- Mr. Gao Zhentao, a
      director of the Company is also a director of Shandong
Yuhe
                      
                      
                      -
                      
                      
                      
                      50,257Weifang
      Jiaweike Food Co., Ltd, "Weifang Jiaweike" - Mr. Gao Zhentao, a director
      of the Company is also a director of Weifang Jiaweike
                      
                      
                      -
                      
                      
                      
                      25$
                      2,770,165
                      
                      
                      $
                      3,706,589


The
amounts due from related companies are unsecured, interest free and have no
fixed repayment date.


F-39




YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


14.
            Long-term
      loans




The
long-term loans are denominated in Chinese Renminbi and are presented in US
dollars as follows:




September 30,
                              
                              
                              December 31,2009
                              
                              
                              2008(unaudited)Loans
      from Nansun Rural Credit, interest rate at 7.56% to 13.82% per annum,
      $292,158 due on December 9, 2009, remaining balance due on March 10, May
      17, May 28 and Nov 29, 2010
                              
                              $
                              8,775,008
                              
                              
                              $
                              8,753,757Loan
      from Shuangyang Rural Credit, interest rate at 9.83% per annum, due on
      October 13, 2010
                              
                              
                              950,626
                              
                              
                              
                              948,324Loan
      from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 7.56% per
      annum, due on January 7, 2011
                              
                              
                              1,067,626
                              
                              
                              
                              -Loan
      from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 11.09% per
      annum, due from November 28, 2008 to January 10, 2009
                              
                              
                              -
                              
                              
                              
                              1,065,04010,793,260
                              
                              
                              
                              10,767,121Less:
      current portion of long-term loans
                              
                              
                              (8,336,258
                              )
                              
                              
                              (1,356,832
                              )$
                              2,457,002
                              
                              
                              $
                              9,410,289




F-40


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Future
maturities of long-term loans as at September 30, 2009 are as
follows:




September
      30,2010
                      
                      $
                      8,336,2582011
                      
                      
                      2,457,002$
                      10,793,260


F-41


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




15.
            Income
      tax




The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 25%. However, the
Company is an agricultural company, and in accordance with the relevant
regulations regarding the tax exemption, the Company is tax-exempt as long as it
is registered as an agricultural entity.




Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is 25%.




On
January 1, 2008, the Company adopted FASB ASC 740.10, which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. This interpretation also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.




Through
September 30, 2009, the directors considered that the Company had no uncertain
tax positions which affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the period ended September 30,
2009.




The
Company uses the asset and liability method, where deferred tax assets and
liabilities are determined based on the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. Taihong has a net operating loss
carry forward and resulted in deferred tax asset of $43,329 as of September 30,
2009.  Management intends to maintain a full valuation allowance of
$43,329 against the deferred tax assets until sufficient positive evidence
exists to support reversal of the valuation allowance.  Management
will reassess the valuation allowance at the end of year 2009.




F-42


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




15.
            Income
      tax - continued




The
provision for income taxes consists of the following:




For The Nine Months Ended
                    
                    
                    For The Three Months EndedSeptember 30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Current
      tax-
      PRC
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    --
      Change in deferred tax asset
                    
                    
                    (5,986
                    )
                    
                    
                    (20,909
                    )
                    
                    
                    (6,221
                    )
                    
                    
                    (13,056
                    )-
      Change in valuation allowance
                    
                    
                    5,986
                    
                    
                    
                    20,909
                    
                    
                    
                    6,221
                    
                    
                    
                    13,056$
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -




All of
the Company’s income (loss) before income taxes is from PRC sources. Actual
income tax expenses reported in the consolidated statements of income and
comprehensive income differ from the amounts computed by applying the PRC
statutory income tax rate of 25% for the fiscal year of 2009 and 2008
respectively to income (loss) before income taxes for the nine and three months
ended September 30, 2009 and 2008 for the following reasons:




For The Nine Months Ended
                                
                                
                                For The Three Months EndedSeptember 30,
                                
                                
                                September 30,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008(unaudited)
                                
                                
                                (unaudited)
                                
                                
                                (unaudited)
                                
                                
                                (unaudited)Income
      before income taxes
                                
                                $
                                9,153,966
                                
                                
                                $
                                2,823,449
                                
                                
                                $
                                4,147,153
                                
                                
                                $
                                1,930,786Computed  “expected”
      income tax expense at 25%
                                
                                
                                2,288,491
                                
                                
                                
                                705,862
                                
                                
                                
                                1,036,788
                                
                                
                                
                                482,697Tax
      effect on net taxable temporary differences
                                
                                
                                (77,964
                                )
                                
                                
                                -
                                
                                
                                
                                (30,805
                                )
                                
                                
                                -Effect
      of cumulative tax losses on Taihong
                                
                                
                                (5,986
                                )
                                
                                
                                (20,909
                                )
                                
                                
                                (6,221
                                )
                                
                                
                                (13,056
                                )Effect
      of cumulative tax losses
                                
                                
                                298,726
                                
                                
                                
                                116,437
                                
                                
                                
                                121,590
                                
                                
                                
                                105,621Effect
      of tax holiday
                                
                                
                                (2,503,267
                                )
                                
                                
                                (801,390
                                )
                                
                                
                                (1,121,352
                                )
                                
                                
                                (575,261
                                )$
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -


F-43


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




16.
            Fair
      value of financial instruments




The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
of financial assets and liabilities, such as cash and cash equivalents, trade
accounts receivable, other receivables, accounts payable, and other payables,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.




17.
            Stock
      options




On June
13, 2008, the Company granted to the Chief Financial Officer (CFO) of the
Company an option to purchase 150,000 shares of the Company’s common stock at an
exercise price of $3.708 per share for the 3 year’s employment. The options
shall vest with respect to 33.3% of the total number of shares purchasable upon
exercise thereof one year after the grant date and 33.3% on the second and third
anniversary of the grant date, Mr. Hu will be fully vested in the option by that
date and shall cease to vest if the executive cease to be Chief Financial
Officer of the Company for any reason.




On the
same date, the Company granted to three independent directors of the Company an
option to purchase 77,717 shares of the Company’s common stock at an exercise
price of $3.708 per share for the 3 year’s employment. The options shall vest
with respect to 33.3% of the total number of shares purchasable upon exercise
thereof one year after the grant date and 33.3% on the second and third
anniversary of the grant date, the directors will be fully vested in the option
by that date and shall cease to vest if the three independent directors cease to
be independent directors of the Company for any reason.




The
options granted to the CFO and the three independent directors will expire on
the fifth anniversary of the grant date and cease to vest if they cease to be
the CFO or independent directors of the company for any reason.




As at
September 30, 2009, the total number of stock options outstanding was 383,151
shares.  The Company recognizes compensation expense, net of estimated
forfeitures, over the requisite service period, which is the period during which
the grantee is required to provide services in exchange for the
award.  The Company has elected to recognize compensation cost for
awards with only a service condition that has a graded vesting schedule on a
straight-line basis over the requisite service period for the entire
award.




F-44


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




17.
            Stock
      options– continued




The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of 109.40%, and a risk-free interest rate of 3.00%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock. Fair value per the Black-Scholes model is
$2,186,499. In accordance with FASB ASC 718, the Company has recorded
stock-based compensation expense during the nine months and three months ended
September 30, 2009 of $545,127 and $183,706 in connection with the issuance of
this option.




The
weighted average grant date fair value of options granted was $5.71 per
share.  The weighted average exercise price of these options was $4.90
per share.  The total number of stock options outstanding as at
September 30, 2009 and December 31, 2008 was 383,151 shares.




18.
            Earnings
      per share




Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period.  Diluted earnings per
share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period.  The following table sets forth the computation of basic
and diluted net income per share:




For The Nine MonthsEnded
            
            
            For The Three MonthsEndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(unaudited)
            
            
            (unaudited)
            
            
            (unaudited)
            
            
            (unaudited)Net
      income attributable to the common stockholders
            
            $
            9,153,966
            
            
            $
            2,823,449
            
            
            $
            4,147,153
            
            
            $
            1,930,786Weighted
      average outstanding shares of common stockCommon
      stock and common stock equivalents
            
            
            15,722,180
            
            
            
            13,750,966
            
            
            
            15,722,180
            
            
            
            15,543,330Dilutive
      effect of options, warrants, and contingently issuable
    shares
            
            
            15,931,379
            
            
            
            13,985,255
            
            
            
            15,931,379
            
            
            
            15,989,256Earnings
      per share:Basic
            
            $
            0.58
            
            
            $
            0.21
            
            
            $
            0.26
            
            
            $
            0.12Diluted
            
            $
            0.57
            
            
            $
            0.20
            
            
            $
            0.26
            
            
            $
            0.12




F-45




YUHE
INTERNATIONAL, INC.
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




19.
            Business
      and geographical segments




The
Company’s operations are classified into two principal reportable segments that
provide different products or services.  PRC Yuhe is engaged in the
business of breeding chicks while Taihong is engaged in the business of feed
production, in which most of the products were used internally.  Separate
management of each segment is required because each business unit is subject to
different production and technology strategies.




