Deyu Agriculture (DEYU) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2011

or

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

For the transition period from ______to______.

DEYU AGRICULTURE CORP.

 (Exact name of registrant as specified in its

charter)

Nevada	333-160476	80-0329825
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(I.R.S. Employer Identification No.)

Tower A, Century Centre, Room 808, 8 North Star Road, Beijing, PRC

(Address of principal executive offices)

(626) 242-5292

86-13828824414

(Registrant’s telephone number, including area code)

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 x No ¨

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

Large Accelerated Filer   ¨         Accelerated Filer   ¨         Non-Accelerated Filer   ¨         Smaller Reporting Company   x

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

As of November 14, 2011, there were 10,544,774 shares outstanding of the registrant’s common stock.

DEYU AGRICULTURE CORP.

FORM 10-Q

SEPTEMBER 30, 2011

INDEX

PART I
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS	4
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 4.	CONTROLS AND PROCEDURES	17
PART II
ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 1A.	RISK FACTORS	17
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17
ITEM 4.	(REMOVED AND RESERVED)	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	17
SIGNATURES		21

- 2 -

Item 1. Financial Statements

DEYU AGRICULTURE CORP AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2011

Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited)	F-1
Consolidated Statements of Income and Comprehensive Income (Unaudited)	F-2
Consolidated Statements of Cash Flows (Unaudited)	F-3
Notes to Consolidated Financial Statements (Unaudited)	F-4

- 3 -

DEYU AGRICULTURE CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Assets	September 30, 2011		December 31, 2010
	(Unaudited)		(Audited)
Current Assets
Cash and cash equivalents	$	25,636,892	$	6,155,744
Restricted cash		11,894,011		125,560
Accounts receivable, net		31,164,420		11,166,452
Due from related parties		245,048		-
Inventory		27,202,345		18,359,505
Advance to supplier		3,989,135		3,596,991
Prepaid expenses		2,115,842		2,219,332
Other current assets		1,965,226		849,593
Total Current Assets		104,212,919		42,473,177
Property, plant, and equipment, net		12,970,618		4,626,004
Construction-in-progress		-		7,224,504
Goodwill		1,088,761		1,052,139
Other assets		3,080,706		10,553,328
Intangible assets, net		10,595,776		-
Total Assets	$	131,948,780	$	65,929,152
Liabilities and Equity
Current Liabilities
Short-term loans	$	12,130,292	$	2,631,364
Accounts payable		2,963,479		540,956
Notes payable		28,491,690		-
Advance from customers		4,962,281		6,484,589
Accrued expenses		1,654,422		1,619,186
Preferred stock dividends payable		110,429		238,620
Due to related parties		13,679,210		8,030,303
Other current liabilities		4,419,263		2,943,681
Total Current Liabilities		68,411,066		22,488,699
Equity
Series A convertible preferred stock, $.001 par value, 10,000,000 shares authorized,  1,997,467 and 2,106,088 shares outstanding, respectively		1,997		2,106
Common stock, $.001 par value; 75,000,000 shares authorized, 10,544,774 and 10,394,774 shares issued and outstanding, respectively		10,545		10,350
Additional paid-in capital		20,316,201		18,770,230
Other comprehensive income		4,005,787		2,272,633
Retained earnings		36,391,869		22,385,134
Total Stockholders' Equity		60,726,399		43,440,453
Noncontrolling Interest		2,811,315		-
Total Equity		63,537,714		43,440,453
Total Liabilities and Equity	$	131,948,780	$	65,929,152

