CHINA ORGANIC AGRICULTURE, INC. - FORM 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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 000-52430

China Organic Agriculture, Inc.

(Exact name of registrant as specified in its charter)

Florida	20-3505071
State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization

Dalian City, Zhongshan District, 105

Youhao Road Manhattan Building #1, Suite 1511,

Dalian City, Liaoning Province, P.R. China.

(Address of principal executive offices) (Zip Code)

707-709-2321

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class

Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

Common Stock, no par value

(Title of class)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_|

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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer \|_\|	Accelerated filer \|_\|
Non-accelerated filer \|_\| (Do not check if a smaller reporting company)	Smaller reporting company \|X\|

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

As of June 30 2009, the aggregate market value of the common stock of the registrant held by non-affiliates (excluding shares held by directors, officers and others holding more than 5% of the outstanding shares of the class) was $20,294,074 based upon a per share closing price of $0.37 as reported by Yahoo Finance.

As of May 13 2010, the registrant had outstanding 73,157,232 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS

PART I	Page No.

Item 1. Business	4
Item 1A.Risk Factors	7
Item 2. Properties	14
Item 3. Legal Proceedings	15
Item 4. (Removed and Reserved)	15

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6. Selected Financial Data	16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 8. Financial Statements and Supplementary Data	24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
Item 9A. Controls and Procedures	25

PART III

Item 10. Directors, Executive Officers and Corporate Governance	27
Item 11. Executive Compensation	28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13. Certain Relationships and Related Transactions, and Director Independence	29
Item 14. Principal Accountant Fees and Services	30

PART IV

Item 15. Exhibits and Financial Statement Schedules	31

Special Note Regarding Forward Looking Information

This report contains forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, future results and events, and financial performance. All statements made in this report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to cash flows, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "plan," "may," "will," variations of such words and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. Readers should not place undue reliance on forward-looking statements which are based on management's current expectations and projections about future events, are not guarantees of future performance, and are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this report, particularly under the caption "Risk Factors." Except as required under the federal securities laws, we do not undertake any obligation to update the forward-looking statements in this report.

PART I

Item 1. Business.

Introduction

In March 2007 we, then a publicly traded company with no operations, acquired through a reverse merger all of the shares of China Organic Agriculture Limited ("COA"). COA is a holding company formed under the laws of the British Virgin Islands that then owned all of the issued and outstanding stock of Jilin Songyuan City ErMaPao Green Rice Limited ("ErMaPao"). ErMaPao is an operating company organized under the laws of China in May 2002 engaged in growing, processing and distributing rice. In addition to such activities, in early 2008 we began to engage in the trading and wholesale distribution of rice and other agricultural commodities.

In May 2007 we changed our name to China Organic Agriculture, Inc. As used in this report, the terms "we," "our," "Company" and "China Organic" refer to China Organic Agriculture, Inc. and its subsidiaries, and the terms "ton" and "tons" refers to metric tons, in each case, unless otherwise stated or the context requires otherwise. Since most of our business activities take place in China, our functional currency is the Renminbi, which had an average exchange rate to the US dollar of $0.1463 and $0.1415 during fiscal years 2009 and 2008, respectively.

The acquisition of COA was accounted for as a reverse acquisition. Consequently, our financial statements included herein for dates and periods prior to the consummation of the acquisition reflect the historical financial condition, results of operations and cash flows of COA and its subsidiary, ErMaPao. Effective September 30, 2008, we sold ErMaPao to Bothven Investments Ltd. Consequently, in all financial statements contained herein, ErMaPao is treated as a “Discontinued Operation.”

Operations

We commenced active operations in China upon completion of the reverse merger in March 2007 in which we acquired COA and its operating subsidiary, ErMaPao. Through ErMaPao we engaged in growing, processing and distributing rice. In addition to such activities, since early 2008 we have been engaged in the trading and wholesale distribution of rice and other agricultural commodities purchased from third parties. The agricultural products we trade are mainly focused on “green and healthy” rice and the Company is actively looking to establish itself as a health foods processor and distributor.

In February 2008 we purchased the Bellisimo Vineyard, a 153 acre operating vineyard in Sonoma County, California. Before we acquired the Bellisimo Vineyard, it was providing Merlot, Chardonnay, and Cabernet Sauvignon grapes to local wineries for both red and white wines. We may continue to sell grapes grown on the Bellisimo Vineyard to local wineries or to wineries which make wines for resale in China and elsewhere in Asia. Bellisimo Vineyard and its housing properties are also being rented out as venues for events and extended stays.

In June 2008 we formed a subsidiary under the laws of the British Virgin Islands to act as the importer of record in connection with our efforts to distribute wines to wholesalers in China and Asia. Management believes that demand in China is growing for premium wines and we intend to seek to import wines from the United States and other growing regions initially into China and then to other destinations in Asia. We are in the early stages of seeking to become a wine importer and this will be a new business for us. We have no experience in the distribution of wines and there can be no assurance that we will be able to successfully import wines into China.

In October 2008, we acquired all of the outstanding shares of Princeton International Investment Ltd. (“Princeton”), which owned, and was formed to facilitate our acquisition of, 60% of the outstanding shares of Dalian Baoshui District Huiming Industry Limited ("Dalian Huiming”). Dalian Huiming, founded in 2001, is headquartered in the Dalian Free Trade Zone, in Dalian City Liaoning Province, China. Dalian Huiming is engaged in grain purchasing, international and domestic trading, wholesale sales and food delivery logistic services. Dalian Huiming’s activities are primarily focused on soybeans, corns and cereal crops, which are major products of the provinces located in Northeastern China. Most of Dalian Huiming's sales are to other distributors or industrial users of agricultural products and it distributes its products in many regions of China, including Liaoning Province, Jiling Province, Heilongjiang Province, Sichuan Province, Fujian Province and the cities of Beijing and Shanghai.

On March 23, 2010, we completed the acquisition of 60% of the capital stock of Changbai Eco-Beverage Co., Ltd. (“Changbai”) for $10,250,403 (70 Million RMB). Changbai produces a variety of products from blueberries grown in the Mountain Changbai region of Northeast China, including blueberry wines, blueberry beverages, blueberry food products such as jam, jelly, preserves and cakes, and blueberry healthcare products. Changbai also produces honey and other products from locally grown herbs and fruits.

ErMaPao – Growing, Processing and Distribution of Rice

The following is a short description of the business of ErMaPao. We acquired ErMaPao in March 2007 and sold it effective September 30, 2008. Consequently, although it represented substantially all of our operations during the time it was owned by us, its results are reported in our financial statements as “Discontinued Operations” and, effective September 30, 2008, it was no longer part of our operations.

ErMaPao operates in Songyuan City of Jilin Province. Since its formation, ErMaPao has been dedicated to the production of "green" and "organic" rice. While it was owned by us, ErMaPao’s rice was grown on 1,600 acres it controlled as a result of the grant of government land use rights and in collaboration with family units who supplied ErMaPao with rice grown on approximately 4,660 acres to which they, in the aggregate, had been granted land use rights. ErMaPao established standards regarding the quality of the product grown by the family units to ensure that high standards of quality were maintained. ErMaPao supplied the family units with seed, tools and training. Throughout the growth cycle, the family units were provided access to agronomists who advised them on the avoidance of common cultivation problems and on the maximization of yield. In 2007, approximately 15% of our revenue came from sales of organic rice, and 85% of our revenues were the result of sales of green rice. In 2008 approximately 20.8 % of our revenues were derived from sales of rice by ErMaPao prior to September 30, 2008.

To be certified as "green" rice, rice and the methods by which it is produced must adhere to certain standards. Specifically to be certified grade green rice, the production quality of the environment must comport with certain basic green food production environmental quality standards established by the Administration of Agricultural Quality, Supervision, Inspection and Quarantine of the People's Republic of China and there may be limited use of synthetic fertilizers and biotech production methods.

To be certified "AA" grade green rice, the production quality and conditions must comport with more stringent green food production environmental quality standards. During the production process, no chemical pesticides, fertilizers, food additives, feed additives, veterinary drugs or anything known to be harmful to the environment or human health can be used. The AA grade is obtained through the use of organic fertilizer such as green manure, biological or physical methods of crop plantation, soil fertilization, and pest control.

Organic rice is rice produced to the highest of the "green food production environment quality standards."

The Bellisimo Vineyard –Wine Operations

In addition to its grape growing activities, there are seven buildings located on the Bellisimo Vineyard, which we occasionally rent to third parties. The rates for the main building run from approximately $900 to $1,300 per night depending upon the season. Although these rental activities supplement the revenues derived from the Vineyard, they are not material to our operations. We sold grapes to other wineries but did not sell Bellisimo wines in 2009

In December 2008, the Company entered a joint venture with China-based Xinbin Manchu Autonomy County East Star Wine Company Ltd. ("Xinbin"). The joint venture, Bellisimo Ice Wine, is intended to enable the Company to market premium table wines and specialty ice wines in China. The Company owns 60% of Bellisimo Ice Wine.

Grain Purchasing, Distribution and Logistic Services

Dalian Huiming purchases agriculture products from independent suppliers and sells the products to distributors and retailers. Although Dalian Huiming has what it believes are valuable working relationships with its suppliers and buyers, its business constantly is subject to competition from other grain traders and distributors.

Principal Customers

During 2009, the Company’s principal customers, the proceeds from sales to each of these customers and the percentages of the Company’s revenues represented by each of these customers were as follows:

Customers	Revenues		Percentage of Company’s Revenues
Shenzhen Shen Jing Da Agriculture Ltd.	$	38,796,677		27%
Beijing Golden Valley Trading Co. Ltd.	$	29,198,587		20%
Dashiqiao Huan Cheng Oil Co. Ltd.	$	4,617,904		3%
Chian Xinliang Logistics Co. Ltd.	$	4,220,807		3%
Shanghai Good Friend Trading Group, Co. Ltd	$	3,322,486		2%

During 2008, the Company’s principal customers, the proceeds from sales to each of these customers and the percentages of the Company’s revenues represented by each of these customers were as follows:

Customers	Revenues		Percentage of Company’s Revenues
Shenzhen Shen Jing Da Agriculture Ltd.	$	51,214,939		46%
Beijing Golden Valley Trading Co. Ltd.	$	38,159,510		34%
Shanghai Good Friend Trading Group, Co. Ltd.	$	3,389,421		3%
Jing Yun Da Investment Co. Ltd.	$	2,988,577		3%
Beijing Li Da Long Trading Co. Ltd.	$	2,793,493		2%

The concentration of our sales to a limited number of customers leaves us vulnerable to an adverse short-term impact on our revenues should one of these customers cease doing business or reduce the amount of business it does with us.

We obtain supplies of grain from a limited number of companies. The purchases made from each of these suppliers during 2009, and the percentages of our business represented by each of these suppliers, were as follows:

Suppliers	Purchases		Percentage of Company’s Purchases
Jiling Shen Kang Long Rice Co. Ltd	$	26,534,323		30%
Wuchang Yangxing Rice Co. Ltd	$	21,067,813		24%
Heihe Aihui Grain Storage Co. Ltd	$	6,824,845		8%
Heilongjiang Linkou Diaoling Grain Storage Co. Ltd	$	5,161,139		6%
Heilongjiang BaoQuanLin Grain Transportation Co. Ltd	$	3,899,832		4%

The purchases made from our largest suppliers during 2008, and the percentages of our business represented by each of these suppliers, were as follows:

Suppliers	Purchases		Percentage of Company’s Purchases
Jiling Shen Kang Long Rice Co. Ltd	$	72,048,373		84%
Heilongjiang Wuchang Littlehill Grain Storage Co. Ltd	$	2,588,401		3%
Heilongjiang Bao Quan Lin Grain Transportation Co. Ltd	$	2,225,176		3%
Heilongjiang Ah City Second Grain Storage Co. Ltd	$	1,732,673		2%
Heihe Aihui Grain Storage Co. Ltd	$	1,678,642		2%

The limited number of companies from which we obtain inventories leaves us vulnerable to an adverse short-term impact on our revenues should one of these suppliers cease doing business or reduce the amount of business it does with us.

Competition

The competition for the purchases of grain in the open market is fierce and the barriers to entry are low. The Company competes with many larger, nationalized companies such as China Grain Co. Ltd. Many of these companies have larger organizations and are substantially better capitalized than the Company.

To date, our sales primarily have been limited to customers within the PRC and we expect that our sales will remain primarily domestic for the immediate future. The markets for our products have been experiencing increased levels of demand as China continues its recent rate of growth. Yet, as they expand, the markets for our products remain highly competitive. Our marketing strategy involves developing long term ongoing working relationships with suppliers and customers which foster mutually advantageous relationships.

Employees

As of December 31, 2009 we employed 206 full-time employees. Approximately 47 % of our employees are management and sales personnel and the balance are operational employees. None of our employees is represented by a union.

Item 1A. Risk Factors.