F-46


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




19.  Business
and geographical segments - continued




Reportable
Segments




For The Nine Months Ended September
                    30, 2009
                  
                  
                  For The Nine Months Ended September
                    30, 2008
                  
                  
                  For The Nine Months
                    Ended September 30Production
                    of chicks
                  
                  
                  Production
                    of feed
                  
                  
                  Corporate
                  
                  
                  Production
                    of chicks
                  
                  
                  Production
                    of feed
                  
                  
                  Corporate
                  
                  
                  Total2009
                  
                  
                  2008External
      revenue
                  
                  $
                  33,740,804
                  
                  
                  $
                  216,189
                  
                  
                  $
                  -
                  
                  
                  $
                  15,995,782
                  
                  
                  $
                  322,481
                  
                  
                  $
                  -
                  
                  
                  $
                  33,956,993
                  
                  
                  $
                  16,318,263Intersegment
      revenue
                  
                  
                  -
                  
                  
                  
                  7,181,507
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,593,623
                  
                  
                  
                  -
                  
                  
                  
                  7,181,507
                  
                  
                  
                  8,593,623Interest
      income
                  
                  
                  174
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  386
                  
                  
                  
                  1
                  
                  
                  
                  4,131
                  
                  
                  
                  182
                  
                  
                  
                  4,518Interest
      expense
                  
                  
                  (115,400
                  )
                  
                  
                  (325,836
                  )
                  
                  
                  -
                  
                  
                  
                  (344,299
                  )
                  
                  
                  (418,869
                  )
                  
                  
                  -
                  
                  
                  
                  (441,236
                  )
                  
                  
                  (763,168
                  )Depreciation
      and amortization
                  
                  
                  (1,509,106
                  )
                  
                  
                  (96,648
                  )
                  
                  
                  -
                  
                  
                  
                  (955,356
                  )
                  
                  
                  (83,623
                  )
                  
                  
                  -
                  
                  
                  
                  (1,605,754
                  )
                  
                  
                  (1,038,979
                  )Net
      profit/(loss) after tax
                  
                  
                  10,013,067
                  
                  
                  
                  335,797
                  
                  
                  
                  (1,194,898
                  )
                  
                  
                  3,205,560
                  
                  
                  
                  83,634
                  
                  
                  
                  (465,745
                  )
                  
                  
                  9,153,966
                  
                  
                  
                  2,823,449Expenditures
      for long-lived assets
                  
                  
                  4,804,393
                  
                  
                  
                  69,490
                  
                  
                  
                  -
                  
                  
                  
                  12,271,784
                  
                  
                  
                  2,609
                  
                  
                  
                  -
                  
                  
                  
                  4,873,883
                  
                  
                  
                  12,274,393








F-47


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




For The Three Months Ended
                    September 30, 2009
                  
                  
                  For The Three Months Ended September
                    30, 2008
                  
                  
                  For The Three Months
                    Ended September 30Production
                    of chicks
                  
                  
                  Production
                    of feed
                  
                  
                  Corporate
                  
                  
                  Production
                    of chicks
                  
                  
                  Production
                    of feed
                  
                  
                  Corporate
                  
                  
                  Total2009
                  
                  
                  2008External
      revenue
                  
                  $
                  13,138,790
                  
                  
                  $
                  69,440
                  
                  
                  $
                  -
                  
                  
                  $
                  9,480,412
                  
                  
                  $
                  129,369
                  
                  
                  $
                  -
                  
                  
                  $
                  13,208,230
                  
                  
                  $
                  9,609,781Intersegment
      revenue
                  
                  
                  -
                  
                  
                  
                  2,591,095
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,079,840
                  
                  
                  
                  -
                  
                  
                  
                  2,591,095
                  
                  
                  
                  4,079,840Interest
      income
                  
                  
                  41
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  63
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41
                  
                  
                  
                  63Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (115,809
                  )
                  
                  
                  -
                  
                  
                  
                  (157,591
                  )
                  
                  
                  (162,457
                  )
                  
                  
                  -
                  
                  
                  
                  (115,809
                  )
                  
                  
                  (320,048
                  )Depreciation
      and amortization
                  
                  
                  (513,319
                  )
                  
                  
                  (32,211
                  )
                  
                  
                  -
                  
                  
                  
                  (358,729
                  )
                  
                  
                  (31,841
                  )
                  
                  
                  -
                  
                  
                  
                  (545,530
                  )
                  
                  
                  (390,570
                  )Net
      profit/(loss) after tax
                  
                  
                  4,485,409
                  
                  
                  
                  148,104
                  
                  
                  
                  (486,360
                  )
                  
                  
                  2,301,047
                  
                  
                  
                  52,223
                  
                  
                  
                  (422,484
                  )
                  
                  
                  4,147,153
                  
                  
                  
                  1,930,786Expenditures
      for long-lived assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  386,503
                  
                  
                  
                  555
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  387,058




Note:
Intersegment revenue of $2,591,095 was eliminated in consolidation.




The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC.  All of the company’s assets are located in the PRC.
Accordingly, no analysis of the Company’s sales and assets by geographical
market is presented.




F-48


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




20.
            Commitments
      and contingencies




Operating
Leases - In the normal course of business, the Company leases the land for hen
house under operating lease agreements. The Company rents land, primarily for
the feeding of the chickens. The operating lease agreements generally contain
renewal options that may be exercised at the Company’s discretion after the
completion of the base rental terms. The Company was obligated under operating
leases requiring minimum rentals as follows:




As
      of September 30,2009
                  
                  $
                  22,5302010
                  
                  
                  90,1202011
                  
                  
                  90,1202012
                  
                  
                  90,1202013
                  
                  
                  90,120Thereafter
                  
                  
                  1,489,993Total
      minimum lease payments
                  
                  
                  1,873,003




During
the nine months ended September 30, 2009 and 2008, rental expenses were $85,836
and $118,265 respectively.




During
the three months ended September 30, 2009 and 2008, rental expenses were $28,618
and $45,283 respectively.




Construction
of Breeding Farm No. 1




On August
15, 2008, PRC Yuhe completed construction work and facilities to set up the
southern farm of breeding farm No 1.  On August 30, 2008, PRC Yuhe
purchased 100,000 sets of parent breeders and began to feed.  By the end of
December 2008, PRC Yuhe has spent RMB 29 million, approximately equivalent to
$4.5 million, to build breeding farm No 1.  The breeding farm can be split
into the southern and the northern regions.  PRC Yuhe looks forward to
completing the northern farm construction work and facilities to set up by
December in 2009.  The residual scheduled payment is RMB 6 million,
equivalent to $0.9 million, for the building and facilities; and RMB 4.9
million, approximately equivalent to $0.72 million, in machinery.  The
capacity of the northern factory is 140,000 sets of parent
broilers.




F-49


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




20.
            Commitments
      and contingencies - continued




Construction
of Breeding Farm No. 2, 3, 5, 6, and 7




On
December 6, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build and renovate five of its breeding farms for a total
consideration of RMB2.6 million, approximately equivalent to $380,000. The
construction has been completed at the end of October 2009.  The
residual scheduled payment is RMB600,000, equivalent to $87,750 and is scheduled
to be paid in December 2009.




Construction
of Steel Structural Surface for Hatchery No. 3




On
December 10, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build the steel structure for its hatchery farm No. 3 for a total
consideration of RMB3.9 million, approximately equivalent to $570,000. The
construction is estimated to be completed at December 2009.  The
residual scheduled payment is RMB2 million, equivalent to $292,540.




Construction
of Breeding Farm and Steel Structural Surface




On June
23, 2009, PRC Yuhe entered into two construction agreements with contractors to
build part of the above breeding farms and construct the steel structure for
total considerations of RMB 6,112,300, approximately $892,984 and RMB5,887,800,
approximately $860,186, respectively.  The construction is estimated
to be completed by the end of November, 2009.  As of September 30,
2009, the Company has advanced RMB5,340,000, approximately $781,100 and
RMB5,140,000, approximately $751,700, respectively to these two
suppliers.




F-50


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




21.
            Equipment
      Leasing and Rental Arrangement




On
November 11, 2008, PRC Yuhe entered into equipment leasing agreement and
property rental agreement, collectively, the “Agreements”, with Shandong
Nongbiao Purina Feed Co., Ltd., “Shandong Nongbiao Purina”. Shandong Nongbiao
Purina will construct a feed production facility on a property leased from PRC
Yuhe and become the exclusive feed supplier for PRC Yuhe. Pursuant to the terms
and conditions of the Agreements, Shandong Nongbiao Purina will lease certain
equipment for feed production from, and install them at the premises owned by
PRC Yuhe. The lease term for both the equipment leasing agreement and property
rental agreement is 10 years. After completion of the feed production facility,
the lease term will commence on the date that the production
begins.  Shandong Nongbiao Purina shall pay to PRC Yuhe an annual
rental payment for the leased land, premises and facilities of RMB 1,500,000,
approximately equivalent to $219,200. The rent payable by Shandong Nongbiao
Purina under the rental agreement will be offset against the prepaid equipment
rental costs of RMB10,000,000, approximately equivalent to
$1,463,000.  As at September 30, 2009, Shandong Nongbiao Purina
advanced USD1,150,000 (RMB7,863,000) to PRC Yuhe as rental payment and was
recorded as advances from customers.




In
connection with the execution of the Agreements, Shandong Yuhe Food Group Co.,
Ltd., “Yuhe Group”, a PRC company based in Shandong Province, would be the
guarantor of PRC Yuhe for RMB 4,500,000, approximately equivalent to $658,000,
for the first five years and for RMB 3,000,000, approximately equivalent to
$439,000, for the next five years. No guarantee fee is required according to the
above Agreements.




F-51


YUHE
INTERNATIONAL, INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




22.              Make
Good Escrow Agreements




According
to the Consolidated Statements of Income and Comprehensive Income of the Company
in its Form 10-K for the fiscal year ended December 31, 2008 filed by the
Company with the Securities and Exchange Commission on March 31, 2009, the
Company’s After Tax Net Income for the fiscal year ended December 31, 2008 was
reported as $10,524,885, which has exceeded the 2008 Guaranteed After Tax Net
Income, as agreed in the Make Good Escrow Agreements described
below.