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

F-1

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

	For The Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net revenue	$	86,625,752		$	20,980,077		$	180,097,288		$	53,895,929
Cost of goods sold		(73,108,061	)		(16,102,399	)		(149,325,484	)		(40,760,575	)
Gross Profit		13,517,691			4,877,678			30,771,804			13,135,354
Selling expenses		(3,919,748	)		(1,485,481	)		(11,214,800	)		(3,083,142	)
General and administrative expenses		(1,933,506	)		(1,077,210	)		(6,480,419	)		(2,048,409	)
Total Operating Expense		(5,853,254	)		(2,562,691	)		(17,695,219	)		(5,131,551	)
Operating income		7,664,437			2,314,987			13,076,585			8,003,803
Interest income		31,465			1,600			31,659			5,065
Interest expense		(269,725	)		(90,208	)		(481,549	)		(242,799	)
Non-operating income		15,552			14,693			20,298			14,693
Total Other Expense		(222,708	)		(73,915	)		(429,592	)		(223,041	)
Income before income taxes		7,441,729			2,241,072			12,646,993			7,780,762
Income tax benefit		444,776			-			932,984			-
Net income		7,886,505			2,241,072			13,579,977			7,780,762
Net (income) loss attributable to noncontrolling interest		(245,406	)					740,308			-
Net income attributable to Deyu Agriculture Corp.		7,641,099			2,241,072			14,320,285			7,780,762
Preferred stock dividends		(83,404	)		(135,072	)		(313,550	)		(231,123	)
Net income available to common stockholders		7,557,695			2,106,000			14,006,735			7,549,639
Foreign currency translation gain		917,582			930,768			1,887,420			1,220,939
Comprehensive income		8,475,277			3,036,768			15,894,155			8,770,578
Less: Other comprehensive income attributable to noncontrolling interest		(47,881	)		-			(91,952	)		-
Comprehensive income attributable to Deyu Agriculture Corp.	$	8,427,396		$	3,036,768		$	15,802,203		$	8,770,578
Net income per common share - basic	$	0.72		$	0.21		$	1.33		$	0.96
Net income per common share - diluted	$	0.61		$	0.18		$	1.15		$	0.85
Weighted average number of common shares outstanding - basic		10,544,774			9,999,999			10,514,243			7,854,714
Weighted average number of common shares outstanding - diluted		12,522,039			12,278,700			12,481,313			9,132,073

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

F-2

DEYU AGRICULTURE CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For The Nine Months Ended
	September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income available to common stockholders	$	14,006,735		$	7,549,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization		808,924			346,410
Share-based compensation		412,745			-
Preferred stock dividends accrued		322,180			231,123
Common stocks issued for services		43,050			-
Reserve for inventory valuation		76,963			56,766
Deferred income tax benefit		(935,763	)		-
Noncontrolling interest		(740,308	)		-
Reserves for sales discount		-			391,419
Decrease (increase) in current assets:
Accounts receivable		(19,251,315	)		(4,210,709	)
Related-parties trade receivable		(240,574	)		-
Inventories		(8,110,577	)		(334,486	)
Advance to suppliers		(262,070	)		(1,642,297	)
Prepaid expense and other current assets		(425,777	)		78,779
Increase (decrease) in liabilities:
Accounts payable		2,359,813			424,891
Advance from customers		(1,716,107	)		1,033,756
Accrued expense and other liabilities		342,060			40,581
Net cash (used in) provided by operating activities		(13,310,021	)		3,965,872
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of machinery and equipment		(2,085,122	)		(1,898,904	)
Construction and remodeling of factory and warehouses		(613,062	)		(1,560,055	)
Purchase of software and other assets		(52,961	)		-
Prepayments for acquisition of farmland use rights		-			(2,852,630	)
Net cash used in investing activities		(2,751,145	)		(6,311,589	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions		4,309,947			-
Net proceeds from short-term loans from related parties		5,271,373			(146,076	)
Cash restricted for credit line of bank acceptance notes		(11,676,877	)		-
Release of cash restricted held at a trust account		125,560			-
Payment of preferred dividends		(242,418	)		-
Net proceeds from short-term loans from bank		9,235,600			2,012,930
Net proceeds from short-term bank acceptance notes		27,971,554			-
Net proceeds from short-term loan from others		-			(559,674	)
Net repayments of short-term loans from related parties		-			-
Proceeds from private placement, net of restricted cash held in escrow		-			8,805,457
Release of restricted cash related to private placement		-			218,119
Net cash provided by financing activities		34,994,739			10,330,756
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		547,575			192,772
NET INCREASE IN CASH & CASH EQUIVALENTS		19,481,148			8,177,811
CASH & CASH EQUIVALENTS, BEGINNING BALANCE		6,155,744			2,562,501
CASH & CASH EQUIVALENTS, ENDING BALANCE	$	25,636,892		$	10,740,312
SUPPLEMENTAL DISCLOSURES:
Income tax paid	$	46		$	-
Interest paid	$	349,259		$	236,616
NONCASH INVESTING AND FINANCING ACTIVITIES:
Construction completed and transferred to property, plant, and equipment	$	5,762,034		$	-
Obtained certificates of land use rights	$	2,308,900		$	-