You should consider carefully each of the following business and investment risk factors and all of the other information in this report. If any of the following risks and uncertainties develops into actual events, the business, financial condition or results of our operations could be materially adversely affected. If that happens, the trading price of our shares of common stock could decline significantly. The risk factors below contain forward-looking statements regarding our business. Actual results could differ materially from those set forth in the forward-looking statements. See "Special Note Regarding Forward-Looking Information."

Risks Relating to Our Business

Our revenues depend in large part on our customer and supplier relationships, and any loss, cancellation, reduction, or interruption in these relationships could harm our business.

In general, we depend on our suppliers and customers to trade the products we carry. If these relationships were to be disrupted, sales to such customers would become difficult or significantly reduced and thus our revenues and net income could significantly decline. The Company is also subject to risks of increased costs from obtaining supplies from suppliers due to production circumstances beyond the Company’s control. We also face risks of decreasing sale prices of the products we trade due to increased competition and or termination of orders from customers. Our success will depend on our continued ability to develop and manage relationships with significant customers and suppliers. Any adverse change in our relationships with our customers and suppliers may have a material adverse effect on our business. Although we have expanded our distribution capacity, we expect that our customer concentration will not change significantly in the near future. We cannot be sure that we will be able to retain our largest customers and suppliers or that we will be able to attract additional customers and suppliers, or that our customers and suppliers will continue to buy and provide our products in amounts comparable to prior years. The loss of one or more of our largest customers or suppliers, any reduction or interruption in sales to these customers or supplies from our suppliers, our inability to successfully develop relationships with additional customers or suppliers or future adverse price moves that may occur, could significantly harm our business.

Attracting and retaining key personnel is an essential element of our future success.

Our future success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate executive and other key employees, including those in managerial, technical, marketing and information technology support positions. Experienced management, technical, marketing and support personnel are in demand and competition for their talents is intense. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

If we lose the services of our chairman and our chief executive officer or chief financial officer, our business may suffer.

We are dependent on Mr. Jinsong Li, our Chairman and Chief Executive Officer, as well as Mr. Bo Shan, our Chief Financial Officer. The loss of the services of either could materially harm our business because of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from operational issues. We do not have key-man term life insurance policy on Mr. Li or Mr. Shan.

Our inability to successfully manage the growth of our business, including acquisitions and their subsequent integration, may have a material adverse effect on our business, results of operations and financial condition.

We expect to experience growth in the number of employees and the scope of our operations as a result of internal growth and acquisitions. Such activities could result in increased responsibilities for management. Our future success will be highly dependent upon our ability to manage successfully the expansion of our operations. Our ability to manage and support our growth effectively will be substantially dependent on our ability to implement adequate improvements to financial, inventory, management controls, reporting, order entry systems and other procedures, and hire sufficient numbers of qualified financial, accounting, administrative, and management personnel.

Our future success depends on our ability to address potential market opportunities and to manage expenses to match our ability to finance operations. The need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses effectively, our business, results of operations and financial condition may be adversely affected.

Our management is comprised almost entirely of individuals residing in the PRC with very limited English skills.

Our management is comprised almost entirely of individuals born and raised in the PRC. As a result of differences in culture, educational background and business experiences, our management may analyze, evaluate and present business opportunities and results of operations differently from the way they are analyzed, evaluated and presented by management teams of public companies in Europe and the United States. In addition, our management has very limited skills in English. Consequently, it is possible that our management team will emphasize or fail to emphasize aspects of our business that might customarily be emphasized in a different manner by comparable public companies from different geographical and political areas.

We will face many of the difficulties that companies in the early stage may face.

We have a relatively limited operating history as an agricultural trading company and none as a distributor of blueberries, which may make it difficult for you to assess our ability to identify merger or acquisition candidates and our growth and earnings potential. Therefore, we may face many of the difficulties that companies in the early stages of their development in new and evolving markets often face. We may continue to face these difficulties in the future, some of which may be beyond our control. If we are unable to successfully address these problems our future growth and earnings will be negatively affected.

We cannot accurately forecast our future revenues and operating results, which may fluctuate.

Our short operating history and the rapidly changing nature of the markets in which we compete and the changes in the nature of our business as a result of the sale of ErMaPao, the acquisitions of Dalian Huiming and Changbai, and the nature of our trading business make it difficult to accurately forecast our revenues and operating results. Furthermore, our revenues and operating results may fluctuate in the future due to a number of factors, including the following:



the introduction of competitive products by different or new competitors;

fluctuations in the prices of the products which we trade;



any factor that might interrupt or otherwise reduce the conduct of business by our distributors;



reduced demand for any given product;



difficulty in keeping current with changing trading technologies or procedures;



increased or uneven expenses, whether related to sales and marketing or administration;



interruptions or reductions in the availability of grain to facilitate our trading operations; and



costs related to possible acquisitions of technology or businesses.

Due to these factors, forecasts may not be achieved, either because expected revenues do not occur or because they occur at lower prices or the costs are less favorable to us. In addition, these factors increase the chances that our results could be lower than the expectations of investors and analysts. If so, the market price of our stock would likely decline.

Risks Related to Doing Business in the People's Republic of China

Our business operations take place primarily in the PRC. Because Chinese laws, regulations and policies are changing, our Chinese operations may face numerous risks unique to businesses in the PRC, several of which are summarized below.

- Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.

The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China's central government as a means of introducing economic market forces and their related benefits into China. Given the overriding desire of the central government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.

-Any change in policy by the Chinese government could adversely affect investments in Chinese businesses.

Changes in policy could result in imposition of restrictions on currency conversion, imports or the source of supplies, as well as new laws affecting joint ventures and foreign-owned enterprises doing business in China. Although China has been pursuing economic reforms, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of certain state-owned industries could significantly affect the government's ability to continue with its reform.

- We face economic risks in doing business in China.

As a developing nation, China's economy is more volatile than that of developed Western industrial economies. It differs significantly from that of the U.S. or a Western European country in such respects as structure, level of development, capital reinvestment, legal recourse, resource allocation and self-sufficiency. Only in recent years has the Chinese economy moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the Chinese government will emphasize greater utilization of market forces. For example, in 1999 the Government announced plans to amend the Chinese Constitution to recognize private property, although private business will officially remain subordinate to state-owned companies, which are the mainstay of the Chinese economy. However, we cannot assure you that, under some circumstances, the government's pursuit of economic reforms will not be restrained or curtailed. Actions by the central government of China could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for our Chinese operations.

- The Chinese legal and judicial system may negatively impact foreign investors.

In 1982, the National People's Congress amended the Constitution of China to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in China. However, China's system of laws is not yet comprehensive. The legal and judicial systems in China are still under development, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. China's legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may shift to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. We cannot assure you that a change in leadership, social or political disruption, or unforeseen circumstances affecting China's political, economic or social life will not affect the Chinese government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

The practical effect of the PRC's legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the accounting laws and regulations of the PRC mandate accounting practices which are not consistent with U.S. Generally Accepted Accounting Principles.

China's accounting laws require that an annual "statutory audit" be performed in accordance with PRC's accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. Second, while the enforcement of substantive rights may appear less clear than United States procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Generally, the Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations' Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.

Because our principal assets are located outside of the United States and all of our directors and executive officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States Federal securities laws against us and our officers and directors in the United States or to enforce judgments of United States courts against us or them in the PRC.

In addition, our operating subsidiaries and the majority all of our assets are located outside of the United States. You will find it difficult to enforce your legal rights based on the civil liability provisions of the United States Federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in the courts of the PRC. In addition, it is unclear if extradition treaties in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States Federal securities laws or otherwise.

- Economic Reform Issues

Although the Chinese government owns the majority of productive assets in China, during the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, we are unable to assure you that:



We will be able to capitalize on economic reforms;



The Chinese government will continue its pursuit of economic reform policies;



The economic policies, even if pursued, will be successful;



Economic policies will not be significantly altered from time to time; and



Business operations in China will not become subject to the risk of nationalization.

Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included revaluations of the Chinese currency, the Renminbi (RMB), restrictions on the availability of domestic credit, and limited re-centralization of the approval process for purchases of some foreign products. These measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.

To date, reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future. However, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.

Risks Associated with Agricultural Trading

We are subject to risks associated with our operations which may affect our results. The agricultural industry in the PRC has issues that the agricultural industry does not have within the United States. For example, in China insurance coverage is a relatively new concept compared to that of the United States and for certain aspects of a business operation, insurance coverage is restricted or expensive. Workers compensation for employees in the PRC may be unavailable, or if available, insufficient to adequately cover such employees.

We cannot assure you that we will be able to adequately address any of these or other limitations.

Our earnings may be affected by price volatility.

We anticipate that the majority of our future revenues will be derived from the trading of rice and other agricultural commodities and, as a result, our earnings may be affected by the prices of these products. There are many factors influencing the price of rice and other agricultural commodities including expectations for inflation; global and regional demand and production; political and economic conditions; and production costs. These factors are beyond our control and are impossible for us to predict. As a result, price changes may adversely affect our operating results.

Other Industry-Specific Risks

Extreme event risks. Weather and climate are variable and extreme weather events could adversely impact our ability to trade grain and, consequently adverse impact our results of operation.

Yield risks. When temperature and precipitation are too high or low, crop yields suffer. Anticipated crops may not materialize, which could limit our trading opportunities.

The availability and price of the agricultural commodities the Company trades can be affected by weather, disease, government programs, and various other factors beyond the Company's control which could adversely affect the Company's operating results.

The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops. These factors have historically caused volatility in the agricultural commodities industry and, consequently, could impact the Company's operating results. Reduced supplies of agricultural commodities could also limit the Company's ability to trade agricultural commodities in an efficient manner which could adversely affect the Company's profitability. In addition, the availability and price of agricultural commodities can be affected by other factors, such as plant disease, which can result in crop failures and reduced harvests.

Government policies and regulations, in general, and specifically affecting the agricultural sector and related industries, could adversely affect the Company's operating results.

Agricultural production is subject to government policies and regulations. We are subject to the law of PRC on Quality and Safety of Agriculture Products, the law of PRC on Promotion of Agricultural Mechanization and the law of PRC on Land Contract in Rural Areas, and other PRC laws applicable to business in China generally. (Further information on these laws is available at: http://english.agri.gov.cn/ga/plar/)

Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, the availability and competitiveness of feedstock as raw materials, and industry profitability. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Future government policies may adversely affect the supply of, demand for, and prices of the products that the Company trades, restrict the Company's ability to do business in its existing and target markets, and could negatively impact revenues and operating results.

The Company is subject to food industry risks which could adversely affect the Company's operating results.

The Company is subject to food industry risks which include, but are not limited to, food spoilage or food contamination, shifting consumer preferences, federal, state, and local food processing regulations, and customer product liability claims. The liability which could result from these risks may not always be covered or could exceed liability insurance related to product liability and food safety matters maintained by the Company. The occurrence of any of the matters described above could adversely affect the Company's revenues and operating results.

The Company is subject to risks associated with the outbreak of disease related to food products related to rice. The outbreak of disease could adversely affect demand for the Company's products. A decrease in demand for these products could adversely affect the Company's revenues and operating results.

The Company is subject to numerous wine import and export regulations and licensing in the United States of America and the People’s Republic of China which could adversely affect the Company’s plans to expand its wine production and trading.

The Company is required to comply with the numerous and broad reaching laws and regulations administered by governmental agencies relating to, but not limited to, the sourcing, transporting, storing, and processing of agricultural raw materials as well as the transporting, storing and distributing of related agricultural products including commercial activities conducted by Company employees and third parties globally. Any failure to comply with applicable laws and regulations could subject the Company to administrative penalties and injunctive relief, civil remedies, including fines, injunctions, and recalls of its products.

The Company is exposed to potential business disruption, including but not limited to transportation services, and other serious adverse impacts resulting from natural disasters and severe weather conditions, and accidents which could adversely affect the Company's operating results.

The assets and operations of the Company are subject to damage and disruption from various events which include, but are not limited to, natural disasters and severe weather conditions, accidents, explosions, and fires.

The potential effects of the conditions cited above include, but are not limited to, extensive property damage, extended business interruption, personal injuries, and damage to the environment. The Company's trading operations also rely on dependable and efficient transportation services. A disruption in transportation services could result in supply problems at the Company's processing plants and impair the Company's ability to deliver processed products to its customers in a timely manner.

Risks Relating to our Common Stock and our Status as a Public Company

The price of our common stock may be affected by a limited trading volume and may fluctuate significantly.

At times there has been a limited public market for our common stock and we cannot assure you that an active trading market for our stock will always be available. The absence of an active trading market may adversely affect our stockholders' ability to sell our common stock in short time periods, or possibly at all. In addition, we cannot assure you that you will be able to sell shares of common stock that you have purchased without incurring a loss. The market price of our common stock may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for our common stock in the future. In addition, the market price for our common stock may be volatile depending on a number of factors, including business performance, industry dynamics, and news announcements or changes in general economic conditions.

We have not and do not anticipate paying any dividends on our common stock; because of this the valuation of our securities could be adversely affected in the market.

We have paid no dividends on our common stock to date and it is not anticipated that any dividends will be paid to holders of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business plan. As an investor, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our Company.