The
Company entered into a Make Good Escrow Agreement, dated March 12, 2008,
with Mr. Kunio Yamamoto, the “Make Good Pledgor”, Tri-State Title &
Escrow, LLC, Roth Capital Partners LLC, “Roth Capital” and each of the investors
in the private offering of securities of the Company.  On July 31, 2009,
Roth Capital instructed the Escrow Agent to release 1,679,992 shares of common
stock, the 2008 Make Good Shares, to Mr. Kunio Yamamoto, the Make Good
Pledgor.  In August, 2009, 1,679,992 shares of the Company’s common
stock were released to Mr. Kunio Yamamoto.




The
Company entered into a separate Make Good Escrow Agreement, dated March 12,
2008, with Mr. Kunio Yamamoto, the “Make Good Pledgor”, Interwest Transfer
Company, Inc., the “Escrow Agent”, and HFG International Limited, “HFG”. 
HFG has executed a Form of Release to release 235,196 shares of the Company’s
common stock to Mr. Kunio Yamamoto, the Make Good Pledgor.  On or about
April 27, 2009, 235,196 shares of the Company’s common stock were released by
HFG to Mr. Kunio Yamamoto.




23.              Subsequent
events




The
Company evaluated subsequent events through the date the accompanying financial
statements were issued, which was November 11,
2009.




F-52


YUHE
INTERNATIONAL, INC.




UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS




F-53


YUHE
INTERNATIONAL, INC.




UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS




Basis
of Presentation




On March
12, 2008, Yuhe International, Inc. entered into a Share Exchange Agreement with
Bright Stand International Limited and its stockholders, pursuant to which Yuhe
International, Inc. acquired all of the issued and outstanding capital stock of
Bright Stand International Limited in exchange for a total of 8,626,236 shares
of our common stock, constituting 56% shares of Yuhe International, Inc. issued
and outstanding common stock at the time of the merger agreement, $0.001 par
value per share.




Yuhe
International, Inc. completed the acquisition of Bright Stand International
Limited pursuant to the Merger Agreement, in March 2008. The acquisition was
accounted for as a reverse merger effected by a share exchange, wherein Bright
Stand International Limited is considered the acquirer for accounting and
financial reporting purposes.




The
unaudited pro forma consolidated statement of operations reflects the results of
operations of the company had the merger occurred on January 1, 2008. The pro
forma consolidated statements of operations were prepared as if the transactions
were consummated on January 1, 2008. These pro forma consolidated statements of
operations have been prepared for comparative purposes only and do not purport
to be indicative of the results of operations which actually would have resulted
had the transaction occurred on the date indicated and are not necessarily
indicative of the results that may be expected in the future.




Due to
the fact that there was no any trading and shareholding relationship between
Yuhe International, Inc. with Bright Stand International Limited before the
share exchange, in the opinion of management, no pro forma adjustment directly
attributable to the share exchange contemplated by the Agreement is to be made
to the unaudited pro forma consolidated statements of operations of Yuhe
International, Inc.




F-54


YUHE
INTERNATIONAL, INC.




UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS




FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008




Pro forma for the
                  period from
                  January 1, 2008
                  toJanuary 31,
                  2008
                
                
                As reported
                  from February
                  1, 2008 to
                  September 30,
                  2008
                
                
                Pro forma
                  Adjustment
                
                
                Pro forma TotalNet
      revenues
                
                $
                1,491,329
                
                
                $
                16,318,263
                
                
                $
                
                
                
                $
                17,809,592Cost
      of revenue
                
                
                (1,337,438
                )
                
                
                (11,732,602
                )
                
                
                
                
                
                
                (13,070,040
                )Gross
      profit
                
                
                153,891
                
                
                
                4,585,661
                
                
                
                
                
                
                
                4,739,552Operating
      expensesSelling
      expenses
                
                
                (28,997
                )
                
                
                (280,489
                )
                
                
                
                
                
                
                (309,486
                )General
      and administrative expenses
                
                
                (122,695
                )
                
                
                (1,500,177
                )
                
                
                
                
                
                
                (1,622,872
                )Total
      operating expenses
                
                
                (151,692
                )
                
                
                (1,780,666
                )
                
                
                
                
                
                
                (1,932,358
                )Income
      from operations
                
                
                2,199
                
                
                
                2,804,995
                
                
                
                
                
                
                
                2,807,194Non-operating
      income (expenses)Bad
      debts recovery
                
                
                219,893
                
                
                
                641,103
                
                
                
                
                
                
                
                860,996Interest
      income
                
                
                5
                
                
                
                4,518
                
                
                
                
                
                
                
                4,523Other
      income
                
                
                5,604
                
                
                
                192,624
                
                
                
                
                
                
                
                198,228Interest
      expenses
                
                
                (86,167
                )
                
                
                (763,168
                )
                
                
                
                
                
                
                (849,335
                )Other
      expenses
                
                
                -
                
                
                
                (56,623
                )
                
                
                
                
                
                
                (56,623
                )Total
      other income (expenses)
                
                
                139,335
                
                
                
                18,454
                
                
                
                
                
                
                
                157,789Net
      Income (loss) before income tax
                
                
                141,534
                
                
                
                2,823,449
                
                
                
                
                
                
                
                2,964,983Income
      Tax
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -Net
      income (loss)
                
                $
                141,534
                
                
                $
                2,823,449
                
                
                $
                
                
                
                $
                2,964,983Earnings
      per shareBasic
                
                $
                0.02
                
                
                $
                0.18
                
                
                
                
                
                
                $
                0.22Diluted
                
                $
                0.02
                
                
                $
                0.18
                
                
                
                
                
                
                $
                0.21Weighted
      average shares outstandingBasic
                
                
                8,626,318
                
                
                
                15,543,330
                
                
                
                
                
                
                
                13,750,966Diluted
                
                
                8,626,318
                
                
                
                15,989,256
                
                
                
                
                
                
                
                13,985,255


F-55




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Special
Note Regarding Forward Looking Statements





This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of the Company’s
management and involve risks and uncertainties, as well as assumptions that, if
they ever materialize or prove incorrect, could cause the results of the Company
to differ materially from those expressed or implied by such forward-looking
statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,”
“optimistic,” “intend,” “aim,” “will” or similar expressions are intended to
identify forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including statements regarding new and existing products, technologies and
opportunities; statements regarding market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; uncertainties
related to conducting business in China; any statements of belief or intention;
any of the factors mentioned in the “Risk Factors” section of the Company’s S-1
or amendment thereof or annual report on Form 10-K; and any statements of
assumptions underlying any of the foregoing. Except as otherwise indicated by
the context, references in this report to the “Company,” “Yuhe International,”
“we,” “us,” or “our,” are references to the combined business of Yuhe
International, Inc. and its subsidiaries, except in the “Management’s Discussion
And Analysis of Financial Condition And Results of Operation” where all
historical financial information prior to March 12, 2008 refers to Weifang Yuhe
Poultry Co. Ltd., “PRC Yuhe”, which includes the accounts of Weifang
Taihong Feed Co. Ltd., “Taihong”.


4


Overview




The
Company is in the middle of the broiler chicken supply chain. The Company
purchases baby parent breeding stocks from primary breeder farms, raises them
for hatching eggs and sells live day-old broilers to the market. The Company’s
business segment in the broiler supply chain has the highest margin along the
supply chain. The Company produces high quality day-old broilers supported by
its know-how in the areas of feed ingredient composition, immunizations system
and breeding techniques, gained through over a decade of
experience.





Unless
otherwise noted, all dollar figures provided herein are translated into United
States Dollars from Renminbi at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.




Unless
otherwise noted, all historical financial information prior to March 12, 2008
refers to PRC Yuhe, which includes the accounts of Taihong.





The
Company’s History





The
Company has an offshore holding structure commonly used by foreign investors
with operations in China. The Company is a Nevada corporation which owns 100% of
the securities of Bright Stand International Limited, “Bright Stand”, an
international business company incorporated in the British Virgin Islands.
Bright Stand directly owns 100% of PRC Yuhe, a wholly foreign-owned enterprise
established under the laws of the PRC, and directly owns 43.75% and indirectly
owns, through PRC Yuhe, the remaining 56.25% of Taihong, a foreign-invested
enterprise established under the laws of the PRC.


5


The
following chart depicts the Company’s organizational structure:










The
Company did not become engaged in the day-old broiler business until March 12,
2008. Effective March 12, 2008, the Company closed an Exchange Agreement with
Bright Stand and Kunio Yamamoto, a citizen of Japan, the sole former shareholder
of Bright Stand. Pursuant to the terms of the Exchange Agreement, the Company
acquired all of the outstanding capital stock of Bright Stand from Mr. Yamamoto
in exchange for 8,626,318 shares of its common stock. At the closing, Bright
Stand became the Company’s wholly-owned subsidiary. Immediately following the
closing of the Exchange Agreement, Mr. Yamamoto owned 8,626,318 shares of the
Company’s common stock.




Upon the
closing of the Exchange Agreement, the Company gained operating control over PRC
Yuhe and Taihong. PRC Yuhe has been owned by Bright Stand since January 31,
2008. Taihong has been owned by PRC Yuhe and Bright Stand since January 31,
2008. Before the closing of the Exchange Agreement, the Company was known as
First Growth Investors, Inc., and was originally formed for the purposes of
buying, selling and investing in vintage wines, which was the Company’s business
from 1997 through December 31, 2003. The Company had no operations from January
1, 2004 until the closing of the Exchange Agreement.