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

F-3

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PREPARATION

Deyu Agriculture Corp. (the “Company”), formerly known as Eco Building International, Inc., was incorporated under the laws of the State of Nevada on December 23, 2008.  We completed the acquisition of City Zone Holdings Limited (“City Zone”), an agricultural products distributor in the Shanxi Province of the Peoples Republic of China (the “PRC”) engaged in procuring, processing, marketing, and distributing various grain and corn products, by means of a share exchange, effective April 27, 2010 (the “Share Exchange”).  As a result of the Share Exchange, City Zone became our wholly-owned subsidiary.  We currently conduct our business primarily through the operating PRC subsidiaries, including Jinzhong Deyu Agriculture Trading Co., Ltd. (“Jinzhong Deyu”), Jinzhong Yuliang Agriculture Trading Co., Ltd. (“Jinzhong Yuliang”), Jinzhong Yongcheng Agriculture Trading Co., Ltd. (“Jinzhong Yongcheng”), and Detian Yu Biotechnology (Beijing) Co., Ltd. (“Detian Yu”) and its subsidiaries and variable interest entities.

On May 11, 2010, our Board of Directors adopted a resolution to change our name to "Deyu Agriculture Corp."  FINRA declared the name change effective on June 2, 2010.

Reverse Acquisition

On April 27, 2010, we entered into the Share Exchange by entering into a share exchange agreement pursuant to which we issued 8,736,932 shares of common stock, par value $0.001 per share, to Expert Venture Limited (“Expert Venture”), a company organized under the laws of the British Virgin Islands, and the other shareholders of City Zone (the “City Zone Shareholders”).  As a result of the Share Exchange, City Zone became our wholly-owned subsidiary and City Zone Shareholders acquired a majority of our issued and outstanding common stock.  Concurrent with the Share Exchange, Mr. Jianming Hao (“Mr. Hao”), the managing director of City Zone and all of its operating subsidiaries, was appointed our Chief Executive Officer.

As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, whereby City Zone is deemed to be the accounting acquirer (legal acquiree) and we are deemed the  accounting acquiree (legal acquirer).  The financial statements before the date of the Share Exchange are those of City Zone with our results being consolidated from the date of the Share exchange.  The equity section and earnings per share have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.

City Zone was incorporated in the British Virgin Islands on July 27, 2009 under the BVI Business Companies Act of 2004.  In November 2009, pursuant to a restructuring plan set out below, City Zone has become the holding company of a group of companies comprised of Most Smart, Shenzhen Redsun, Shenzhen JiRuHai, Beijing Detian Yu, Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang.

Restructuring

In November 2009, pursuant to a restructuring plan (“Restructuring”) intended to ensure compliance with the PRC rules and regulations, City Zone, through a series of acquisitions and wholly-owned subsidiaries, acquired 100% of the equity interests of Jinzhong Deyu, Jinzheng Yuliang and Jinzhong Yongcheng.  The former shareholders and key management of Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang became the ultimate controlling parties and key management of City Zone.  This restructuring has been accounted for as a recapitalization of Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang with no adjustment to the historical basis of the assets and liabilities of these companies, while the historical financial positions and results of operations are consolidated as if the restructuring occurred as of the beginning of the earliest period presented in the accompanying consolidated financial statements.  For the purpose of consistent and comparable presentation, the consolidated financial statements have been prepared as if City Zone had been in existence since the beginning of the earliest and throughout the whole periods covered by these consolidated financial statements.