Our management is not familiar with the United States securities laws.

Our management and the former owners of the businesses we acquire are generally unfamiliar with the requirements of the United States securities laws and may not appreciate the need to devote the resources necessary to comply with such laws. A failure to adequately respond to applicable securities laws could lead to investigations by the Securities and Exchange Commission and other regulatory authorities that could be costly divert management's attention and disrupt our business.

We will continue to incur significant costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance requirements.

As a public company we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular it requires that the Company perform system and process evaluations and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 would likely require that we incur substantial accounting expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, or if our accountants later identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.

Our Board of Directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stock holders and with the ability to adversely affect stockholder voting power and perpetuate the board's control over the Company.

Our certificate of incorporation authorizes the issuance of up to 1,000,000,000 shares of common stock, no par value. Our Board of Directors by resolution may authorize the issuance of up to 20,000,000 shares of preferred stock in one or more series with such limitations and restrictions as it may determine, in its sole discretion, with no further authorization by security holders required for the issuance thereof. The Board may determine the specific terms of the preferred stock, including: designations; preferences; conversions rights; cumulative, relative; participating; and optional or other rights, including: voting rights; qualifications; limitations; or restrictions of the preferred stock.

The issuance of preferred stock may adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our company or make removal of management more difficult. As a result, the Board of Directors' ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the common stock. We presently have no plans to issue any preferred stock.

We may issue shares of our capital stock or debt securities to complete an acquisition, which would reduce the equity interest of our stockholders or subject our company to risks upon default.

We may issue our securities, such as additional shares of our common stock or share of preferred stock, to acquire companies or assets. If we issue additional shares of our common stock or shares of our preferred stock, the equity interest of our existing stockholders may be reduced significantly, and the market price of our common stock may decrease. The shares of preferred stock we issue are likely to provide holders with dividend, liquidation and voting rights, and may include participation rights, senior to, and more favorable than, the rights and powers of holders of our common stock.

If we issue debt securities as part of an acquisition, and we are unable to generate sufficient operating revenues to pay the principal amount and accrued interest on that debt, we may be forced to sell all or a significant portion of our assets to satisfy our debt service obligations, unless we are able to refinance or negotiate an extension of our payment obligation. Even if we are able to meet our debt service obligations as they become due, the holders of that debt may accelerate payment if we fail to comply with, and/or are unable to obtain waivers of, covenants that require us to maintain certain financial ratios or reserves or satisfy certain other financial restrictions. In addition, financial and other covenants in the agreements we may enter into to secure debt financing may restrict our ability to obtain additional financing and our flexibility in operating our business.

Future sales of our common stock, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock.

We have 73,157,232 shares of our common stock outstanding. Except for 18,308,456 shares owned by beneficial owners of more than 5% of our outstanding shares and our directors and officers, these shares are freely tradeable without limitation under the Securities Act. Future sales of our common stock, pursuant to a registration statement or Rule 144 under the Securities Act, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock. The number of our shares available for sale pursuant to registration statements or Rule 144 is very large relative to the trading volume of our shares. Any attempt to sell a substantial number of our shares could severely depress the market price of our common stock. In addition, we may use our capital stock in the future to finance acquisitions and to compensate employees and management, which will further dilute the interests of our existing shareholders and could also depress the trading price of our common stock.

Item 2. Properties.

We do not own any land in the PRC although, as a result of government land use grants, prior to the sale of ErMaPao we controlled approximately 1,600 acres, and indirectly we controlled the 4,660 acres used by the family farmers who grew the grain we purchased and marketed. Prior to the sale of ErMaPao our executive offices were located in China at Songyuan City in Jilin Province. These offices and processing facilities are located on the approximately 1,600 acres of land owned by the PRC that had been leased to the Company. The lease for the land expires in 2032, and the annual rent for the land was RMB 994,795 or approximately US$140,000. The buildings on this land have approximately 20,000 square meters of usable space and are owned by ErMaPao. They consist mainly of warehouses, shelters for farm equipment and supplies, and processing buildings. As a result of the sale of ErMaPao, we no longer directly or indirectly control any of the properties mentioned in this paragraph.

Dalian Huiming rents office space at 25 Tongxing Street Zhong Shan District, Dalian, Liaoning. This space is approximately 337 sq. meters and the annual rent is approximately $40.000. Through another subsidiary we rent space at Manhattan Building #1, Suite 1511, Dalian City, Liaoning Province. This space is approximately 300 sq. meters and the annual rent is approximately $17,300.

The Bellisimo Vineyard is a 153 acre operating vineyard in Sonoma County, California. There are seven buildings located on the Bellisimo Vineyard which we occasionally rent to third parties.

We acquired the Bellisimo Vineyard in February, 2008 for $14,750,000. A portion of the purchase price, $8,515,000, was paid with funds provided by a commercial US lender which was granted a first lien on the property. The balance of the purchase price was financed with $6,216,000 loaned from a related party pursuant to an agreement providing for 4% interest per annum over a five year term and internally generated funds. During 2008 the 4% loan was swapped for equity as discussed in the notes to our financial statements included herein. The $8,515,000 mortgage is payable over twenty years with an interest rate, initially set at 7.70% per year, that adjusts every four years.

Changbai Eco-Beverage is a company producing products based on blueberries, and it has two buildings of approximately 32,000 square feet used to process and store blueberries. Changbai also has an office space of 4,800 square feet adjacent of the buildings in Changbai, Liaoning, the total rent for these buildings is approximately $ 26,000 per year.

Item 3. Legal Proceedings.

On December 12, 2008, Lance C. Provo, "on behalf of himself and all others similarly situated", filed a class action lawsuit in the United States District Court for the Southern District of New York against China Organic Agriculture, Inc. (the "Company"), past officers and directors of the Company, and one current director of the Company (the "Defendants"). The suit alleges, among other things, that the Defendants disseminated false and misleading statements or concealed materially adverse facts causing members of the class to purchase the Company's stock at inflated prices, and engaged in other improper actions, including divesting the Company of its sole productive asset and acquiring a luxury retreat for the use of the Defendants. The suit alleges that the Defendants' actions violated Sections 10(b) and 20A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10(b) 5 under the Exchange Act. The suit seeks as relief civil penalties, attorney's fees, and disgorgement.

The Company has reached a preliminary settlement regarding the class action lawsuit for $300,000 in cash and $300,000 worth of stock and is pending a court approval for the settlement.

Item 4. (Removed and Reserved)

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Common Stock

Our common stock is traded in the over-the-counter market (the OTC Bulletin Board) and quoted under the symbol "CNOA.OB."

The prices set forth below reflect the quarterly high and low bid price information for shares of our common stock for the periods indicated. These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

	High	Low
2009

First Quarter	$0.32	$0.15
Second Quarter	$0.50	$0.19
Third Quarter	$0.54	$0.31
Fourth Quarter	$1.40	$0.45

2008

First Quarter	$2.20	$0.83
Second Quarter	$2.06	$0.63
Third Quarter	$0.68	$0.17
Fourth Quarter	$.69	$0.17

As of May 13 2010, our common stock was held of record by approximately 3,500 stockholders, some of whom may hold shares for beneficial owners and have not been polled to determine the extent of beneficial ownership.

We have never paid cash dividends on our common stock. Holders of our common stock are entitled to receive dividends, if any, declared and paid from time to time by the Board of Directors out of funds legally available. We intend to retain any earnings for the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon future earnings, results of operations, capital requirements, our financial condition and other factors that our Board of Directors may consider.

Our Equity Compensation Plans

The Company has not used shares of its common stock or options to purchase such shares as a means of compensating its management, employees or directors. Nevertheless, there is set forth below a table confirming that no securities or options were issued during 2009 or were outstanding as of the end of such year.

Equity Compensation Plan Information - December 31, 2009

	Number of securities to be issued	Weighted-average exercise price	Number of securities available for future
	upon exercise of outstanding	of outstanding options, warrants	issuance under equity compensation
Plan Category	options, warrants and rights	and rights	plans (excluding reflected in column (a))
	(a)	(b)	(c)


Equity Compensation
Plan Approved by
Shareholders	0	0	0


Equity Compensation
Plan Not Approved by
Shareholders	1,000,000*	$1.39	0

Total	1,000,000	$1.39	0

*Represents shares that may be issued upon exercise of warrants issued to a public relations firm. The Company and the investor relations firm have agreed to terminate the warrants as of April 30, 2010.

See Note 19 of Notes to Consolidated Financial Statements

Purchases of Equity Securities by the Company and Affiliated Purchasers

During the fourth quarter of our fiscal year ended December 31, 2009, neither we nor any "affiliated purchaser" (as defined in Rule 10b-18(a) (3) under the Exchange Act) purchased any shares of our common stock.

Recent Sales of Unregistered Securities

We have reported all sales of our unregistered equity securities that occurred during 2009 in our Reports on Form 10-Q or Form 8-K, as applicable.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Forward Looking Statements

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that may cause future results to differ materially from those projected include, but are not limited to, those discussed in Item 1A. “Risk Factors” contained elsewhere in this Report.

Overview

On March 15, 2007, China Organic Agriculture Inc. ("CNOA" or the "Company"), through a reverse merger, issued 27,448,776 shares of stock in exchange for all the outstanding shares of China Organic Agriculture Limited ("COA") which then owned ErMaPao, an operating company engaged in growing, processing and distributing rice in China. Under accounting principles generally accepted in the United States, the share exchange was considered to be a capital transaction in substance, rather than a business combination. Thus the share exchange was equivalent to the issuance of stock by COA for the net monetary assets of CNOA, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the comparative historical financial statements issued after the acquisition of the legal acquirer, CNOA, are those of the legal acquiree, COA, which is considered to be the accounting acquirer, and thus represent a continuation of the financial statements of COA. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

In February 2008 we purchased the Bellisimo Vineyard, a 153 acre operating vineyard in Sonoma County, California. Before we acquired the Bellisimo Vineyard, it was providing Merlot, Chardonnay, and Cabernet Sauvignon grapes to wineries for both red and white wines. We anticipate that we may sell some of the vineyard’s production to distributors for resale in China. In addition to the growing of grapes, we have also periodically rented to third parties seven residential buildings located on the Bellisimo Vineyard. In June 2008, anticipating that we might begin to import wines into China, we formed Far East Wine Holding Group Ltd. (“FEW”) to act as our distributor of wines into China should we choose to do so.

In early 2008, the Company also began to engage in the trading of rice and other agricultural commodities. The agricultural products we trade are mainly focused on “green and healthy” rice and the Company is actively looking to establish itself as a health foods processor and distributor.

Until the September, 2008 sale of ErMaPao and the acquisition of 60% of the shares of Dalian Huiming, the Company had been engaged in the business of the production, processing, sale, trading and distribution of agricultural products grown by or under the direction of ErMaPao. These products were sold principally within the People's Republic of China. As a result of the sale of ErMaPao, the Company is now primarily engaged in the acquisition, trading and distribution of agricultural products, such as corn, soybean and rice, acquired from third parties, which are then sold mainly to five regions in China. They are Beijing, Shanghai, Zhejiang, Guangdong and Liaoning. ErMaPao is now treated as a Discontinued Operation and is no longer reported as a separate segment.

On March 23, 2010, we acquired 60% of the capital stock, of Changbai Eco-Beverage Co., Ltd. (“Changbai”) for $10,250,403 (70 Million RMB). Changbai produces a variety of products from blueberries grown in the Mountain Changbai region of Northeast China, including blueberry wines, blueberry beverages, blueberry food products such as jam, jelly, preserves and cakes, and blueberry healthcare products. Although Changbai’s results of operations are not included in our consolidated financial statements for 2009, the operations of the blueberry business previously conducted by Changbai will be included in our consolidated financial statements commencing in 2010 and be reported as a separate segment.

Result of Operations – Annual Periods 2009 and 2008

The following tables present certain information from the consolidated statements of operations for the twelve months ended December 31, 2009 and December 31, 2008.