6


Effective
April 4, 2008, the Company amended its articles of incorporation to change its
name from “First Growth Investors, Inc.” to “Yuhe International, Inc.”, and
effected a 1-for-14.70596492 reverse stock split of its common stock. The
Company’s Board of Directors and shareholders approved the name change and the
reverse stock split pursuant to the Nevada Revised Statutes. The name change
became effective with NASDAQ’s Over-the-Counter Bulletin Board at the opening
for trading on April 7, 2008, under the new stock symbol of
“YUII.OB”.  All references to common stock in this filing are to
post-split shares as if the reverse stock split was effective as of the
beginning of the first period presented.





On June
13, 2008, the Company appointed three independent directors and one
non-independent director to its board of directors and formed an audit
committee, compensation committee and nomination committee under its board of
directors.





The
Company’s Business Operations





The
Company’s business is part of the commercial broiler supply chain.





Day-old
broilers are one-day-old broilers that are sold to broiler raisers. Day-old
broilers sold by the Company’s wholly-owned subsidiary, PRC Yuhe, are its
primary source of revenue.




The
Company purchases parent breeding chicken from grandparent breeder farms and
raises them to maturity. Once these parent breeding chicken have matured, they
produce hatching eggs that the Company incubates and then sells the resulting
day-old broiler chicks to its customers.





Under
normal circumstances, female parent breeder chicken become productive from the
26 th week,
and are no longer commercially productive after the 66th week. Typically a
breeder is capable of producing approximately 167 eggs which will be hatched to
137 broilers over its production lifetime and the breeders are maintained by the
Company for a period of 420 days. The Company sources its parent breeder chicken
from licensed suppliers located in Beijing, and Shandong and Jiangsu provinces
and these suppliers are required to have a vaccination certificate and a breeder
production certificate for the sale of the breeders. The Company’s hatching eggs
typically must be incubated for a period of 21 days. At least 28 weeks usually
pass from the Company’s receipt of a day-old parent breeder to its sale of the
first day-old broilers.


7





The
Company operates in two elements of the broiler supply chain: day-old broiler
production and feed production. These activities are operated under two separate
subsidiaries, PRC Yuhe and Taihong, respectively.





Competition





The
market for day-old broilers in China is highly fragmented. Shandong Province has
the highest number of day-old broilers in China. The Company’s market share was
approximately 3% in China in the first nine months of 2009 and the Company
sold 78.8 million day-old broilers for the first nine months in
2009.




Day-old
broilers are very weak physically and need to be transported in closely
controlled temperature conditions during delivery. Therefore, producers of
broiler chicks usually only sell locally or to surrounding areas, which limits
the Company’s current effective sales and competition in North
China.




Shandong
Minhe Animal Husbandry Co., Ltd., also located in Shandong Province, is one of
the Company’s major competitors for sales of day-old broilers. They are slightly
larger than the Company in terms of their annual day-old broiler production
volume. Another regional competitor of the Company is Jilin Deda, which is
located in Jilin Province in north-eastern China and is smaller than the Company
in terms of annual day-old broiler production volume. However, Jilin Deda is an
integrated chicken company, so it does not generally sell day-old broilers to
unaffiliated third parties.





Results
of Operations





The
Company has consolidated the results of PRC Yuhe and Taihong into its
Consolidated Financial Statements from January 1, 2009 to September 30, 2009 and
February 1, 2008 to September 30, 2008.


8





The
following is a discussion of the Company’s results of operations for the three
months ended September 30, 2009 compared to the three months ended September 30,
2008.




Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008




Quarter to Date
                    
                    All amounts,
                      other than
                      percentage, in
                      U.S. dollars
                      For the three
                      months ended
                      September 30
                      2009
                    
                    
                    As a
                      percentage of
                      net revenues
                      For the three
                      months ended
                      September 30
                      2009
                    
                    
                    All amounts,
                      other than
                      percentage, in
                      U.S. dollars
                      For the three
                      months ended
                      September 30
                      2008
                    
                    
                    As a
                      percentage of
                      net revenues
                      For the three
                      months ended
                      September 30
                      2008
                    
                    
                    Increase/
                      (Decrease)
                      Dollar ($)
                      For the three
                      months ended
                      September 30
                      2008
                    
                    
                    Increase/
                      (Decrease)
                      Percentage
                      For the three
                      months ended
                      September 30
                      2008Sales
      revenue
                    
                    
                    13,208,230
                    
                    
                    
                    100.00
                    %
                    
                    
                    9,609,781
                    
                    
                    
                    100.00
                    %
                    
                    
                    3,598,449
                    
                    
                    
                    37.45
                    %Costs
      of goods sold
                    
                    
                    8,042,920
                    
                    
                    
                    60.89
                    %
                    
                    
                    7,089,355
                    
                    
                    
                    73.77
                    %
                    
                    
                    953,565
                    
                    
                    
                    13.45
                    %Gross
      profit
                    
                    
                    5,165,310
                    
                    
                    
                    39.11
                    %
                    
                    
                    2,520,426
                    
                    
                    
                    26.23
                    %
                    
                    
                    2,644,884
                    
                    
                    
                    104.94
                    %Selling
      expenses
                    
                    
                    113,776
                    
                    
                    
                    0.86
                    %
                    
                    
                    135,658
                    
                    
                    
                    1.41
                    %
                    
                    
                    -21,882
                    
                    
                    
                    -16.13
                    %General
      and administrative expenses
                    
                    
                    784,402
                    
                    
                    
                    5.94
                    %
                    
                    
                    781,247
                    
                    
                    
                    8.13
                    %
                    
                    
                    3,155
                    
                    
                    
                    0.40
                    %Operating
      income
                    
                    
                    4,267,132
                    
                    
                    
                    32.31
                    %
                    
                    
                    1,603,521
                    
                    
                    
                    16.69
                    %
                    
                    
                    2,663,611
                    
                    
                    
                    166.11
                    %Bad
      debts recovery
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    554,188
                    
                    
                    
                    5.77
                    %
                    
                    
                    -554,188
                    
                    
                    
                    -100.00
                    %Interest
      income
                    
                    
                    41
                    
                    
                    
                    0.00
                    %
                    
                    
                    63
                    
                    
                    
                    0.00
                    %
                    
                    
                    -22
                    
                    
                    
                    -35.16
                    %Other
      income
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    93,062
                    
                    
                    
                    0.97
                    %
                    
                    
                    -93,062
                    
                    
                    
                    -100.00
                    %(Loss)
      gain on disposal of fixed assets
                    
                    
                    (1,081
                    )
                    
                    
                    0.01
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    1,081
                    
                    
                    
                    -Interest
      expenses
                    
                    
                    115,809
                    
                    
                    
                    0.88
                    %
                    
                    
                    320,048
                    
                    
                    
                    3.33
                    %
                    
                    
                    -204,239
                    
                    
                    
                    -25.38
                    %Other
      expenses
                    
                    
                    3,130
                    
                    
                    
                    0.03
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    3,130Income
      taxes
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -Net
      income
                    
                    
                    4,147,153
                    
                    
                    
                    31.40
                    %
                    
                    
                    1,930,786
                    
                    
                    
                    20.09
                    %
                    
                    
                    2,216,367
                    
                    
                    
                    114.79
                    %





Net revenue. Sales revenue
increased by $3.6 million, or 37%, from $9.6 million for the three months ended
September 30, 2008 to $13.2 million for the three months ended September 30,
2009. The increase was driven by the increase in sales volume of 6.1 million
day-old broilers, or 26%, from 23.9 million birds for the three months ended
September 30, 2008 to 30 million birds for the three months ended September 30,
2009. The increase in sales volume was the result of expansion in production
capacity in year 2008 and 2009.


9





The sales
growth was also driven by the increase in selling price. The selling price of
day-old broilers increased from RMB2.57 per bird for the three months ended
September 30, 2008 to RMB2.85 per bird for the three months ended September 30,
2009. This 10% increase in day old broiler price year over year was mainly due
to the abnormal low price in the third quarter of year 2008, which has been
affected by 2008 Olympic Games. Compared to the average price of RMB2.74 in the
first nine months of year 2009, the price of RMB 2.85 in the third quarter of
year 2009 was at a normal level.





Sales of
retired breeder stocks increased by $89,000, or 27%, from $330,000 for the three
months ended June 30, 2008 to $419,000 for the three months ended September 30,
2009. The sales growth was due to the significant increase in the volume of
parent breeders at the end of 2008 and the early retirement of certain breeder
stock whose productivity has decreased.





Sales of
eggs increased by $12,000, or 10%, from $120,000 for the three months ended
September 30, 2008 to $132,000 for the three months ended September 30, 2009.
This increase is in line with the growth of the day-old broiler sales
volume.





Since
almost all the products of Taihong were supplied to its parent, PRC Yuhe,
revenue contributed from Taihong’s external sales was $69,000, or 0.5%, of the
Company’s total revenues for the three months ended September 30,
2009.





Cost of revenues. The
Company’s cost of revenues increased by $0.9 million, or 13.5%, from $7.1
million for the three months ended September 30, 2008 to $8.0 million for the
three months ended September 30, 2009. The main reason for the increase in the
cost of revenues was the increase in sales volume, which was partially offset by
a decrease in unit cost of day-old broilers.  The unit cost of day-old
broilers decreased 12% from the three months ended September 30, 2008 to
the three months ended September 30, 2009. This decrease was due to the
Company’s expanded productivity which diluted allocated cost.





As a
percentage of net revenues, the cost of revenues decreased by 13%, from 74% for
the three months ended September 30, 2008 to 61% for the three months ended
September 30, 2009. The decrease in cost of revenues as a percentage of net
revenues was mainly due to the selling price increase and unit cost decrease as
discussed above.





Sales of
retired breeder stocks is $419,000 in the third quarter of year 2009, compared
to the cost of the retired breeder stock being sold which is $330,000. The net
increase is $89,000.