F-4

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Variable Interest Entities

On November 16, 2010, Detian Yu entered into a series of contractual arrangements (the “Contractual Arrangements”) with each of Beijing Jundaqianyuan Investment Management Co., Ltd. (“Junda”), Jinzhong Longyue Investment Consultancy Services Co., Ltd. (“Longyue”) and their shareholders, pursuant to which Detian Yu effectively took over the management of the business activities of Junda and Longyue.

Junda is a limited liability company incorporated in the PRC on June 13, 2010 with registered capital of $14,637 (RMB 100,000) by Mr. Hao and Wenjun Tian, President and Executive Director of the Company.  As of December 31, 2010, Junda’s equity interest was 100% held by several executives and managers of the Company, including (a) Mr. Hao, owning 33% of Junda, (b) Wenjun Tian, owning 34% of Junda, (c) Jianbin Zhou, the Chief Operating Officer of the Company, owning 10% of Junda, (d) Li Ren, Vice President of Branding and Marketing of the Company, owning 5% of Junda, (e) Yongqing Ren, Vice President of the Corn Division of the Company, owning 3% of Junda and (f) Junde Zhang, Vice President of the Grains Division of the Company, owning 3% of Junda.  As a result, the execution of the contractual arrangements with Junda is considered a related party transaction.

The contractual arrangements are comprised of a series of agreements with a term of ten (10) years, including:

· Exclusive Management and Consulting Service Agreements, through which Detian Yu shall provide to each of Junda and Longyue management consulting services in relation to the business of Junda and Longyue in exchange for 35% of the net income after taxes of Junda and Longyue every fiscal year.

· Business Cooperation Agreements, through which Detian Yu shall provide business cooperation opportunities and services including clients, cooperation partners and market information in the fields of grain processing, sales and financing to each of Junda and Longyue in exchange for cooperation fees and commissions from each of Junda and Longyue equal to 65% of the net income after tax of each of Junda and Longyue in every fiscal year.

· Business Operations Agreements, through which Detian Yu has exclusive authority of all decision-making of ongoing operations, including establishing compensation levels and hiring and firing of key personnel.  In order to ensure normal operations of Junda and Longyue, Detian Yu agrees to act as the guarantor and provide guarantee on the performance of the obligations of Junda and Longyue under all contracts executed by Junda and Longyue.

· Share Pledge Agreements, through which the shareholders of Junda and Longyue have agreed to pledge all of their respective equity interests in Junda or Longyue (as the case may be) as security for the performance of all of the obligations or debts under the Exclusive Management and Consulting Service Agreements and Business Cooperation Agreements assumed by Junda and Longyue, and under a counter-guarantee to all the payments made by Detian Yu for the performance of the guarantees assumed by Detian Yu under the Business Operation Agreements.

· Powers of Attorney, signed by each of the shareholders of Junda and Longyue, authorizing designees appointed by Detian Yu to exercise all of their respective voting rights as shareholders.

F-5

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

· Equity Acquisition Option Agreements, through which the shareholders of Junda and Longyue granted Detian Yu an irrevocable and unconditional right to purchase, or caused a designated party of Detian Yu to purchase, part or all of the equity interests in Junda and Longyue from such shareholders, when and to the extent that applicable PRC laws permit.  The consideration for the equity acquisition option for Junda was RMB 80,000,000 and the consideration for the equity option for Longyue was RMB 120,000,000.

On February 21, 2011, Deyufarm received capital injection of $3,800,505 (RMB 24,971,218) from SBCVC Fund III Company Limited ("SBCVC"), a company organized under the laws of Hong Kong, in exchange for 35.69% of Deyufarm's equity interest pursuant to the two Investment and Relevant Issues Agreements entered into by each of Junda and Longyue with Deyufarm and SBCVC on September 15, 2010. According to the Investment and Relevant Issues Agreements, SBCVC shall invest an equivalent of RMB 25,000,000 of US dollars to Deyufarm. Before or in the meantime that SBCVC completes such investment to Deyufarm, Longyue shall have invested RMB 35,000,000 to Deyufarm through a capital increase and obtained the relevant capital verification report. Any time within 2 years after completing an investment to Deyufarm, SBCVC has the right to require Deyufarm to repurchase in advance, or Junda or Longyue to purchase part of or all the equity interests of Deyufarm owned by SBCVC. The board of directors of Deyufarm shall be comprised of 3 directors, and Junda, Longyue and SBCVC shall each nominate one director. The board of directors shall nominate a financial administrator agreed to by SBCVC. Forty-eight (48) months after SBCVC completes its investment in Deyufarm, the parties shall consummate a qualified IPO of Deyufarm.