	YEAR ENDED DECEMBER 31,						Increase			%
	2009			2008			(Decrease)			Change

Sales	$	143,856,835		$	112,695,908			31,160,927			28	%
Cost of sales		(106,797,867	)		(87,329,141	)		(19,468,726	)		22	%
Gross profit		37,058,968			25,366,767			11,692,204			46	%
Selling, general and administrative expenses		(3,713,734	)		(1,743,201	)		(1,970,533	)		113	%
Bad debt allowance		(1,930,568	)		(12,143	)		(1,918,425	)		N/M
Loss on Impairment		(1,539,403	)		-			(1,539,403	)		N/M
Income from operations		29,875,263			23,611,423			6,263,840			27	%
Gain on debt conversion		-			432,169			(432,169	)		(100	%)
Other income, net		1,071,989			395,408			676,581			171	%
Interest expense		(1,294,020	)		(541,959	)		(752,061	)		139	%
Income from continuing operations before income taxes		29,653,232			23,897,041			5,756,191			24	%
Provision for income taxes		(8,446,233	)		(6,975,212	)		(1,471,021	)		21	%
Net income from continuing operations		21,206,999			16,921,829			4,285,170			25	%
Discontinued operations：
Income from ErMaPao, net of tax		-			934,037			(934,037	)		(100	%)
Income due to disposal of ErMaPao, net of tax		-			934,194			(934,194	)		(100	%)
Net income from discontinued operations		-			1,868,231			(1,868,231	)		(100	%)
Net Income		21,206,999			18,790,060			2,416,939			13	%
Less income attributed to noncontrolling interest		(10,331,078	)		(1,328,623	)		(9,002,455	)		677	%
Net Income attributable to CNOA	$	10,875,921		$	17,461,437			(6,585,516	)		(38	%)
Basic and Diluted weighted average shares		73,157,232			58,515,437			1,461,795			25	%
Earnings per share of common stock:
Basic and Diluted Earnings Per Share:
Income from Continuing operations attributable to CNOA shareholders	$	0.15			0.27			(0.12	)		(44	%)
Income from Discontinued operations attributable to CNOA shareholders		-			0.03			(0.03	)		(100	%)
Total Basic and Diluted Earnings Per Shares	$	0.15		$	0.30			(0.15	)		(50	%)
Net Comprehensive Income:
Net Income	$	10,875,921		$	17,461,437			(6,585,516	)		(38	%)
Foreign Currency Translation Adjustment		38,910			2,212,245			(2,173,335	)		(98	%)
Net Comprehensive Income	$	10,914,831		$	19,673,682			(8,758,851	)		(45	%)

Business Segment Information

Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

We operate in two business segments, agricultural products, which acquires, trades and supplies agriculture commodities to users; and the wine production, which grows grapes and intends to act as an importer into Asia where we may also distribute wines and ice wines. ErMaPao has been sold and thus is treated as a Discontinued Operation and is no longer reported as a separate segment. Results of the operations of the blueberry business previously conducted by Changbai are not included in our consolidated financial statements for 2009, but will be included in our consolidated financial statements and reported as a separate segment commencing in 2010.

For the Year ended December 31, 2009 (2)
	Agricultural products			Wine production			Others (1)			Total
Sales, net	$	143,855,973			862						143,856,835
Cost of sales		(106,791,738	)		(6,129	)					(106,797,867	)
Gross Profit		37,064,235			(5,267	)					37,058,968
Other operating income		-			1,072,025						1,072,025
Bad debt provision		(1,930,568	)		-			-			(1,930,568	)
Impairment of fixed assets		-			(1,539,403	)		-			(1,539,403	)
Income (loss) from continuing operations		33,732,305			(2,569,927	)		(1,509,146	)		29,653,232
Depreciation and amortization		178,934			563,374						742,308
Total assets		93,853,462			12,973,479						106,826,941
Capital expenditures		676			55,026						55,702
Goodwill	$	1,602,134			-						1,602,134

For the Year ended December 31, 2008 (2)
	Agricultural products			Wine production			Others (1)			Total
Sales, net	$	112,695,908			-		-				112,695,908
Cost of sales		(87,329,141	)		-		-				(87,329,141	)
Gross Profit		25,366,767			-		-				25,366,767
Other operating income		-			585,666		-				395,408
Income (loss) from continuing operations		24,900,541			(416,390	)		(587,110	)		23,897,041
Depreciation and amortization		47,163			167,710			-			323,529
Total assets		56,385,100			15,341,073			-			71,726,173
Capital expenditures		-			-			-			-
Goodwill	$	1,602,134			-			-			1,602,134

(1)	Others include corporate expenses such legal and audit fees, warrants, and litigation settlement for 2009.

(2)	The ErMaPao segment is classified as a Discontinued Operation and as such is not reflected in these tables.

Sales

Sales for the twelve months ending December 31, 2009 totaled $143,856,835, an increase of 27.7% compared to $112,695,908 in 2008. This increase is due to the increasing demand for “green and healthy” foods in China. The “green” rice products the Company trades usually are priced two to three times higher than regular rice. During 2009, most of the Company's sales were generated by the Company's Agricultural Products segment. The Company’s purchase of 60% of Dalian Huiming in October of 2008 also had a significant impact on the level of 2009 sales.

Gross Profit

The Company's gross profit for the twelve months ending December 31, 2009 was $37,058,968, an increase of 46.1% compared to $25,366,767 in 2008 reflecting the increase in sales and higher prices. Gross profit margin was 25.8% in 2009 compared to 22.5% in 2008. The increase in gross profit in 2009 is due to the increase in prices in beans in China.

Selling, General and Administrative Expense

Selling, general and administrative expense for the twelve months ending December 31, 2009 totaled $3,713,734 or approximately 2.6% of total sales, an increase of 113.1% compared to $1,743,201 or approximately 1.5% of sales in 2008. This increase is largely due to a litigation expense of $600,000 recorded in 2009 in anticipation of the settlement and $610,759 for warrant expenses. These costs also reflect the expansion of sales and hiring of salesmen as well as increases in marketing.

Bad Debt Allowance

Our bad debt allowance was $12,143 in 2008 to $1,930,568 in 2009 due to the Company’s conclusion that it may not recover a portion of our outstanding receivables for products sold in 2008 and 2009. The Company is still actively seeking payments from the customers and, if appropriate, will take legal actions to seek recovery of these payments.

Impairment

The Company recorded an impairment of $1,539,403 for Bellisimo Vineyard in 2009 due to the deteriorating real estate conditions in Sonoma County, California.

Other Income

Other income includes licensing fees and net grape and rental income.

Other income for the twelve months ending December 31, 2009 totaled $1,071,989, which is an increase of 171.1% compared to $ 395,408 in 2008. The grape production at Bellisimo increased significantly in 2009 compared to 2008 due to better weather conditions. Grape income was $316,113 in 2009, an increase of 167% compared to $118,566 in 2008. Rental income increased from $78,050 in 2008 to $255,827 in 2009 due to increased occupancy and events held at the vineyard.

Licensing fees of $500,000 were recorded for the twelve months ending 2009 based on an agreement between the Company and Red Wine Saga Company, Ltd. (“Red Wine”) effective on October 1, 2008. In this agreement, the Company gave Red Wine the authority to sell red wine in Asia under the Bellisimo brand name. The agreement extends from October 1, 2008 through September 30, 2011. On June 3, 2009 the agreement was amended to eliminate the quarterly installments until such time as the Company begins to deliver wine for sale under the Bellisimo brand.

Interest Expense

Interest expenses were $1,294,020 in 2009, an increase of 139.2% compared to $541,959 in 2008. These expenses result from the debt incurred to finance the February 2008 acquisition of the Bellisimo Vineyard, which totaled about $14.7 million as well as the bank loans of $14,637,217 as of December 31, 2009 as compared to $1,170,515 as of December 31, 2008. This increase in bank loans is to support the working capital of the Company and its continuing operations.

Provision for Income Taxes

During the twelve months ending December 31, 2009 the Company's income-tax-provision was $8,446,233, an increase of 28.0% compared to $6,975,212 in 2008. While most of this increase was attributable to the 25% increase in income before taxes, the increase in income taxes also reflects a higher effective tax rate. The Company’s effective 2009 tax rate is higher than the statutory rate as expenses incurred in the US, including those pertaining to the Bellisimo Vineyard such as the impairment loss, are not deductible for PRC tax purposes.

Noncontrolling Interest

As the Company owns 60% of Dalian Huiming, 40% of total net income from Dalian Huiming was recorded as income attributed to noncontrolling interest. Noncontrolling interest increased from $1,328,623 for 2008 to $9,664,324 in 2009. In part this increase reflects that the Dalian Huiming acquisition occurred as of October 1, 2008, while the non-controlling interest was a factor for all of 2009.

Discontinued Operations

The Company discontinued reporting the operating results of ErMaPao as of September 30, 2008, the effective date of the sale of ErMaPao. The following table summarizes the operating results of the Discontinued operations for the periods ended September 30, 2008.

	2008

Sales	$	4,536,142
Cost of sales		(2,977,670	)
Gross profit		1,558,472
Operating expenses		(314,713	)
Income from discontinued operations before income tax		1,243,759
Income tax		(309,722	)
Net Income	$	934,037

Net Income

Net income was $10,875,921 for the twelve months ending 2009, a decrease of 38.4% compared to $ 17,461,437 in 2008. This mainly results from the higher amount of income attributable to noncontrolling interests, a bad debt provision of $1,930,568, the impairment loss of $1,539,403 for the Bellisimo vineyard and the absence of any income from ErMaPao which in 2008 reported from discontinued operations income of $1,868,231.

Liquidity and Capital Resources

At December 31, 2009, cash and cash equivalents were $18,512,835 as compared to $7,338,817 at December 31, 2008, excluding restricted cash. Working capital as of December 31, 2009 was $64,469,295 (current assets of $91,246,934 less current liabilities of $26,778,639) as compared to working capital of $41,018,783 as of December 31, 2008.

The components of the $11,174,018 increase of cash and cash equivalents during the year ended December 31, 2009 are reflected below:

	Year Ended December 31,
	2009			2008
Net cash provided (used) by operating activities	$	(7,256,991	)	$	4,827,267
Net cash provided (used) by investing activities		8,644,298			(26,392,233	)
Net cash provided by financing activities		9,774,192			17,937,377
Effects of exchange rates on cash		12,519			1,268,613
Net change in cash and cash equivalents	$	11,174,018		$	(2,358,976	)

Net Cash Provided (Used) by Operating Activities

The cash used by operating activities for the twelve month period ended December 31, 2009 was $ (7,256,991). This is largely due to the Net income of $10,875,921 and noncontrolling interest of $10,331,078 being more than offset by the increases in accounts receivables of $14,198,378 and inventory of $10,209,228, which resulted from the increase in sales due to the expanded trading activities. The level of cash used by operating activities was $12,084,258 more than that of the prior year largely due to the increase in inventory.

Net Cash Provided (Used) by Investing Activities

Net cash provided by investing activities in the twelve months ended December 31, 2009 was $8,644,298 reflecting the $8,700,000 received during 2009 from the 2008 sale of ErMaPao.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $9,774,192 for 2009 consists of two short term bank loans partially offset by repayments of amounts due. The first loan is $10,246,052 with an annual interest rate of approximately 6.4%, due in April 2010.The second loan is for $4,391,165 with annual interest rate of 5.3%, due in May 2010. The funds from these loans were used to support the higher levels of receivables and inventory resulting from the Company’s increased operations

We anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated on-going operating needs for the next twelve months. However, we may need to raise additional capital in order to fund acquisitions and any substantive expansion of our business operations. We would expect to raise those funds through credit facilities obtained from lending institutions, the issuance of equity, or a combination of both. However, there can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our Board of Directors.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the year ended December 31, 2009 that have, or are reasonably likely to have, a current or future affect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

Recent Accounting Pronouncements

In February 2007, the FASB issued ASC Topic 825, “Financial Instruments” which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted this standard on January 1, 2008, and the implementation of this standard did not have a significant impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued ASC Topic 805, “Business Combinations”, to establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement was effective for the Company beginning January 1, 2009.

In December 2007, the FASB issued ASC Topic 810, “Consolidation”, to establish accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. It also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for the Company beginning January 1, 2009. The Company adopted the new standard on January 1, 2009, and the implementation of the new standard did not have a significant impact on the Company’s financial position or results of operations.

In April 2008, the FASB issued ASC Topic 350, “Intangibles-Goodwill and Other”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Application of this standard did not have a significant impact on the Company’s financial statements.

In May 2008, the FASB issued ASC Topic 470, “Debt”, which is effective for financial statements issued for fiscal years beginning after December 15, 2008. This standard includes guidance that convertible debt instruments that may be settled in cash upon conversion should be separated between the liability and equity components, with each component being accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. This standard is not currently applicable to the Company since the Company does not have convertible debt.

In June 2008, the FASB issued ASC Topic 260, “Earnings per Share”, regarding determining whether instruments granted in share-based payment transactions are participating securities. This provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this is not expected to have an effect on the Company’s financial reporting.

In April 2009, the FASB issued ASC Topic 820, “Fair Value Measurements and Disclosures”, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that regardless of market conditions the fair value measurement is an exit price concept as defined in the standard. The scope of this standard does not include assets and liabilities measured under Level 1 inputs (quoted prices in active markets for identical assets). The standard is applied prospectively to all fair value measurements where appropriate and is effective for the Company’s interim and annual periods beginning in the second quarter of fiscal year 2009. The Company’s adoption of this above standard did not have a material impact on the Consolidated Financial Statements.

In May 2009, the FASB issued ASC Topic 855, “Subsequent Events”, that established general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and shall be applied to subsequent events not addressed in other applicable generally accepted accounting principles. This standard, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted this standard effective with the fiscal quarter ending June 30, 2009.