Gross profits. The Company’s
gross profit increased by $2.64 million, or 105%, from $2.52 million for the
three months ended September 30, 2008 to $5.16 million for the three months
ended September 30, 2009. Gross profit as a percentage of net revenues was
approximately 39.1% for the three months ended September 30, 2009, as compared
to 26.2% for the three months ended September 30, 2008. Compared against the
gross margin of 38% and 37% in year 2008 and 2007, the margin in the third
quarter of year 2009 is at a normal level.





General and administrative
expenses. The general and administrative expenses increased slightly
by $3,000, or 0.4%, from $781,000 for the three months ended September 30, 2008
to $784,000 in the three months ended September 30, 2009. The general and
administrative expenses comprised mainly of public company related expenses of
$486,000 including the stock based compensation of $184,000, representing 63% of
total general and administrative expenses, human resources and related expenses
of $48,000, representing 6% of total general and administrative expenses,
facilities and utility expenses of $78,000, representing 10% of total general
and administrative expense, and travel expenses of $99,000, representing 13% of
total general and administrative expenses.





Selling Expenses. The
Company’s selling expenses decreased by $22,000, or 16%, from $135,000 for the
three months ended September 30, 2008 to $113,000 for the three months ended
September 30, 2009. The main reason for the decrease in the selling expense is
the decrease in the packaging expense, which lowered 20% due to the price
decreasing in package raw material. Selling expenses comprised mainly of
packaging and packaging expenses of $81,000, representing 72% of total selling
expenses, human resources and related expenses of $10,000, representing 9% of
total selling expenses, and travel and office expenses of $15,000, representing
13% of total selling expense. Selling expenses as a percentage of revenues
decreased from 1.41% in the three months ended September 30, 2008 to 0.86% in
the three months ended September 30, 2009.





Interest
expense. Interest expense decreased by $204,000, or 25%, from
$320,000 for the three months ended September 30, 2008 to $116,000 for the three
months ended September 30, 2009. Interest expense decreased because of the
increase in interest being capitalized in construction in
progress.




Other expense. Other expense
amounted to $3,000 for the three months ended September 30, 2009. It consists
mainly of donation payment.


10





Provision for Income
Taxes. PRC Yuhe is a poultry company, and in accordance with the
relevant regulations, the PRC government announced the exemption of income
taxes on poultry producers, effective as of January 1, 2008.





The
corporate income tax rate for its subsidiary Taihong is 25%. There is no
provision for income tax because Taihong has a net operating loss carry forward
which resulted in a deferred tax asset of $43,329 as of September 30, 2009.
Taihong historically experiences net losses before income taxes, and management
does not expect Taihong to generate net income before taxes in the future as its
business is to supply feed to PRC Yuhe.





Net profit. Net profit
increased by $2.22 million, or 115%, from $1.93 million for the three months
ended September 30, 2008 to $4.15 million for the three months ended September
30, 2009, as a result of the factors described above.





Nine
months Ended September 30, 2009 Compared to Nine months Ended September 30,
2008




Quarter to Date
                                        
                                        All amounts,
                                          other than
                                          percentage, in
                                          U.S. dollars
                                          For the nine
                                          months ended
                                          September 30
                                          2009
                                        
                                        
                                        As a
                                          percentage of
                                          net revenues
                                          For the nine
                                          months ended
                                          September 30
                                          2009
                                        
                                        
                                        All amounts,
                                          other than
                                          percentage, in
                                          U.S. dollars
                                          For the nine
                                          months ended
                                          September 30
                                          2008
                                        
                                        
                                        As a
                                          percentage of
                                          net revenues
                                          For the nine
                                          months ended
                                          September 30
                                          2008
                                        
                                        
                                        Increase/
                                          (Decrease)
                                          Dollar ($)
                                          For the nine
                                          months ended
                                          September 30
                                          2009
                                        
                                        
                                        Increase/
                                          (Decrease)
                                          Percentage
                                          For the nine
                                          months ended
                                          September 30
                                          2009
                                        
                                        
                                        All amounts,
                                          other than
                                          Percentage, in
                                          U.S. dollars
                                          For the eight
                                          months ended
                                          September 30
                                          2008
                                        
                                        
                                        As a
                                          percentage of
                                          net revenues
                                          For the eight
                                          months ended
                                          September 30
                                          2008
                                        
                                        
                                        Increase/
                                          (Decrease)
                                          Dollar ($)
                                          For the
                                          nine/eight
                                          months ended
                                          September 30
                                          2009
                                        
                                        
                                        Increase/
                                          (Decrease)
                                          Percentage
                                          For the
                                          nine/eight
                                          months ended
                                          September 30
                                          2009(Pro forma)
                                        
                                        
                                        (Pro forma)
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (As reported)
                                        
                                        
                                        (As reported)Sales
      revenue
                                        
                                        
                                        33,956,993
                                        
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        17,809,592
                                        
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        16,147,401
                                        
                                        
                                        
                                        90.67
                                        %
                                        
                                        
                                        16,318,263
                                        
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        17,638,730
                                        
                                        
                                        
                                        108.09
                                        %Costs
      of revenue
                                        
                                        
                                        21,926,699
                                        
                                        
                                        
                                        64.57
                                        %
                                        
                                        
                                        13,070,040
                                        
                                        
                                        
                                        73.39
                                        %
                                        
                                        
                                        8,856,659
                                        
                                        
                                        
                                        67.76
                                        %
                                        
                                        
                                        11,732,602
                                        
                                        
                                        
                                        71.90
                                        %
                                        
                                        
                                        10,194,097
                                        
                                        
                                        
                                        86.89
                                        %Gross
      profit
                                        
                                        
                                        12,030,294
                                        
                                        
                                        
                                        35.43
                                        %
                                        
                                        
                                        4,739,552
                                        
                                        
                                        
                                        26.61
                                        %
                                        
                                        
                                        7,290,742
                                        
                                        
                                        
                                        153.83
                                        %
                                        
                                        
                                        4,585,661
                                        
                                        
                                        
                                        28.10
                                        %
                                        
                                        
                                        7,444,633
                                        
                                        
                                        
                                        162.35
                                        %Selling
      expenses
                                        
                                        
                                        315,372
                                        
                                        
                                        
                                        0.93
                                        %
                                        
                                        
                                        309,486
                                        
                                        
                                        
                                        1.74
                                        %
                                        
                                        
                                        5,886
                                        
                                        
                                        
                                        1.90
                                        %
                                        
                                        
                                        280,489
                                        
                                        
                                        
                                        1.72
                                        %
                                        
                                        
                                        34,883
                                        
                                        
                                        
                                        12.44
                                        %General
      and administrative expenses
                                        
                                        
                                        2,163,639
                                        
                                        
                                        
                                        6.37
                                        %
                                        
                                        
                                        1,622,872
                                        
                                        
                                        
                                        9.11
                                        %
                                        
                                        
                                        540,767
                                        
                                        
                                        
                                        33.32
                                        %
                                        
                                        
                                        1,500,458
                                        
                                        
                                        
                                        9.19
                                        %
                                        
                                        
                                        663,181
                                        
                                        
                                        
                                        44.20
                                        %Operating  income
                                        
                                        
                                        9,551,283
                                        
                                        
                                        
                                        28.13
                                        %
                                        
                                        
                                        2,807,194
                                        
                                        
                                        
                                        15.76
                                        %
                                        
                                        
                                        6,744,089
                                        
                                        
                                        
                                        240.24
                                        %
                                        
                                        
                                        2,804,714
                                        
                                        
                                        
                                        17.19
                                        %
                                        
                                        
                                        6,746,569
                                        
                                        
                                        
                                        240.54
                                        %Bad
      debts recovery
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        860,996
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (860,996
                                        )
                                        
                                        
                                        -100.00
                                        %
                                        
                                        
                                        641,103
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (641,103
                                        )
                                        
                                        
                                        -100.00
                                        %Interest
      income
                                        
                                        
                                        182
                                        
                                        
                                        
                                        0.00
                                        %
                                        
                                        
                                        4,523
                                        
                                        
                                        
                                        0.03
                                        %
                                        
                                        
                                        (4,342
                                        )
                                        
                                        
                                        -95.99
                                        %
                                        
                                        
                                        4,518
                                        
                                        
                                        
                                        0.03
                                        %
                                        
                                        
                                        (4,337
                                        )
                                        
                                        
                                        -95.98
                                        %Other
      income
                                        
                                        
                                        20,635
                                        
                                        
                                        
                                        0.06
                                        %
                                        
                                        
                                        198,228
                                        
                                        
                                        
                                        1.11
                                        %
                                        
                                        
                                        (177,593
                                        )
                                        
                                        
                                        -89.59
                                        %
                                        
                                        
                                        105,036
                                        
                                        
                                        
                                        0.64
                                        %
                                        
                                        
                                        (84,401
                                        )
                                        
                                        
                                        -80.35
                                        %(Loss)
      gain on disposal of fixed assets
                                        
                                        
                                        26,697
                                        
                                        
                                        
                                        0.08
                                        %
                                        
                                        
                                        -
                                        
                                        
                                        
                                        0.00
                                        %
                                        
                                        
                                        26,697
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        87,588
                                        
                                        
                                        
                                        0.54
                                        %
                                        
                                        
                                        (60,891
                                        )
                                        
                                        
                                        -69.52
                                        %Interest
      expenses
                                        
                                        
                                        441,236
                                        
                                        
                                        
                                        1.30
                                        %
                                        
                                        
                                        849,335
                                        
                                        
                                        
                                        4.77
                                        %
                                        
                                        
                                        (408,099
                                        )
                                        
                                        
                                        -48.05
                                        %
                                        
                                        
                                        763,168
                                        
                                        
                                        