On February 25, 2011, Deyufarm received an additional capital injection of $4,495 (RMB 28,782) from SBCVC for 0.02% of Deyufarm's equity interest.

After the above two capital injections, SBCVC, Junda and Longyue currently own 35.71%, 14.29% and 50% of the equity interests in Deyufarm, respectively.  The total registered capital of Deyufarm increased from $6,688,635 (RMB 5,000,000) to $10,493,516 (RMB 70,000,000). SBCVC’s 35.71% equity interest in Deyufarm constitutes “noncontrolling interest” under FASB ASC Topic 810. Net income attributable to noncontrolling interest of Deyufarm was $243,471 for the three months ended September 30, 2011, while it was net loss of $742,242 attributable to noncontrolling interest of Deyufarm for the nine months ended September 30, 2011.  As of September 30, 2011, the equity balance of noncontrolling interest of Deyufarm was $2,989,303.

Details of our subsidiaries and variable interest entities subject to consolidation are as follows:

	Domicile and		Percentage
	Date of	Registered	of
Name of Subsidiary	Incorporation	Capital	Ownership	Principal Activities
City Zone Holdings	British Virgin	$20,283,581	100%	Holding company of Most Smart
Limited ("City Zone")	Islands, July 27, 2009
Most Smart International Limited ("Most Smart")	Hong Kong, March 11, 2009	$1	100%	Holding company of Shenzhen Redsun
Redsun Technology (Shenzhen) Co., Ltd. ("Shenzhen Redsun")	The PRC, August 20, 2009	$30,000	100%	Holding company of Shenzhen JiRuHai
Shenzhen JiRuHai Technology Co., Ltd. ("Shenzhen JiRuHai")	The PRC, August 20, 2009	$14,638	100%	Holding company of Beijing Detian Yu
Detian Yu Biotechnology (Beijing) Co., Ltd. ("Detian Yu")	The PRC, November 30, 2006	$7,637,723	100%	Wholesale distribution of simple-processed and deep-processed packaged food products and staple food.  Holding company of the following first six entities.
Jinzhong Deyu Agriculture Trading Co., Ltd. ("Jinzhong Deyu")	The PRC, April 22, 2004	$1,492,622	100%	Organic grains preliminary processing and wholesale distribution.
Jinzhong Yongcheng Agriculture Trading Co., Ltd. ("Jinzhong Yongcheng")	The PRC, May 30, 2006	$288,334	100%	Corns preliminary processing and wholesale
Jinzhong Yuliang Agriculture Trading Co., Ltd. ("Jinzhong Yuliang")	The PRC, March 17, 2008	$281,650	100%	Corns preliminary processing and wholesale distribution.
Tianjin Detian Yu Food Co., Ltd. ("Tianjin Detian Yu")	The PRC, June 21, 2011	$1,544,497	100%	Wholesale distribution of simple-processed and deep-processed packaged food products and staple food.
Hebei Yugu Grain Co., Ltd. ("Hebei Yugu")	The PRC, July 25, 2011	$1,563,824	70%	Wholesale distribution of grain products and operating or acting as an agent of import & export business for grain products.
Beijing Jundaqianyuan	The PRC, June 13, 2010	$14,637	Variable interest	Shareholding of Deyufarm (14.29%)
Investment Management
Co., Ltd. ("Junda")
Jinzhong Longyue Investment Consultancy Services Co., Ltd. ("Longyue")	The PRC, June 2, 2010	$4,393	Variable interest	Shareholding of Deyufarm (50%)
Deyufarm Innovation Food (Beijing) Co., Ltd. ("Deyufarm")	The PRC, June 13, 2010	$10,493,516	Variable interest	Wholesale distribution of packaged food products and instant millet beverage. Holding company of the following two companies.
Sichuan HaoLiangXin Instant Food Co., Ltd. ("HaoLiangXin")	The PRC, April 25, 2008	$1,202,460	Variable interest	Manufacturing and wholesale distribution of instant grain vermicelli and buckwheat tea products.
Beijing Xinggu Deyufarm	The PRC, November 25, 2010	$1,515,152	Variable interest	Manufacturing of
Food Co., Ltd. ("Xinggu				instant grain
Deyufarm")				vermicelli products.