In July 2009, the FASB issued standards that established the ASC Accounting Standards Codification as the single source of authoritative US GAAP for nongovernmental entities. The ASC supersedes all non-SEC accounting and reporting standards that existed at the ASC’s effective date, including FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. The FASB uses Accounting Standards Updates (“ASU”) to amend the ASC. The Codification was effective for interim and annual periods ending after September 15, 2009 (i.e., the year ended December 31, 2009 for the Company).

I tem 8. Financial Statements and Supplementary Data.

The financial information required by this item is set forth beginning on page F-1.

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

On June 30, 2009, China Organic Agriculture, Inc. (the "Company") appointed the firm of Acqavella, Chiarelli, Shuster, Berkower & Co., LLP ("New Auditor") as the Company's independent registered public accounting firm upon the resignation of the firm Morgenstern, Svoboda & Baer CPAs, P.C ("Former Auditor"), which had served as the Company's independent registered public accounting firm through that date. The public audit section of the Former Auditor, which was responsible for overseeing its audit of the Company's financial statements, has merged with the New Auditor.

The reports of the Former Auditor on the Company's financial statements for the fiscal years ended December 31, 2008 and December 31, 2007 did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles. During the fiscal years ending December 31, 2008 and December 31, 2007 and the period from December 31, 2008 to June 30, 2009, the Company did not have any disagreements (within the meaning of Instruction 4 of Item 304 of Regulation S-K) with the Former Auditor as to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure and there have been no reportable events (as defined in Item 304 of Regulation S-K).

Item 9A. (T) Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the "Evaluation"), under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls") as of December 31, 2009 pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were not effective as of December 31, 2009. The primary deficiency in our disclosure controls and procedures is our failure to adopt written policies and procedures to direct our personnel to advise our management of events and information to enable them to make timely decisions regarding required disclosure. This deficiency is due, in part, to the lack of experience of our management personnel in China with the rules and regulations of the Securities and Exchange Commission and, more generally, western business procedures, and the failure of our personnel in China to timely communicate with the Company's representatives in the United States. This absence of procedures has resulted in a number of late filings and in the receipt by the Company of a number of requests for amendments and additional information from the Staff of the Securities and Exchange Commission.

During 2008, the Company engaged within the US an individual familiar with the requirements of US securities laws and accounting regulations. This individual was engaged as a consultant, and coordinated between the Company's Chinese representatives and its counsel and accountants in the United States. He also provided us with procedures intended to heighten management's awareness of the need to comply with US securities laws and thereby improve our disclosure controls and procedures. In December 2009 we engaged an individual to help establish a systematic approach we can follow to establish appropriate controls and procedures throughout our company. Since the appointment our new CFO Bo Shan, he has assumed these duties. The Company is in the early stages of preparing an internal control matrix to document its controls and procedures which it plans to utilize to test the effectiveness of its controls and procedures. We have not completed all steps necessary to insure that are disclosure controls and procedures are effective. Our efforts to adopt and implement appropriate disclosure controls and procedures are ongoing and are intended to ensure that we have appropriate disclosure controls and procedures by the end of 2010.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a -15(f). The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of the inherent limitations due to, for example, the potential for human error or circumvention of controls, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting at December 31, 2009 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal controls over financial reporting were not effective as of December 31, 2009.

In addition to the remedial measures we have adopted and plan to adopt relating to disclosure controls and procedures discussed above in the section “Evaluation of Disclosure Controls and Procedures,” we have started to create a structure in which critical accounting policies and estimates are identified, and together with other complex areas, are subject to multiple reviews by accounting personnel. In addition, we plan to enhance and test our month-end and year-end financial closing process. We also intend to develop and implement policies and procedures for the financial closing and reporting processes, such as identifying the roles, responsibilities, methodologies, and review/approval process. We believe these actions will remediate the material weaknesses by focusing additional attention and resources on our internal accounting functions. However, the material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

*The foregoing report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.

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

Changes in Internal Controls Over Financial Reporting

During the fiscal quarter ended December 31, 2009, there were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Our directors and executive officers at, 2010 were:

Name	Age		Title

Jinsong Li		38	Chief Executive Officer and Chairman
Bo Shan		30	Chief Financial Officer and Secretary
Guangwu Zhang		76	Director
Shujie Wu		39	Director

The business experience of each director and executive officer of the Company is set forth below.

Mr. Jinsong Li was elected to the position of Chief Executive Officer in late September 2008. He was formerly vice president of Beijing Jingwei Capital Investment Co., Ltd, an investment firm focusing on agricultural companies, where he managed investment projects valued at more than $100 million. Mr. Li previously worked for more than 15 years in various executive roles at a commercial trade company in Shantou and an agricultural products company in Beijing. On October 15, 2008, Mr. Li was elected Chairman of the Company's Board of Directors replacing Huizhi Xiao, who resigned as of that date.

Mr. Bo Shan was elected Chief Financial Officer of the Company on January 15, 2010. Mr. Shan is a Chinese Certified Public Accountant and a graduate of the Hebei University of Economics and Business with a degree in Accounting. Prior joining the Company, Mr. Shan served as the senior accountant and deputy director in Zhonglei Certified Public Accountants Co., Ltd.

Guangwu Zhang currently holds the position of Professor of Agriculture at Shandong Agricultural University. As author of over 100 academic papers, he currently holds several national appointments including Vice Committee Chairman of Cultivation Research Committee of The Crop Science Society of China as well as evaluator of the National Natural Science Foundation of China. He joined the Company as an independent director in December 2008

Shujie Wu served from 2002 to 2004 as Chairman of Dongguan Shijin Market Investment Company Limited. From 2003 to 2005, Mr. Wu served as Chairman of Guangzhou City Weirong Investment Consulting Company Limited, and from 2005 to 2007 he served as Managing Director of Jiayuanfen International Investments Company Limited. He joined the Company as a independent director in April 2008.

Corporate Governance: Board Committees and Independent Directors

Our Board of Directors does not have an audit, compensation or nominating committee. The OTC Bulletin Board, through which our shares of common stock are quoted, does not require us to have an audit, compensation or nominating committee. Guangwu Zhang is an independent director under the standards for independent directors established set forth in Rule 10A-3 under the Exchange Act.

Compensation of Directors

During 2009, we paid directors who do not serve as officers $1,171 per month.

The following table sets forth a summary of compensation paid to the Company's directors who were not officers as of December 31, 2009:

			Option		All other
Name	Fees paid in cash		awards		compensation		Total

Shujie Wu	$	14,053	$	0		N/A	$	14,053
Zhouzhe Jin (1)	$	5,855	$	0		N/A	$	5,855
Jingyong Ma (2)	$	5,855	$	0		N/A	$	5,855
Guangwu Zhang	$	14,053	$	0		N/A	$	14,053

(1)

Mr. Jin resigned on April 29 2009

(2)

Mr. Ma resigned on April 29 2009

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC reports of their holdings of, and transactions in, our common stock. Based solely upon our review of copies of such reports and written representations from reporting persons that were provided to us, we believe that our officers and directors complied with these reporting requirements with respect to 2009.

Code of Ethics

We have not adopted a code of ethics to apply to our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions because, until recently, we have not been an operating company. We expect to prepare a Code of Ethics in the near future.

Item 11. Executive Compensation.

The following table sets forth information with respect to the amounts awarded to, earned by, or paid to, each individual who served as our chief executive officer for services provided in all capacities to us and our subsidiaries for all, or a portion of, the fiscal year ended December 31, 2009. No other individual who served as an executive officer of our company was awarded, earned, or paid total compensation in excess of $100,000 for services provided in all capacities to us and our subsidiaries in that year.

Summary Compensation Table

Change in

pension value

and nonqualified

Non-equity

deferred

Name and

Stock

Option

incentive plan

compensation

All other

principal

Year

Salary

Bonus

awards

compensation

earnings

compensation

Total

position

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Jinsong Li

CEO

2008

9,198

N/A

9,198

Jinsong Li

CEO

2009

9,198

N/A

9,198

We have not granted any equity-based compensation, awards or stock options to our chief executive officer or any other executive officer, nor were any outstanding as of December 31, 2009.

We have not entered into an employment or consulting agreement with any of our executive officers or directors. Except as disclosed below under the caption "Compensation of Directors," we have not paid or accrued any fees to any of our directors for serving as a member of our Board of Directors. We do not have any retirement, pension, profit sharing or stock option plans or insurance or medical reimbursement plans covering our officers and directors.

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

The following table sets forth information known to us regarding beneficial ownership of our common stock as of March 31, 2010 by (i) each person known by us to own beneficially more than 5% of the outstanding common stock, (ii) each of our directors and executive officers, (iii) any other "Named Executive Officer" identified in the Executive Compensation section, below, and (iv) all of our officers and directors as a group. As of May 13, 2010, we had outstanding 73,157,232 shares of common stock. Except as otherwise indicated, we believe, based on information provided by each of the individuals named in the table below, that such individuals have sole investment and voting power with respect to such shares, subject to community property laws, where applicable. Each executive officer and director may be contacted c/o the Company: Dalian City Zhongshan District, Youhao Road, Manhattan Building #1 Suite 1511, Dalian Liaoning, PRC.

Name and Address of	Amount and Nature of		Percent
Beneficial Owner	Beneficial Ownership		of Class

Owners of More than 5%:

Xirong Xu		17,808,456		23.3	%

First Capital Limited
P.O. Box 2804,
Georgetown Grand Cayman,
Ky1-1112
Cayman Islands

Directors and Officers:

Jinsong Li		500,000		*

Bo Shan		0		0

Shujie Wu		0		0

Guangwu Zhang		0		0

Officers and Directors
as a group (4 persons)		500,000		*
____
* Less than one percent.

Item 13. Certain Relationships and Related Transactions.

In February 2008, the Company received a loan in connection with the acquisition of the Bellisimo Vineyard from an individual shareholder, Mr. Xirong Xu, for the total amount of $6,216,000. The interest rate was 4.00% and both principal and interest were due in February 2013. On September 4, 2008, the Company issued 18,282,353 shares, representing approximately 25%, of its outstanding common stock, to Mr. Xirong Xu in exchange for the surrender and cancellation of his promissory note. Mr. Xirong Xu is not a relative of the Company's former CEO, Mr. Changqing Xu.

On September 4, 2008, the Company issued 3,326,103 shares, representing approximately 4.5%, of its outstanding common stock, to First Capital Limited in exchange for the surrender and cancellation of the Company’s promissory note to First Capital Limited in the principal amount of $ 1,130,875. The indebtedness that had been represented by this note results from amounts advanced by First Capital on behalf of the Company to pay accounts payable.

Mr. Xirong Xu and First Capital Limited are accredited investors within the meaning of Rule 501 (a) of Regulation D under the Securities Act. The shares were issued pursuant to exemptions from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated hereunder, and in the case of Mr. Xirong Xu, Regulation S under the Securities Act.

Item 14. Principal Accounting Fees and Services.

On June 30, 2009, China Organic Agriculture, Inc. appointed the firm of Acqavella, Chiarelli, Shuster, Berkower & Co., LLP ("New Auditor") as the Company's independent registered public accounting firm upon the resignation of the firm Morgenstern, Svoboda & Baer CPAs, P.C ("Former Auditor"), which had served as the Company's independent registered public accounting firm through that date. The public audit section of the Former Auditor which was responsible for overseeing its audit of the Company's financial statements has merged with the New Auditor.

During fiscal year 2009 and fiscal year 2008, the aggregate fees which we paid to or were billed by Morgenstern, Svoboda & Baer CPAs, PC and Acqavella, Chiarelli, Shuster, Berkower & Co., LLP for professional services were as follows:

	Fiscal Year Ended December 31,
	2009		2008
Audit Fees (1)	$	93,200	$	121,000
Audit-Related Fees (2)	$	5,682	$	22,500
All Other Fees (3)		*		*

(1) Fees for services to perform an audit or review in accordance with generally accepted auditing standards and services that generally only our independent registered public accounting firm can reasonably provide, such as the audit of our consolidated financial statements, the review of the financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided by independent registered public accounting firms in connection with statutory and regulatory engagements.

(2) Fees, if any, for assurance and related services that are traditionally performed by our independent registered public accounting firm, such as audit attest services not required by statute or regulation, and consultation concerning financial accounting and reporting standards.