                                        4.68
                                        %
                                        
                                        
                                        (321,932
                                        )
                                        
                                        
                                        -42.18
                                        %Other
      expenses
                                        
                                        
                                        3,595
                                        
                                        
                                        
                                        0.01
                                        %
                                        
                                        
                                        56,623
                                        
                                        
                                        
                                        0.32
                                        %
                                        
                                        
                                        (53,028
                                        )
                                        
                                        
                                        -93.65
                                        %
                                        
                                        
                                        56,342
                                        
                                        
                                        
                                        0.35
                                        %
                                        
                                        
                                        (52,747
                                        )
                                        
                                        
                                        -93.62
                                        %Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      income
                                        
                                        
                                        9,153,966
                                        
                                        
                                        
                                        26.96
                                        %
                                        
                                        
                                        2,964,983
                                        
                                        
                                        
                                        16.65
                                        %
                                        
                                        
                                        6,188,983
                                        
                                        
                                        
                                        208.74
                                        %
                                        
                                        
                                        2,823,449
                                        
                                        
                                        
                                        17.30
                                        %
                                        
                                        
                                        6,330,517
                                        
                                        
                                        
                                        224.21
                                        %


11





The
Company has consolidated the results of PRC Yuhe and Taihong into its
Consolidated Financial Statements from January 1, 2009 to September 30, 2009 and
February 1, 2008 to September 30, 2008. For comparative purposes, the Company
has provided a pro forma Consolidated Statement of Operations from January 1,
2008 to September 30, 2008  (please refer to F-27–F-29) to provide
comparable presentation to its reported results for the nine months ended
September 30, 2009 and 2008. The Company believes that providing this pro forma
financial statement as if it had consolidated PRC Yuhe and Taihong as of January
1, 2008 may assist investors in assessing performance between periods and in
developing expectations of future performance.





Net revenue (As reported).
Sales revenue increased by $17.6 million, or 108%, to $33.9 million for the nine
months ended September 30, 2009 from $16.3 million for the period from February
1, 2008 to September 30, 2008.





Net revenue (Pro
forma). Sales revenue increased by $16.1 million, or 90%, to $33.9
million for the nine months ended September 30, 2009 from $17.8 million for the
nine months ended September 30, 2008. The increase was driven by the increase in
sales volume of the Company’s day-old broilers by 38 million birds, or 94%, from
41 million birds for the nine months ended September 30, 2008 to 79 million
birds for the nine months ended September 30, 2009. The increase in sales volume
was a result of capacity expansion in year 2008 and 2009. The increase in sales
volume was partially offset by a decrease in unit selling price. The selling
price of day-old broilers decreased slightly from RMB 2.82 per bird for the
three months ended September 30, 2008 to RMB 2.74, or 3%, per bird for the three
months ended September 30, 2009. The price decrease was mainly due to the
decreasing pork price, which led to a decrease in unit price of its
substitution, chicken meat as discussed above, the pork price rebounded in the
third quarter of year 2009.





Cost of revenues (As
reported). The Company’s cost of revenues increased by $10.2 million, or
87%, to $21.9 million for the nine months ended September 30, 2009 from $11.7
million for the period from February 1, 2008 to September 30, 2008.





Cost of revenues (Pro forma).
The Company’s cost of revenues increased by $8.9 million, or 68%, to $21.9
million for the nine months ended September 30, 2009 from $13.1 million for the
nine months ended September 30, 2008. The main reason for the increase in the
cost of revenues was the increase in sales volume, which was partially offset by
a decrease in unit cost of day-old broilers.  The unit cost of day-old
broilers decreased 19% from the three months ended September 30, 2008 to
the three months ended September 30, 2009. This decrease was due to the
Company’s expanded productivity which diluted allocated cost.





As a
percentage of net revenues, the cost of revenues decreased by 8%, from 73% for
the nine months ended September 30, 2008, to 65% for the nine months ended
September 30, 2009. The lower cost of revenues as a percentage of net revenues
for the nine months ended September 30, 2009 was attributable to the breeder
stock having reached maturity level and normal egg production rates. This
resulted in a lower unit-cost as there were more day-old broilers to absorb
fixed hatching costs. For the comparative period in 2008, the cost of revenues
as a percentage of net revenues is higher because the breeder stock has not
matured in the first quarter 2008, causing a lower production rate and a higher
unit-cost, affecting the nine months ended September 30, 2008.





Gross profit (As reported).
The Company’s gross profit increased by $7.4 million, or 162% to $12 million for
the nine months ended September 30, 2009 from $4.5 million for the period from
February 1, 2008 to September 30, 2008.





Gross profit (Pro forma). The
Company’s gross profit increased by $7.3 million, or 154%, to $12 million for
the nine months ended September 30, 2009 from $4.7 million for the nine months
ended September 30, 2008.  Gross profit as a percentage of net revenues was
35.4% for the nine months ended September 30, 2009, as compared to 26.6% for the
nine months ended September 30, 2008. The increase was mainly attributable
to the normal productivity level better leveraged sales price in the first nine
months of year 2009.





General and administrative expenses
(As reported). The general and administrative expenses increased by $0.66
million, or 44%, to $2.2 million for the nine months ended September 30, 2009
from $1.5 million for the period from February 1, 2008 to September 30,
2008.





General and administrative expenses
(Pro forma). The general and administrative expenses increased by $0.54
million, or 33%, to $2.2 million for the nine months ended September 30, 2009
from $1.6 million for the nine months ended September 30, 2008. The increase in
general and administrative expense was mainly due to the public company related
expenses for the nine months ended September 30, 2009. The general and
administrative expenses comprised mainly of public company related expenses of
$1.2 million including stock based compensation of $545,000, representing 58% of
total general and administrative expenses, human resources and related expenses
of $0.2 million, representing 10% of total general and administrative expenses,
facilities and utility expenses of $0.3 million, representing 13% of total
general and administrative expense, and travel expenses of $0.3 million,
representing 15% of total general and administrative expenses.





12


Selling Expenses (As
reported). The Company’s selling expenses increased by $35,000, or 12%,
to $315,000 for the nine months ended September 30, 2009 from $280,000 for the
period from February 1, 2008 to September 30, 2008.





Selling Expenses (Pro forma).
The Company’s selling expenses increased by $6,000, or 2%, to $315,000 for the
nine months ended September 30, 2009 from $309,000 for the same period in 2008.
Selling expenses comprised mainly of packaging and transportation expenses of
$0.2 million, representing 64% of total selling expenses; human resources and
related expenses of $45,000, representing 14% of total selling expenses; and
travel and office expenses of $31,000, representing 16% of total selling
expense. The increase in selling expenses was primarily due to the increase in
sales volume. As a percentage of net revenues, selling expenses decreased by
0.81%, to 0.93% for the nine months ended September 30, 2009 from 1.74% for the
same period in 2008. The Company’s selling expense will not increase in
proportion with sales growth because the Company distributes its product through
distributors.





Interest expenses (As
reported). Interest expenses decreased by $322,000, or 26%, to $441,000
for the nine months ended September 30, 2009 from $763,000 for the period from
February 1, 2008 to September 30, 2008. The decrease was due to the increase in
interest being capitalized in construction in progress.  Excluding
capitalized interest, interest expense on bank loans would have been $984,000
for the nine months ended September 30, 2009.





Interest expenses (Pro
forma). Interest expenses decreased by $408,000, or 48%, to $441,000 for
the nine months ended September 30, 2009 from $849,000 for the nine months ended
September 30, 2008. Excluding capitalized interest, interest expense on bank
loans would have been $984,000 for the nine months ended September 30, 2009.
This increase in interest expense of $221,000 was due to the interest rate on
bank loans for the year ended September 30, 2009 compared with the lower
interest rates for the same period of 2008.





Net profit (As reported). Net
profit increased by $6.3 million, or 220%, to $9.1 million for the nine months
ended September 30, 2009 from net profit of $2.8 million for the period from
February 1, 2008 to September 30, 2008, as a result of the factors described
above.





Net profit (Pro forma).
Net profit increased by $6.2 million, or 205%, to $9.1 million for the nine
months ended September 30, 2009 from net profit of $2.9 million for the nine
months ended September 30, 2008, as a result of the factors described
above.





Liquidity
and Capital Resources





The
Company expects that its strong positive working capital of $10.57 million as of
September 30, 2009 will meet its foreseeable working capital needs for the next
12 months from the date of this report as management believes the Company would
be able to renew the $8.3 million bank loans that are due in the next 12
months.





General





As of
September 30, 2009, the Company had cash and cash equivalents of approximately
$22.04 million. The following table provides detailed information about the
Company’s net cash flow for the nine months ended September 30,
2009.





Nine
      months endedSeptember
      30, 2009Net
      cash provided by operating activities
                  
                  $
                  12,790,656Net
      cash used in investing activities
                  
                  
                  (3,996,735
                  )Net
      cash used in financing activities
                  
                  
                  (210,412
                  )Effect
      of foreign currency translation on cash
                  
                  
                  40,836Net
      cash inflow
                  
                  
                  8,624,345Cash
      at beginning of period
                  
                  
                  13,412,205Cash
      at end of period
                  
                  $
                  22,036,550




Operating Activities. Net
cash provided by operating activities was $13 million for the nine months ended
September 30, 2009. Net cash provided by operating activities was primarily
attributable from the net income of $9.2 million; an increase of $0.5 million of
advance from customers; an increase of $0.6 million of accounts payable; and
noncash adjustment for depreciation of $1.6 million; non cash compensation of
$0.5 million.  In addition, inventory level has remained fairly
consistent at the $6 million to $6.6 million level; therefore, no significant
impact to operating cash flow during the nine months ended September 30,
2009.