(3) Fees for tax compliance. Tax compliance generally involves preparation of original and amended tax returns, claims for refunds and tax payment planning services.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

Exhibit No.		Description
3(I).1		Articles of Incorporation (1)
3(I).2		Certificate of Amendment to Articles of Incorporation (1)
3(II)		Bylaws (1)
4.1		Warrant Agreement between China Organic Agriculture, Inc. and Trilogy Capital Partners, Inc.(1)
10.1		Agreement between ErMaPao and Jilin University (translation) (1)
10.2		Agreement between ErMaPao and Xinmiao Grain Depot (translation) (1)
10.3		Agreement between ErMaPao and Wukeshu Grain Depot (translation) (1)
10.4		Agreement between ErMaPao and Huaxing Foods Limited (translation) (1)
10.5		Agreement between ErMaPao and Songyuan City Grain and Oil Company (translation) (1)
10.6		Agreement between ErMaPao and Changchun City Qinghai Grain and Oil Company (translation)(1)
10.7		Agreement between ErMaPao and Shunda Grain and Oil Company (translation) (1)
10.8		Agreement between ErMaPao and Tongda Grain and Oil Company (translation) (1)
10.9		Agreement between ErMaPao and Nanjing Suguo Supermarket (translation) (1)
10.10		Agreement between ErMaPao and Hualian Hypermarket (translation) (1)
10.11		Loan Agreement between ErMaPao and Shenzhen Dingyi Investment Consultants Ltd. (translation) (1)
10.20		Promissory Note dated February 25, 2008 between China Organic Agriculture, Inc. and Mr. Xi Rong Xu (Incorporated by reference herein from Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 ("2007 Form 10-K"))
10.21		Promissory Note Secured By Deed of Trust in the initial principal amount of $8,515,000(Incorporated by reference herein from Exhibit 10.21 to the Registrant's 2007 Form 10-K)
10.22		Agreements regarding the February 29, 2008 purchase of Bellisimo Vineyard (Incorporated by reference herein from Exhibit 10.22 to the Registrant's 2007 Form 10-K)
10.23		Stock Purchase Agreement dated December 21. 2009 between Ankang Agriculture (Dalian) Co., Ltd. and Mr. Hongjun Ma for the acquisition of 60% of the shares of Changbai Eco-Beverage Co., Ltd. (“Changbai”) (incorporated by reference herein from the Registrant’s Form 8-K filed on December 21, 2009).
21.1		Subsidiaries
31.1		Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference herein as an exhibit to the Registrant’s Registration Statement on Form 10 filed on February 13, 2008.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA ORGANIC AGRICULTURE, INC.

Dated: May 13, 2010	By:	/s/ Jinsong Li
		Jinsong Li
		Chief Executive Officer
		(principal executive officer)



	By:	/s/ Bo Shan
		Bo Shan
		Chief Financial Officer
		(principal financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on May 13, 2010 in the capacities indicated.

Signature		Title

/s/ Jonsong Li		Chairman, Chief Executive Officer and Director (principal executive officer)
Jinsong Li

/s/ Bo Shan		Chief Financial Officer (principal financial and accounting officer)
Bo Shan

/s/ Guangwu Zhang		Director
Guangwu Zhang

/s/ Shujie Wu		Director
Shujie Wu

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

TABLE OF CONTENTS


1. Reports of Independent Registered Public Accounting Firms	F - 2 to F - 3

2. Consolidated Balance Sheets	F - 4

3. Consolidated Statements of Operations	F - 5

4. Consolidated Statements of Cash Flows	F - 6 to F - 7

5. Consolidated Statements of Stockholders’ Equity	F - 8

6. Notes to Consolidated Financial Statements	F - 9 to F - 24

F - 1

Reports of Independent Registered Public Accounting Firms

Board of Directors and Stockholders of

China Organic Agriculture, Inc.

We have audited the accompanying consolidated balance sheets of China Organic Agriculture, Inc. ("Company") as of December 31, 2009, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. China Organic Agriculture, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, and audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but no for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinions.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Organic Agriculture, Inc. as of December 31, 2009 and the results of its operations and its cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ Acquavella, Chiarelli, Shuster, Berkower & Co., LLP

Acquavella, Chiarelli, Shuster, Berkower & Co., LLP

Certified Public Accountants

May 13, 2010

F - 2

Reports of Independent Registered Public Accounting Firms

F - 3

Consolidated Balance Sheets

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED BALANCE SHEETS

Assets	12/31/2009		12/31/2008
Current Assets
Cash and cash equivalents	$	18,512,835	$	7,338,817
Restricted cash		7,322,574		-
Accounts receivable, net		40,677,865		26,448,294
Inventory		14,711,117		4,492,892
Acquisition deposit		2,617,952		2,617,952
Consideration receivable		-		8,700,000
Trade deposit		1,370,647		2,832,507
Advances		29,290		1,846,041
Other receivables and prepayments		5,345,208		126,296
Other current assets		659,446		-
Total Current Assets		91,246,934		54,402,799
Property, plant & equipment, net		12,478,943		14,521,452
Mortgage costs – net		136,288		143,788
Intangible asset, net		880,000		1,056,000
Deferred taxes		482,642		-
Goodwill		1,602,134		1,602,134
Total Assets	$	106,826,941	$	71,726,173
Liabilities and Stockholders’ Equity
Current Liabilities
Mortgages payable – current	$	213,348	$	198,854
Short term loans		14,637,217		1,170,515
Notes payable		7,322,574		-
Accounts payable and accrued expenses		1,961,923		5,048,054
Due to related party		120,026		3,630,842
Taxes payable		2,451,302		3,335,751
Other current liabilities		90,778		-
Total Current Liabilities		26,778,639		13,384,016

Mortgages payable – long term		7,965,517		8,161,705

Total Liabilities		34,762,685		21,545,721
Stockholders' Equity
Preferred stock, par value, $0.001 per share, 20,000,000 shares authorized, none outstanding		-		-
Common stock, no par value, 1,000,000,000 shares authorized, 73,157,232 issued and outstanding as of December 31, 2009 and December 31, 2008		7,648,410		7,648,410
Additional paid in capital		1,222,021		597,209
Statutory reserves		1,423,933		1,423,933
Other comprehensive income		2,853,653		2,814,743
Retained earnings		43,887,643		33,011,722
CNOA Stockholders’ Equity		57,035,660		45,496,017
Noncontrolling Interest		15,028,596		4,684,435
Total Stockholders' Equity		72,064,256		50,180,452
Total Liabilities and Stockholders' Equity	$	106,826,941	$	71,726,173

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

F - 4

Consolidated Statements of Operations

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	YEAR ENDED DECEMBER 31,
	2009			2008

Sales	$	143,856,835		$	112,695,908
Cost of sales		(106,797,867	)		(87,329,141	)
Gross profit		37,058,968			25,366,767
Selling, general and administrative expenses		(3,713,734	)		(1,743,201	)
Bad debt expense		(1,930,568	)		(12,143	)
Loss on Impairment		(1,539,403	)		-
Income from operations		29,875,263			23,611,423
Gain on debt conversion		-			432,169
Other income, net		1,071,989			395,408
Interest expense		(1,294,020	)		(541,959	)
Income from continuing operations before income taxes		29,653,232			23,897,041
Provision for income taxes		(8,446,233	)		(6,975,212	)
Net income from continuing operations		21,206,999			16,921,829
Discontinued operations：
Income from ErMaPao, net of tax		-			934,037
Income due to disposal of ErMaPao, net of tax		-			934,194
Income from discontinued operations		-			1,868,231
Net Income		21,206,999			18,790,060
Less income attributed to noncontrolling interest		(10,331,078	)		(1,328,623	)
Net Income attributable to CNOA	$	10,875,921		$	17,461,437
Basic and Diluted weighted average shares		73,157,232			58,515,437
Earnings per share of common stock:
Basic and Diluted Earnings Per Share
Income from Continuing operations attributable to CNOA shareholders	$	0.15			0.27
Income from Discontinued operations attributable to CNOA shareholders		-			0.03
Total Basic and Diluted Earnings Per Shares	$	0.15		$	0.30
Net Comprehensive Income
Net Income	$	10,875,921		$	17,461,437
Foreign Currency
Translation Adjustment		38,910			2,212,245
Net Comprehensive Income	$	10,914,831		$	19,673,682

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

F - 5

Consolidated Statements of Cash Flows

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	YEAR ENDED DECEMBER 31,
	2009			2008
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net income attributable to CNOA from Continuing operations	$	10,875,921		$	15,593,206
provided by operating activities:
Income attributed to non-controlling interests		10,331,078			1,328,623
Loss on impairment of fixed-assets		1,539,403			-
Net income from Discontinued operations		-			1,868,231
Gain on sale of ErMaPao		-			(934,194	)
Gain of debt conversion		-			(432,169	)
Stock based compensation		624,812			280,100
Depreciation and amortization		742,308			323,529

Effect of changes in assets and liabilities:
Accounts receivables		(14,198,378	)		(14,868,192	)
Inventory		(10,209,228	)		3,015,085
Trade deposit		1,463,829			(2,641,527	)
Advances		1,817,616			-
Restricted cash		(7,322,574	)		-
Other receivables and prepayments		(5,213,964	)		(1,817,931	)
Other current assets		(659,137	)		-
Deferred tax		(482,416	)		-
Increase / (decrease) in current liabilities:
Proceeds of notes payables (related to restricted cash)		7,322,574			-
Other current liabilities		92,074			-
Accounts payable and accrued expenses		(3,093,073	)		(24,828	)
Taxes payable		(887,838	)		3,137,334
Net cash provided (used) by operating activities		(7,256,991	)		4,827,267

CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Cash paid for the acquisition of Dalian Huiming		-			(10,111,621	)
Proceeds of sale of ErMaPao, net of cash sold		8,700,000			(1,057,877	)
Purchase of property & equipment		(55,702	)		(15,222,735	)
Net cash provided (used) by investing activities		8,644,298			(26,392,233	)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from mortgage payable, net of costs		-			8,515,000
Proceeds of short term loan		14,637,217			-
Repayment of short term loan		(1,170,515	)		-
Repayment of mortgage payable		(181,694	)		(300,104	)
Due from related parties		-			438,884
Due to related parties		(3,510,816	)		9,283,597
Net cash provided by financing activities		9,774,192			17,937,377

Effect of exchange rate changes on cash and cash equivalents		12,519			1,268,613
Net change in cash and cash equivalents		11,174,018			(2,358,976	)
Cash and cash equivalents, beginning balance		7,338,817			9,697,793
Cash and cash equivalents, ending balance	$	18,512,835		$	7,338,817

F - 6

	YEAR ENDED DECEMBER 31,
	2009		2008
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income tax payments	$	9,330,682	$	3,977,228
Interest payments	$	1,294,020		551,377

Non Cash Transaction:
Debt converted to equity	$	-	$	6,216,000

Sell of ErMaPao:
Selling Price		-		8,700,000
Book Value of ErMaPao’s Assets:		-		-
Cash		-		1,057,877
Other Assets				6,707,929
Total	$		$	7,765,806

Fair value of net tangible assets acquired		-		7,940,475
Valuation of intangible assets		-		1,100,000
Goodwill		-		1,602,134
Cash paid for acquisition	$	-	$	10,642,609

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

F - 7

Consolidated Statements of Stockholders’ Equity

CHINA ORGANIC AGRICULTURE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock Number of Shares		Amount		Additional Paid In Capital			Statutory Reserves			Accumulated Other Comprehensive Income		Retained Earnings			Noncontrolling Interest		Total Equity
Balance December 31, 2007		51,548,776	$	733,704	$	420,525		$	824,168		$	602,498	$	16,471,521				$	19,052,416
Comprehensive Income:
Net Income		-		-		-			(824,168	)		-		17,461,437			1,328,623		17,965,892
Foreign currency translation		-		-		-			-			2,212,245		-			-		2,212,245
Debt conversion		21,608,456		6,914,706		-			-			-		-			-		6,914,706
Acquisition of Dalian Huiming		-		-		(1,304	)		502,697			-		-			-		501,393
Reserves accrued in Dalian Huiming		-		-		-			921,236			-		(921,236	)		-		-
Additional PIC from Xinbin		-		-		20,861			-			-		-			-		20,861
Purchase of subsidiary shares from non-controlling interest		-		-		-			-			-		-			3,355,812		3,355,812
Stock based compensation		-		-		157,127			-			-		-			-		157,127
Balance December 31, 2008		73,157,232		7,648,410		597,209			1,423,933			2,814,743		33,011,722			4,684,435		50,180,452
Comprehensive Income:
Noncontrolling interest																	10,331,078		10,331,078
Net Income		-		-		-			-			-		10,875,921					10,875,921
Foreign currency translation		-		-		-			-			38,910		-			13,083		51,993
Contributed Capital		-		-		14,053			-			-		-			-		14,053
Stock based compensation		-		-		610,759			-			-		-			-		610,759
Balance December 31 , 2009		73,157,232	$	7,648,410	$	1,222,021		$	1,423,933		$	2,853,653	$	43,887,643		$	15,028,596	$	72,064,256

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

F - 8

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 1 - ORGANIZATION

China Organic Agriculture, Inc. (“CNOA” or “Company”) (formerly Industrial Electric Services, Inc. or “IESI”) was incorporated on August 5, 2005, in the state of Florida. The Company has seven subsidiaries as at December 31, 2009. China Organic Agriculture, Ltd. (“COA”) was incorporated on August 10, 2006 under the laws of the British Virgin Islands. Far East Wine Holding Group Ltd. (“FEW”) was incorporated on June 10, 2008 under the laws of the British Virgin Islands. CNOA owns 100% of COA and FEW. Ankang Agriculture (Dalian) Co., Ltd. (“Ankang Dalian”) was founded in January 2008 under the laws of the People’s Republic of China (“PRC”). It is owned 100% by Hong Kong Ankang Investments Co., Ltd. (“HK Ankang”). COA owns 100% of HK Ankang.