13




Investing Activities. Net
cash used in investing activities for the three months ended September 30, 2009
was $4 million. It was mainly for capital expenditure in the building of breeder
farms and payment of rental deposit for the breeder farms totaling $4.9 million
for the nine months ended September 30, 2009. The following is a summary of
the $4.9 million cash used in deposits paid and acquisition of property, plant
and equipment:





Nine
      months endedSeptember
      30,2009Rental
      deposits
                    
                    $
                    2,587,750Deposits
      paid for construction of breeding farm
                    
                    
                    1,053,085Deposits
      paid for purchase of equipment
                    
                    
                    147,208Purchase
      of equipment
                    
                    
                    548,303Capitalized
      interest
                    
                    
                    542,765Others
                    
                    
                    64,994Total
      deposit paid and acquisition of property, plant and
    equipment
                    
                    $
                    4,944,105




Financing Activities. Net
cash used in financing activities for the nine months ended September 30, 2009
was $210,412. Net cash used in financing activities was attributed to the
decrease of the net payment to related parties for working capital
purposes.




Loan
Facilities





As
at September 30, 2009, maturities of the Company’s bank loans are as
follows:





As of 
      September 30, 20092010
                        
                        
                        8,336,2582011
                        
                        
                        2,457,002$
                        10,793,260




All
amounts, other than percentages, are in U.S. dollars





Type
                                
                                Contracting Party
                                
                                Valid period
                                
                                Duration
                                
                                AmountBank loan
                                
                                Hanting Kaiyuan
                                  Rural Credit Cooperative
                                
                                January 7, 2009-Jan 7, 2011
                                
                                18 months
                                
                                $
                                1,067,626Bank loan
                                
                                Nansun Rural Credit
                                
                                Nov 28,2008-Nov 28, 2010
                                
                                24 months
                                
                                
                                4,826,255Bank loan
                                
                                Nansun Rural Credit
                                
                                Dec 10, 2008-Dec 9, 2009
                                
                                24 months
                                
                                
                                292,500Bank loan
                                
                                Nansun Rural Credit
                                
                                May 17, 2008-May 17, 2010
                                
                                36 months
                                
                                
                                3,656,253Bank loan
                                
                                Shuangyang Rural Credit
                                
                                Oct 16,2008 -Oct 13, 2010
                                
                                24 months
                                
                                
                                950,626Total
                                
                                
                                
                                
                                
                                
                                
                                $
                                10,793,260




The
Company has loan facilities from three institutions and the following are the
material terms of such bank loans





Loan
from Hanting Kaiyuan Rural Credit Cooperative:





On
January 8, 2009, PRC Yuhe renewed the loan agreement with Hanting Kaiyuan Rural
Credit Cooperative. Pursuant to the loan agreement, Hanting Kaiyuan Rural Credit
Cooperative loaned PRC Yuhe $1,067,626 at an interest rate of 7.56% per annum.
PRC Yuhe is obligated under such loan agreement to pay interest monthly and
repay the loan on its maturity date, January 7, 2011. The loan is secured by the
plant and equipment of PRC Yuhe with a net book of $1,026,842 as of September
30, 2009.





14




Loans
from Nansun Rural Credit:





PRC Yuhe
renewed four loan agreements with Nansun Rural Credit on November 28,
2008.  The interest rate for the loan agreements is 13.82% per annum
for the renewed bank loan agreement, compared to the original rate of 9.21%,
which enjoyed the support of government. The total amount of these four
bank loans is $4,826,255.





The other
four loans with an outstanding balance of $3,656,253 from Nansun Rural Credit
have an interest rate reduced from 12.1% to 8.64% due to the interest rate
adjustment by the PRC government.





The last
bank loan from Nansun Rural Credit with an outstanding balance of $292,500 was
borrowed in October 2008 with an interest rate reduced from 10.46% to 7.56% per
annum.





All loans
are secured by the land use right and building of PRC Yuhe and Taihong with a
net book value of $8,933,078 as of September 30, 2009.





Loan
from Shuangyang Rural Credit:





Taihong
renewed the loan agreements with Shuangyang Rural Credit on October 16, 2008,
amounting to $950,626. The interest rate for the loans is 9.83% per annum.
Taihong is obligated under such loan agreements to pay interest monthly and
repay the loans on their maturity date, October 13, 2010. The loans are secured
by the plant and equipment of Taihong with a net book value of $931,914 as
of September 30, 2009.





Due to
related companies:





As of
September 30, 2009, the Company has $2,194 due to Weifang Hexing Breeding Co.,
Ltd., a company for which Mr. Gao Zhentao serves as a director.  The
amounts due to this related company are unsecured, interest free and have no
fixed repayment date.  These loans are used for working capital
purposes.





Obligations Under
Material Contracts





Below is a table setting
forth the Company’s material contractual obligations as of September 30,
2009:





Payment due by periodContractual Obligations
                    
                    Total
                    
                    
                    Less than 1
                      year
                    
                    
                    1-3 years
                    
                    
                    3-5 years
                    
                    
                    More than
                      5 yearsLong-Term
      Debt Obligations
                    
                    $
                    10,793,260
                    
                    
                    $
                    8,336,258
                    
                    
                    $
                    2,457,002
                    
                    
                    
                    -
                    
                    
                    
                    -Due
      to Related Companies
                    
                    $
                    5,612
                    
                    
                    $
                    5,612
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Lease Obligations
                    
                    $
                    1,873,003
                    
                    
                    $
                    22,530
                    
                    
                    $
                    270,360
                    
                    
                    $
                    180,240
                    
                    
                    $
                    1,399,873Capital
      Lease Obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Purchase
      Obligations
                    
                    $
                    1,101,256
                    
                    
                    $
                    1,101,256
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      Long-Term LiabilitiesReflected
      on the Registrant’sBalance
      Sheet under GAAP
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    13,773,131
                    
                    
                    $
                    9,465,656
                    
                    
                    $
                    2,727,362
                    
                    
                    $
                    180,240
                    
                    
                    $
                    1,399,873


15




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company’s management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. The Company considers its critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of financial statements, including the
following:





            Inventory- Inventories consisting of raw
      materials, work in progress and finished goods are stated at the lower of
      cost and net realizable value. The cost of inventories is determined using
      the weighted average cost method, and includes expenditures incurred in
      acquiring the inventories and bringing them to their existing location and
      condition. Net realizable value is the estimated selling price in the
      ordinary course of business less any applicable selling expenses. Finished
      goods are comprised of direct materials, direct labor and an appropriate
      proportion of overhead. At each balance sheet date, inventories that are
      worth less than cost are written down to their net realizable value, and
      the difference is charged to the cost of revenues of that
      period.





            Trade
      receivable–Trade receivables are recognized
      and carried at the original invoice amount less an allowance for any
      uncollectible amounts. An estimate for doubtful accounts is made when
      collection of the full amount is no longer probable. Bad debts are written
      off as incurred.





            Notereceivables  – Note receivables are
      stated at the original principal amount less an allowance for any
      uncollectible amounts. Management provides for an allowance when
      collection of the full amount is no longer probable by establishing an
      allowance equivalent to 30% of gross amount of notes receivables due over
      6 months and 60% of gross amount of notes receivables due over 1 year.
      Full provision will be made for notes receivables due over 2
      years.




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





Buildings
              20
      yearsMachinery
              10
      yearsVehicles
              5
      yearsFurniture
      and equipment
              3
      years




The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.




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




If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During the reporting
periods, there was no impairment loss.





            Intangible
      assets- Intangible
      assets represent land use rights in the PRC. Land use rights are carried
      at cost and amortized on a straight-line basis over the period of rights
      of 50 years commencing from the date of acquisition of equitable interest.
      According to the laws of PRC, the government owns all of the land in PRC.
      Companies or individual are authorized to possess and use the land only
      through land usage rights approved by the PRC
      government.


16






            Guarantee
      Expense- The
      Company accounts for its liability for products guaranteed in accordance
      with FASB ASC 460, “Guarantees” (“FASB ASC 460”).  Under FASB ASC
      460, the aggregate changes in the liability for accruals related to
      product warranties issued during the reporting period must be charged to
      expense as incurred.




The
Company guarantees a 98% survival rate of its product by delivering additional
2% of the product.  The guarantee expires seven days after delivery. 
If the survival rate falls below 98%, the Company provides additional guarantee
compensation to customers.  Based on historical experience, the likelihood
that survival rate falls below 96% is remote and therefore no accrued guarantee
liability was recorded at period end.  The Company records guarantee
expense as incurred.





            Revenue
      recognition- Net
      revenue is recognized when the third-party distributors and broiler farms
      and integrated chicken companies take delivery and acceptance of
      products.  The Company treats both the distributors and broiler farms
      and integrated chicken companies as end customers.  The price is
      fixed or determinable as stated in the sales contract, and the
      collectability is reasonably assured.  Customers do not have a
      general right of return on products
  delivered.





            Use of
      estimates- The
      preparation of the Company’s financial statements in conformity with
      accounting principles generally accepted in the United States of America
      (“GAAP”) requires management to make estimates and assumptions that affect
      reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and the
      reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. The financial statements
      include some amounts that are based on management’s best estimates and
      judgments. These accounts and estimates include, but are not limited to,
      the valuation of accounts receivable, other receivables, inventories,
      deferred income taxes, and the estimation on useful lives of plant and
      equipment. These estimates may be adjusted as more current information
      becomes available, and any adjustment could be
      significant.





            Significant
      Estimates -
      Relating to Specific Financial Statement Accounts and Transactions Are
      Identified - The financial statements include some amounts that are based
      on management’s best estimates and judgments. The most significant
      estimates relate to allowance for uncollectable accounts receivable,
      inventory work in process valuation and obsolescence, depreciation, useful
      lives, taxes, and contingencies. These estimates may be adjusted as more
      current information becomes available, and any adjustment could be
      significant.