In November 2008, Xinbin Manchu Autonomous County Bellisimo Ice Wine Co., Ltd (“Ice Wine”) was incorporated under the laws of the PRC. Ankang Dalian holds 60% of the outstanding shares of Ice Wine.

On October 31, 2008, the Company completed the acquisition of 100% of the shares of Princeton International Investment Ltd. (“Princeton”), which owned 60% of the outstanding shares of Dalian Huiming Industry Ltd. (“Dalian Huiming”). Huiming was incorporated on July 31, 2001 under the laws of the PRC. Princeton was incorporated on April 14, 2008 under the laws of Hong Kong.

On September 25, 2008, the Company entered into a Share Purchase Agreement with Bothven Investments Ltd. related to the sale of its subsidiary, Jilin Songyuan City Ermapao Green Rice Ltd. (“ErMaPao”) for US$8.7 million. The sale was completed on October 7, 2008 with effective date of September 30, 2008.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of CNOA and its subsidiaries, collectively referred to herein as the “Company”. These financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) and all material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s financial position as of December 31, 2009 and 2008, and its results for the periods then ended.

On March 15, 2007, CNOA, through a reverse merger, issued 27,448,776 shares of stock in exchange for all the outstanding shares of COA. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. Thus the share exchange is equivalent to the issuance of stock by COA for the net monetary assets of CNOA, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, CNOA, are those of the legal acquiree, COA, which is considered to be the accounting acquirer, and thus represent a continuation of the financial statements of COA. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

F - 9

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Translation Adjustment

As of December 31, 2009 and December 31, 2008, the accounts of CNOA were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“RMB”). Such financial statements were translated into U.S. Dollars in accordance with GAAP with the RMB as the functional currency. All assets and liabilities were translated at the current exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with GAAP as a component of stockholders’ equity. Transaction gains and losses are reflected in the statement of operations.

Use of Estimates

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

Risks and Uncertainties

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, disease and other natural events that could impact rice cultivation, limited operating history, foreign currency exchange rates and the volatility of public markets.

Reclassification

Certain amounts in the 2008 financial statements were reclassified to conform to the 2009 presentation.

Contingencies

Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the

F - 10

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Restricted Cash and Notes Payable

Restricted cash is used as security for purchasing goods from suppliers. Restricted cash represents the amount of money held under the Company's account by a bank, which will be released to the suppliers when purchase and delivery transactions have been completed. By December 31, 2009, the Company issued bank notes of $7,322,574 to suppliers for goods purchased. The Notes payable are non-interest bearing, and secured by the $7,322,574 balance of the Company’s restricted cash.

Accounts Receivable

The Company maintains reserves it judges are required for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of sales vary. Reserves are recorded according to Company policies. There were allowances for doubtful accounts in the amount of $1,930,568 and $12,143 as of December 31, 2009 and December 31, 2008, respectively.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowances are made for writing down inventories to market value, if lower. As of December 31, 2009 and December 31, 2008 inventory consisted of finished goods valued at $14,709,255 and $4,492,892 respectively. Raw material inventories as of December 31, 2009 and December 31, 2008 are valued at $1,862 and $0, respectively. Expenses that are included in inventory and in cost of sales include the cost of purchased product, fees paid to the contractors, and any processing fees and packaging costs that may have been incurred in the preparation of raw rice into finished product.

F - 11

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, Plant & Equipment

Property, plant and equipment is stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of Property, plant and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Real property	15-30 years
Planted vineyard Machinery & equipment	20 years 5-10 years
Transportation equipment	5 years

Goodwill

Goodwill represents the cost of a business acquisition over the fair value of the net identified assets acquired. In accordance with GAAP, indefinite-life identifiable intangible assets and goodwill are not amortized. GAAP requires that an annual impairment test of our goodwill be performed. Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as our business segments, with its net book value or carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. This test was conducted as of December 31, 2009 and it indicated that there was no impairment of Goodwill. See Note 15, Acquisition, for additional information regarding goodwill.

Long-Lived Assets

The Company annually evaluates the carrying value of long-lived assets to be held and used in accordance with GAAP, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the current valuation of these long-lived assets is less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

The Company has evaluated its long-lived assets and based on its review, there was impairment identified on fixed-assets in the amount of $1,539,403 as of December 31, 2009, No impairment was identified as of December 31, 2008.

F - 12

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

The Company believes that the carrying amounts reported in the statements of financial position for current assets and current liabilities that qualify as financial instruments are a reasonable estimate of fair value.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.” Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Company’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts. Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. There are no post-shipment obligations, price protection, or “bill and hold” arrangements. Payments received before all of the relevant criteria for revenue recognition are satisfied would be recorded as unearned revenue. As of December 31, 2009 and December 31, 2008, there was no unearned revenue recorded.

Other Income

Other income for the years ended December 31, 2009 and December 31, 2008 both include income of $500,000 based on an agreement between the Company and Red Wine Saga Company, Ltd. (“Red Wine”) effective October 1, 2008. In this agreement, the Company gave Red Wine the authority to sell the Bellisimo brand red wine in Asia under the Bellisimo brand name. The agreement extends from October 1, 2008 through September 30, 2011 with $6,000,000 originally to be paid in quarterly installments of $500,000. The agreement has been amended effective April 1, 2009 to eliminate the quarterly installments until such time as the Company begins to deliver red wine for sale under the Bellisimo brand. The remaining components of other income were the rent revenue and grape sales of Vineyard in the amounts of $572,025 and $327,577 for the fiscal years of 2009 and 2008, respectively.

Income Taxes

The Company is subject to US federal, various state and international income taxes. The Statute of limitations for assessment by the Internal Revenue Services (“IRS”) and state tax authorities is open for tax years ended December 2007 and 2008, including net operating loss carryfowards and tax credits, may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period.

GAAP requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company follows accounting requirements that a recognition threshold and measurement be established and utilized for the financial statement recognition and measurement of a tax position that has been taken or is expected that the Company will take in a tax return. The Company also follows the requirements regarding the derecognition, classification, interest, and penalties, accounting in interim periods and disclosures. The Company assesses its deferred assets whether it believes that it is more likely than not that any deferred income tax assets, net of any valuation allowance, will be realized based on the current income tax laws and the expectations of future taxable income including the reversal of any existing deferred tax liabilities. This evaluation includes whether a tax position that the Company has taken will be sustained upon examination based on the technical merits of that position. The Company would recognize interest and any penalties relating to unrecognized tax benefits as an element of tax expense. Uncertainties surrounding income tax law changes, modifications in operations between tax jurisdictions and future operating income levels may affect the actual realization of some or all of these deferred tax assets.

Based on a review of our tax positions, the Company was not required to record a liability for unrecognized tax benefits. Further, there has been no change during the years ended December 31, 2009 and 2008. Accordingly, we have not accrued any interest and penalties through December 31, 2009.

F - 13

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basic and Diluted Earnings per Share

Earnings per share are calculated in accordance with GAAP. The basic earnings per share are based upon the weighted average number of common shares outstanding. Dilutive earnings per share are based on the weighted average shares of the common shares outstanding adjusted for the impact of potentially dilutive securities outstanding. The dilutive impact of any warrants outstanding is calculated using the treasury stock method, which treats the warrants as if they were exercised at the date of grant, adjusted for common stock assumed to be repurchased with the proceeds realized upon the exercise of the warrants. The warrants outstanding were anti-dilutive for the years ended December 31, 2009 and 2008 and thus were not included in the computation of earnings per share for those periods.

Statement of Cash Flows

In accordance with GAAP, cash flows from the Company’s operations are based upon the local currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company attempts to control credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts. As a consequence, the Company believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Recent Accounting Pronouncements

F - 14

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

on January 1, 2009, and the implementation of the new standard did not have a significant impact on the Company’s financial position or results of operations.

F - 15

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 3 – SEGMENT REPORTING

GAAP requires use of the management approach model for segment reporting. The management approach model is based on how a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

We operate in two business segments, agricultural products, which acquires, trades and supplies agricultural commodities to users; and wine production, which grows grapes and intends to act as an importer into Asia where we may also distribute wines and ice wines. ErMaPao has been sold and thus is treated as a Discontinued Operation and is no longer reported as a separate segment.

For the Year ended December 31, 2009 (2)
	Agricultural products			Wine production			Others (1)			Total
Sales, net	$	143,855,973			862						143,856,835
Cost of sales		(106,791,738	)		(6,129	)					(106,797,867	)
Gross Profit		37,064,235			(5,267	)					37,058,968
Other operating income		-			1,072,025						1,072,025
Bad debt provision		(1,930,568	)		-			-			(1,930,568	)
Impairment of fixed assets		-			(1,539,403	)		-			(1,539,403	)
Income (loss) from continuing operations		33,732,305			(2,569,927	)		(1,509,146	)		29,653,232
Depreciation and amortization		178,934			563,374						742,308
Total assets		93,853,462			12,973,479						106,826,941
Capital expenditures		676			55,026						55,702
Goodwill	$	1,602,134			-						1,602,134

For the Year ended December 31, 2008 (2)

	Agricultural products			Wine production			Others (1)			Total
Sales, net	$	112,695,908			-			-			112,695,908
Cost of sales		(87,329,141	)		-			-			(87,329,141	)
Gross Profit		25,366,767			-			-			25,366,767
Other operating income		-			585,666			-			395,408
Income (loss) from continuing operations		24,900,541			(416,390	)		(587,110	)		23,897,041
Depreciation and amortization		47,163			167,710			-			323,529
Total assets		56,385,100			15,341,073			-			71,726,173
Capital expenditures		-			-			-			-
Goodwill	$	1,602,134			-			-			1,602,134

(1) Others include corporate expenses such legal and audit fees, warrants, and litigation settlement for 2009.

(2) The ErMaPao segment is classified as a Discontinued Operation and thus is not reflected in these tables. The Discontinued Operation of the ErMaPao segment is discussed in Note 21.

F - 16

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 4 – ACQUISITION DEPOSITS

The Company has deposited approximately $2,617,952 with the Huanyatong Investment Co., Ltd, (“Huanyatong”) in anticipation of further investment and acquisition activity. It had been expected that Huanyatong would pay back the deposit with no interest to the Company before December 31, 2009 if there had been no substantive investing activities as of November 30, 2009. Due to the exchange control, the return of the deposit was delayed and collected in March, 2010.

Note 5 – CONSIDERATION RECEIVABLE

Effective September 30, 2008, the Company sold all of its shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited ("ErMaPao"), to Bothven Investments Limited ("Bothven"), for a non-interest bearing note receivable of $8,700,000. The Company received payment of this amount in 2009.

Note 6 – TRADE DEPOSIT AND ADVANCES

Trade deposits represent amounts paid by the Company and held by suppliers as deposits. As of December 31, 2009 and 2008, the Company had $1,370,647 and $2,832,507 outstanding as trade deposits, respectively.

The Company entered into a co-operation agreement with two unrelated companies to assist those companies in their business development by participating in those business operations and providing working capital funding. As of December 31, 2008 the Company had advanced these companies $1,846,041, which was returned to the Company in 2009.

Note 7 – OTHER RECEIVABLES AND PREPAYMENTS

An amount of $5,125,201 was deposited for the acquisition of Changbai Eco-Beverage Co. Ltd. at the end of December 2009. This acquisition was completed on March 23 2010.

Note 8 – PROPERTY, PLANT & EQUIPMENT

As of December 31, 2009 and December 31, 2008, Property, plant & equipment consisted of the following:

	12/31/2009			12/31/2008
Land	$	3,350,000			3,075,148
Planted Vineyard		2,561,589			4,375,844
Real property		7,079,233			7,079,233
Machinery & equipment		211,552			155,850
Total		13, 202,374			14,686,075
Accumulated depreciation		(723,431	)		(164,623	)
Net book value	$	12,478,943			14,521,452

F - 17

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 8 – PROPERTY, PLANT & EQUIPMENT (CONTINUED)

During the years ending December 31, 2009 and December 31, 2008, depreciation expenses were $558,808 and $164,623, respectively. The 2008 expense included $55,864 of costs which pertain to the Discontinued Operations.

On February 29, 2008, the Company purchased the assets of the Bellisimo Vineyard, a 153-acre operating vineyard located in Sonoma County, California, for $14,750,000. This purchase price was allocated to the following asset categories:

Real property	$	7,489,233
Land		7,040,992
Machinery, equipment & others		32,595
Sub-total	$	14,562,820
Agency expenses		187,180
Total	$	14,750,000

The Company evaluated the carrying value of its long-lived asset as of December 31, 2009. Based on this review, management determined that the carrying value exceeded the market value and, as a result, a provision for impairment on fixed-assets in the amount of $1,539,403 was recorded as of December 31, 2009, No reserve was deemed necessary as of December 31, 2008.

Note 9 – INTANGIBLE ASSETS

As of December 31, 2009 and December 31, 2008, intangible assets pertaining to the customer relationships acquired as part of the acquisition of Dalian Huiming are as following:

		12/31/2009			12/31/2008

Customer relationships	$	1,100,000		$	1,100,000
Accumulated amortization		(220,000	)		(44,000	)

Intangible assets	$	880,000		$	1,056,000

During the years ending December 31, 2009 and December 31, 2008, amortization expenses were $176,000 and $44,000, respectively.

The projected future amortization is as following:

2010		$176,000
2011		$176,000
2012		$176,000
2013		$176,000
2014		$176,000

F - 18

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 10 - COMPENSATED ABSENCES

Regulation 45 of local labor law entitles employees to annual vacation leave after one year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

Note 11 – DUE TO RELATED PARTY

The Company has become indebted to a shareholder as a result of payments that the shareholder made to third parties on behalf of the Company. As of December 31, 2009 and December 31, 2008, the Company owed $120,026 and $830,842, respectively, to such shareholder. The amount is evidenced by a non-interest bearing promissory note payable upon demand.

As discussed in Note 16, the Company has an outstanding bank loan of RMB 70,000,000 ($10,246,052) which has been guaranteed by Dalian Ruilong Group, Dalian Furongweiye Group and Ms. Zhao Jinxia, who was the legal representative of the Dalian Huiming. All of the above are related parties of Dalian Huiming’s minority shareholder.

As discussed in Note 16, the Company has an outstanding bank loan of RMB 30,000,000 ($4,391,165) which has also been guaranteed by Ms. Zhao Jinxia.

All of the inventories of Dalian Huiming are kept in the warehouse of Heilongjiang Rice & Oil Material Co., Ltd., which is a related party of Dalian Huiming’s minority shareholder. During the year of 2009, the Company paid Heilongjiang Rice & Oil Material Co., Ltd. warehouse fees of $156,704.

The annual salary of $9,198 in 2009 for Mr. Jinsong Li was paid by the Dalian Huiming’s affiliate Ms. Zhao Jingxia.

The annual salary of $14,053 in 2009 for Mr. Weihong Xia was paid by the Company’s major shareholder Mr. Xirong Xu and has been recorded as a component of contributed capital.

Note 12 – MORTGAGES PAYABLE

As discussed in Note 8, in February 2008 the Company purchased the assets of the Bellisimo Vineyard. This was in part financed by a mortgage funded by Trans America Life insurance Company in the amount of $8,515,000. This mortgage is amortized monthly over a 20 year term, with an interest rate initially set at 7.70%, with rate adjustments every four years. The long-term and short-term amounts pertaining to this mortgage as of December 31, 2009 were $7,965,517 and $213,348 respectively.

Projected future principal payable are as follows:

2010		$213,348
2011		$230,369
2012		$248,747
2013		$268,591
2014		$290,018
Thereafter		$6,927,792

F - 19

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 13 – LITIGATION

The Company has reached a preliminary settlement for the class action lawsuit filed on December 18, 2008 for an amount of $300,000 in cash and $300,000 worth of the Company’s stock. This expense was recorded in Selling, general, and administrative expenses in 2009 and the accrual for this settlement is contained in accounts payable and accrued expenses

Note 14 - INCOME TAXES

The Company is subject to the Income Tax Laws of the US and PRC. The provisions of $8,446,233 and $6,975,212 for the years ended December 31, 2009 and December 31, 2008, respectively, pertain to PRC taxes. Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is now at a statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this tax because of its involvement in agricultural production and in the PRC Urban Labor and Employment Services Program. As of January 1, 2008, a new tax policy became generally applicable to Chinese enterprises, and hence the Company.

Deferred Tax Assets consist of the following

	2009			2008
Deferred Tax Asset - NOL's	$	1,227,177		$	467,241
Deferred Asset (impairment and litigation settlement costs)	$	748,791		$	-
Bad Debt Allowance	$	482,642			-
Subtotal	$	2,458,610		$	467,241
Valuation Allowance	$	(1,975,968	)	$	(467,241	)
Total Deferred Taxes	$	482,642		$	-

The cumulative Net Operating Losses pertaining to the US available to the Company are $3,506,219. These will expire between 2028 and 2029.

The reconciliation of the PRC statutory tax rate of 2009 and 2008 follows

	2009			2008

PRC Statutory Tax Rate		25	%		25	%
Inability to record tax benefit on US losses		3.6	%		1.4	%
Effect of Taxation on Debt Forgiveness
Associated with Acquisition		-			3.2	%
Other		(0.2	)%		(0.4	)%
Effective Tax Rate		28.5	%		29.2	%

Due to the uncertainty surrounding the realization of the favorable U.S. tax attributes in future tax returns, the Company has recorded a full valuation allowance against the otherwise recognizable U.S. net deferred tax assets resulting from losses in the US as of December 31, 2009 and December 31, 2008.

F - 20

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 15 – ACQUISITION

In October 2008, the Company acquired 60% of the outstanding shares of Dalian Huiming Industry Ltd. (“Dalian Huiming”) for a payment equivalent to $10,642,609. With this acquisition the Company shifted its focus to agriculture products trading in addition to agricultural and food production.

The net purchase price reflects the valuation of net identifiable assets and goodwill acquired, less the noncontrolling interest that continues to be held by selling shareholders.

The acquisition has been accounted for as a purchase business combination and the results of operations from the acquisition date, October 1, 2008, have been included in the Company’s consolidated financial statements n accordance with GAAP. The allocation of the purchase price was as follows:

Cash acquired	$	3,148,940
Accounts receivable		8,806,935
Inventory		5,419,932
Loans to related parties		438,884
Property plant & equipment, and Other assets		12,274
Goodwill		1,602,134
Identifiable intangible asset- Customer relationships		1,100,000
Total Assets Acquired		20,529,099
Less Liabilities Assumed:
Accounts & Income taxes payable		4,100,530
Loans from related parties		1,329,255
Notes payable		1,173,313
Total Liabilities Assumed		6,603,098
Noncontrolling interest		3,283,392
Net Purchase Price	$	10,642,609

The excess of purchase price over the identifiable assets acquired and liabilities assumed of $1,602,134 was recorded as Goodwill. Identifiable intangible assets consisted of the $1,100,000 of value attributed to the Dalian Huiming’s customer relationships.

The goodwill resulted from this acquisition was due to the value attributed to Dalian Huiming by the selling shareholders based on Dalian Huiming’s recent levels and growth of net income. The computation of the acquired goodwill was as per the following:

Purchase Price			$	10,642,609
Fair value of net tangible assets acquired	$	7,940,475
Fair value of Identified intangible asset - Customer relationships (Note 9)		1,100,000
				9,040,475
Goodwill			$	1,602,134

Goodwill is not expected to be deductible for tax purposes in the PRC, the only jurisdiction in which the Company is paying and expects to pay income taxes.

F - 21

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 16 – SHORT TERM LOANS

As of December 31, 2009 and December 31, 2008, the outstanding short term bank loans were comprised of:

	12/31/2009		12/31/2008

Huaxia Bank Dalian Branch (1)	$	10,246,052	$	1,170,515
Industrial Bank Dalian Branch (2)		4,391,165		-
	$	14,637,217	$	1,170,515

(1) Bank loans of RMB 70,000,000 ($10,246,052) having an annual interest rate of 6.37% guaranteed by Dalian Ruilong Group, Dalian Ruilongweiye Group and Ms. Zhaojinxia, who was the legal representative of Dalian Huiming Industry Ltd. All of the above are related parties of Dalian Huiming’s minority shareholder. The loan is due on April 28, 2010.

(2) Bank loans of RMB 30,000,000 ($4,391,165) having an annual interest rate of 5.31% secured by Dalian Credit Guarantee Co., Ltd. and guaranteed by Ms. Zhaojinxia. The loan is due on May 15, 2010.

Note 17 - COMMITMENTS

The Company leases facilities and equipment under operating leases that have expired, but continue on a month to month basis. Rental expenses were $44,480 and $41,460 for the years ended December 31, 2009 and 2008, respectively. The Company has no future minimum obligations as of December 31, 2009.

Note 18 - STATUTORY RESERVE

Upon approval from the Board of Directors, the Company’s statutory reserve can be used to offset accumulated losses or to increase capital. As of December 31 2009, the Company had allocated $1,423,933 to these non-distributable reserve funds. The Company’s Statutory reserve fund has exceeded 50% of registered capital and thus no further allocation is required.

Note 19 – CONCENTRATIONS

Sales

The Company had two customers who together accounted for 47% of revenues during the year ended December 31, 2009. Two customers accounted for 80% of the Company’s accounts receivables at December 31, 2009.

During the year ended December 31 2009, the Company’s two principal customers, the sales to each of these customers and the percentages of the Company’s revenues represented by each of these customers were as follows:

Customers	Revenues		Percentage of Company’s Revenues
Shenzhen Shen Jing Da Agriculture Ltd.	$	38,796,677		27	%
Beijing Golden Valley Trading Co. Ltd.	$	29,198,587		20	%

F - 22

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 19 – CONCENTRATIONS (CONTINUED)

Customers	Revenues		Percentage of Company’s Revenues
Shenzhen Shen Jing Da Agriculture Ltd.	$	51,214,939		46	%
Beijing Golden Valley Trading Co. Ltd.	$	38,159,510		34	%

This concentration of our sales to a limited number of customers leaves us vulnerable to an adverse short-term impact on our revenues should one of these customers cease doing business or reduce the amount of business it does with us.

Purchases

Two vendors accounted for almost 54% of the Company's purchases for the year ended of 2009. Two vendors accounted for almost 24% of accounts payable at December 31, 2009.

The Company obtains supplies of grain from a limited number of companies. The purchases made from each of these suppliers during the year ended of 2009, and the percentages of our business represented by each of these suppliers, were as follows:

Suppliers	Purchases		Percentage of Company’s Purchases
Jiling Shen Kang Long Rice Co. Ltd.	$	26,534,323		30	%
Wuchang Yangxing Rice Co. Ltd.	$	21,067,813		24	%

The purchases made from the Company’s largest supplier during 2008, and the percentages of our business represented by this supplier, were as follows:

Suppliers		Purchases				Percentage of Company’s Purchases
Jiling Shen Kang Long Rice Co. Ltd.		$	72,048,373				84	%

The limited number of companies from which the Company obtains inventories leaves it vulnerable to an adverse short-term impact on its operations should one of these suppliers cease doing business or reduce the amount of business it does with the Company

Note 20 – STOCK WARRANTS

On February 6, 2008, the Company committed to issue warrants to purchase 1,000,000 shares of the Company’s stock at a price of $1.39 to its investor relations firm as part of a consulting agreement. The warrants were valued using the Black-Scholes option-pricing model. The related expense for the years ended December 31, 2009 and December 31, 2008 is $610,759 and $280,100, respectively.

F - 23

CHINA ORGANIC AGRICULTURE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

Note 20 – STOCK WARRANTS (CONTINUED)

Warrants Outstanding as of December 31, 2009:

	Total Warrants			Exercise Price
Outstanding, December 31, 2008		1,350,000		$	1.39-$1.50
Granted		-			-
Exercised		-			-
Expired		(350,000	)	$	1.50
Outstanding December 31, 2009		1,000,000		$	1.39

As of December 31, 2009, 1,000,000 warrants were exercisable. Both the Company and the Investor relations firm has agreed to terminate the warrants as of April 30 2010. See Note 22 for further discussion.

Note 21 – DISCONTINUED OPERATIONS

Effective September 30, 2008, the Company sold all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited ("ErMaPao"), to Bothven Investments Limited ("Bothven") for which the Company received a non-interest bearing note receivable from Bothven in the amount of $8,700,000, as discussed in Note 5. As a result, the 2008 operations of ErMaPao are now treated as a Discontinued Operations in the Statements of Operations and Cash Flows.

The following table summarizes the operating result of the Discontinued Operations for the year ended December 31, 2008:

	2008
Sales	$	4,536,142
Cost of sales		(2,977,670	)
Gross profit		1,558,472
Operating expenses		(314,713	)
Income from discontinued operations before income tax		1,243,759
Income tax		(309,722	)
Net Income from discontinued operations	$	934,037

Note 22 – SUBSEQUENT EVENTS

On March 19, 2010, the Company collected the deposit of approximately $2,617,952 with the Huanyatong Investment Co., Ltd, (“Huanyatong”). This deposit was made in anticipation of further investment and acquisition activity.

On March 23 2010, the Company acquired 1,800,000 shares, representing approximately 60% of the capital stock, of Changbai Eco- Beverage Co., Ltd. for $10,250,403. Changbai produces a variety of products from blueberries grown in the Mountain Changbai region of Northeast China, including blueberry drink and food products.

On April 30, 2010, the Company and its former Investor Relations firm agreed to terminate 1,000,000 warrants previously issued to such firm, citing lack of services provided by the Investor Relations firm.

The Company has evaluated subsequent events through May 13 2010, and has determined that there were no subsequent events to recognize or disclose in these financial statements.

F - 24

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CHINA ORGANIC AGRICULTURE, INC. Reports

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