            Income
      tax– The Company
      accounts for income taxes using an asset and liability approach and allows
      for recognition of deferred tax benefits in future years.  Under
      the asset and liability approach, deferred taxes are provided for the net
      tax effects of temporary differences between the carrying amounts of
      assets and liabilities for financial reporting purposes and the amounts
      used for income tax purposes.  A valuation allowance is provided
      for deferred tax assets if it is more likely than not these items will
      either expire before the Company is able to realize their benefits, or
      that future realization is
uncertain.




The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporate income tax rate is 25%. Weifang Yuhe
Poultry Co., Ltd. is a poultry company, and in accordance with the relevant
regulations regarding the favorable tax treatment for an outstanding poultry
company, the Company is entitled to income tax exemption effective as of January
1, 2008.  The corporate income tax for the subsidiary, Weifang Taihong
Feed Co., Ltd is 25%.





            Fair value of
      financial instruments–FASB ASC 825, “Disclosures about
      Fair Value of Financial Instruments” (“FASB ASC 825”) requires entities to
      disclose the fair values of financial instruments except when it is not
      practicable to do so. Under FASB ASC 825, it is not practicable to make
      this disclosure when the costs of formulating the estimated values exceed
      the benefit when considering how meaningful the information would be to
      financial statement
users.


17




The fair
values of all assets and liabilities do not differ materially from their
carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes during
the period ended September 30, 2009 and December 31, 2008.





            Statutory
      reserve– In
      accordance with the relevant laws and regulations of the PRC and the
      articles of associations of the Company’s PRC subsidiaries, PRC Yuhe and
      Taihong are required to allocate 10% of their net income reported in the
      PRC statutory accounts, after offsetting any prior years’ losses, to the
      statutory surplus reserve, on an annual basis.  When the balance
      of such reserve reaches 50% of the respective registered capital of the
      subsidiaries, any further allocation is optional.  The statutory
      surplus reserves can be used to offset prior years’ losses, if any, and
      may be converted into registered capital, provided that the remaining
      balances of the reserve after such conversion is not less than 25% of
      registered capital. The statutory surplus reserve is
      non-distributable.




Effects
of Inflation




Inflation
and changing prices have not had a material effect on the Company’s business and
the Company does not expect that inflation or changing prices will materially
affect its business in the foreseeable future. However, the impact of inflation
on PRC Yuhe and Taihong may not be readily recoverable in the prices of the
Company’s products.




Off
Balance Sheet Arrangements




The
Company does not have any off balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity or capital expenditures or capital resources that is material to an
investor in its securities.




Seasonality




The
Company’s business has been subject to material seasonal variations in
operations for the normal life cycle of 66 weeks of the breeder stock. Breeder
stock produced eggs at their mature stage, around weeks 28 - 60 and therefore,
the Company’s business will have seasonal variation on the early and aged stage
of the breeder stock. In addition, the Company normally raises a new batch of
breeder stock after the aged breeder stock retires and is sold. This impact of
seasonality can be resolved when the Company expands its batches of breeder
stocks.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
required for a smaller reporting company.




ITEM
4T. CONTROLS AND PROCEDURES




(a)            Evaluation of disclosure controls and
procedures.




The
Company’s disclosure controls and procedures are designed to provide reasonable
assurance of achieving its objectives, and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.


18





The
Company’s management, with the participation of its chief executive officer and
chief financial officer, Messrs. Gao Zhentao and Hu Gang, respectively evaluated
the effectiveness of its disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports, such as this 10-Q, that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure.  Based on that evaluation, Messrs. Gao and Hu concluded that
because of the existence of certain related party loans in violation of Section
402 of the Sarbanes-Oxley Act of 2002 contributed to in part by a lack of review
and approval of these related party loans by independent directors constituting
a significant deficiency in internal control over financial reporting, the
Company’s disclosure controls and procedures were not effective as of September
30, 2009.  As of September 30, 2009, the Company advanced money to
four related parties with a total outstanding amount in excess of $2.77 million,
of which, the Company advanced over $2.77 million to one related party, Shandong
Yuhe Food Group Co., Ltd.




(b)            Changes in internal control over
financial reporting.




There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation performed that occurred during the
quarter covered by this report that has materially affected or is reasonably
likely to materially affect, its internal control over financial
reporting.


19





PART
II




OTHER
INFORMATION




ITEM
1. LEGAL PROCEEDINGS




From time
to time, the Company may become involved in various lawsuits and legal
proceedings that arise in the ordinary course of business. To the Company’s
knowledge, no director, officer or affiliate of the Company, and no owner of
record or beneficial owner of more than five percent, 5%, of the Company’s
securities, or any associate of any such director, officer or security holder is
a party adverse to the Company or has a material interest adverse to the Company
in reference to pending litigation.




ITEM
1A. RISK FACTORS




Not
required for a smaller reporting company.




ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Since
January 1, 2005, the Company has issued unregistered securities to a limited
number of accredited investors as described below:




(1)
  On November 16, 2007, the Company issued 951,996 shares of its common
stock to Halter Financial Investments, L.P., an accredited investor, for
aggregate proceeds of $425,000. The issuance and sales of these securities were
deemed to be exempt from registration pursuant to Section 4(2) of the Securities
Act. The Company declared and paid a special cash dividend of $3.088 per
share to its shareholders on November 19, 2007. Halter Financial
Investments, L.P. did not participate in such dividend. The dividend was payable
to shareholders of record on November 15, 2007. The dividend payment date was
November 19, 2007. The dividend was payable to the Company’ shareholders who
held 135,999 shares of its common stock and resulted in a total dividend
distribution of $420,000. The funds for the dividend came from the $425,000
proceeds received from the sale of common stock to Halter Financial Investments,
L.P.




(2)
  On March 12, 2008 in connection with transactions related to the
acquisition of Bright Stand International Limited, the Company issued 8,626,318
shares of its common stock to Kunio Yamamoto, an accredited investor. The
issuance and sales of these securities were deemed to be exempt from
registration pursuant to Section 4(2) of the Securities Act.




(3)
  On March 12, 2008 the Company issued 5,829,018 shares of its common stock
to twenty-five accredited investors for aggregate proceeds of
approximately $18,000,000. The issuance and sales of these securities were
deemed to be exempt from registration pursuant to Rule 506 under the
Securities Act. The Company used part of the proceeds to build new chicken farms
and purchase new equipment for the expansion of the Company’s production
capacity.


20




(4) On
October 27, 2008, the Company issued 178,848 new shares to Roth Capital
Partners, LLC based on their cashless exercise of 333,198 warrants issued to it
as compensation for their services as co-placement agent. The issuance of
these securities was deemed to be exempt from registration pursuant to Section
4(2) of the Securities Act.




There
were no underwritten offerings employed in connection with any of the
transactions set forth above.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS




None.




ITEM
5. OTHER INFORMATION





Make Good
Escrow Agreements




According
to the Consolidated Statements of Income and Comprehensive Income of the Company
in its Form 10-K for the fiscal year ended December 31, 2008 filed by the
Company with the Securities and Exchange Commission on March 31, 2009, which was
subsequently amended for other reasons, the Company’s After Tax Net Income for
the fiscal year ended December 31, 2008 was reported as $10,524,885, which has
exceeded the 2008 Guaranteed After Tax Net Income, as defined in the Make Good
Escrow Agreements described below.




The
Company entered into a Make Good Escrow Agreement, dated March 12, 2008,
with Mr. Kunio Yamamoto, the “Make Good Pledgor”, Tri-State Title &
Escrow, LLC, the “Escrow Agent”, Roth Capital Partners LLC, “Roth Capital” and
each of the investors in the private offering of securities of the Company.
 On July 31, 2009, Roth Capital executed a Form of Release and instructed
the Escrow Agent to release 1,679,992 shares of common stock, the 2008 Make Good
Shares, to Mr. Kunio Yamamoto, the Make Good Pledgor.  On or about August,
2009, 1,679,992 shares of the Company’s common stock were released to Mr. Kunio
Yamamoto.





The
Company entered into a separate Make Good Escrow Agreement, dated March 12,
2008, with Mr. Kunio Yamamoto, the “Make Good Pledgor”, Interwest Transfer
Company, Inc., the “Escrow Agent”, and HFG International Limited, “HFG”. 
HFG has executed a Form of Release to release 235,196 shares of the Company’s
common stock to Mr. Kunio Yamamoto, the Make Good Pledgor.  On or about
April 27, 2009, 235,196 shares of the Company’s common stock were released by
HFG to Mr. Kunio Yamamoto.





The
NASDAQ Stock Market, the “Exchange”, informed the Company that the Exchange had
approved the listing of the Company’s common stock on the Exchange. The
Company’s common stock ceased trading on the OTC Bulletin Board and commenced
trading on the Exchange on October 30, 2009 under the trading symbol
“YUII”.


21





ITEM
6. INDEX TO EXHIBITS




31.1
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *




31.2
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *




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




32.2
                Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002. **
      filed herewith


22




SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




DATED:
November 11, 2009




YUHE
INTERNATIONAL, INC.




By:
                /s/
      Gao
      ZhentaoGao
      ZhentaoChief
      Executive Officer(On
      behalf of the Registrant and as Principal Executive
    Officer)By:
                /s/
      Hu
      GangHu
      GangChief
      Financial Officer(On
      behalf of the Registrant and as Principal Financial
    Officer)


23




EXHIBIT
INDEX




ExhibitNumber
            
            Description31.1
            
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
            
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
            
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*32.2
            
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*




* filed
herewith


24