F-6

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited consolidated financial statements of Deyu Agriculture Corp. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.  However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations.  Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet information as of December 31, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.  These interim financial statements should be read in conjunction with that report.  Certain comparative amounts have been reclassified to conform to the current period's presentation.

The consolidated financial statements include the accounts of Deyu Agriculture Corp. and its wholly-owned subsidiaries and joint ventures. All material intercompany balances and transactions have been eliminated.

F-7

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of presentation

The accompanying consolidated financial statements include the financial statements of Deyu Agriculture Corp., its wholly-owned subsidiaries, and those variable interest entities where the Company is the primary beneficiary.  All significant intercompany account balances and transactions have been eliminated in consolidation.  Results of operations of companies purchased are included from the dates of acquisition.

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The Company’s function currency is the Chinese Yuan, or Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).

On April 27, 2010, as a result of the consummation of the Share Exchange, we changed our fiscal year end from May 31 to December 31 to conform to the fiscal year end of City Zone.

Use of estimates

The preparation of the consolidated financial statements in conformity with generally accepted  accounting  principles requires management to make estimates and  assumptions  that  affect  the  reported  amounts  of  assets and liabilities and disclosure of contingent assets and liabilities at the date  of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Management makes its estimates based on historical experience and various other assumptions and information that are available and believed to be reasonable at the time the estimates are made.  Therefore, actual results could differ from those estimates under different assumptions and conditions.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, cash in bank and all highly liquid investments with original maturities of three months or less.

As a result of the financings associated with the reverse merger, we had, as of December 31, 2010, $125,560 in an escrow account held at a trust account managed by K&L Gates, LLP, the Company’s U.S. legal counsel. The use of these funds requires the written approval of our placement agent and us. The funds in the escrow account were designated for certain expenses, such as investor relations, accounting/consulting fees, SEC fees, and stock transfer agent fees. This amount was classified as restricted cash under current assets on our balance sheet as of December 31, 2010, while the restriction has been released in 2011.

As of September 30, 2011, $4,703,669 of cash was restricted as a pledge for $15,678,896 (RMB 100,000,000) of notes payable obtained from Jinzhong City Commercial Bank at ZhongDu branch in April 2011, $3,010,348 of cash was restricted as a pledge for $6,020,696 (RMB 38,400,000) of notes payable obtained from Jinzhong City Commercial Bank at Dongshun branch in April 2011, $2,612,104 of cash was restricted as a pledge for $5,224,208  (RMB 33,320,000) of notes payable obtained from Jinzhong City Commercial Bank at Dongshun branch in May 2011, and $1,567,890 of cash was restricted as a pledge for $1,567,890 (RMB 10,000,000) of notes payable obtained from Bank of Communication at Beijing Gongzhifen branch in May 2011.

Accounts receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less allowance for doubtful accounts, as needed.  We assess the collectability of accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves.  As of September 30, 2011 and December 31, 2010, there were no customers with accounts receivable greater than six months past due.

Inventories

The Company's inventories are stated at lower of cost or market.  Cost is determined on moving-average basis.  Costs of inventories include purchase and related costs incurred in delivering the products to their present location and condition.  Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions.  Management periodically evaluates the composition of its inventories at least quarterly to identify slow-moving and obsolete inventories to determine if valuation allowance is required.  As of September 30, 2011 and December 31, 2010, management had identified and reserved $103,213 and $0 for inventory valuation for changes in price levels.

F-8

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Property, plant, and equipment

Property, plant and equipment are stated at cost less accumulated depreciation.  Expenditures for maintenance and repairs are charged to earnings as incurred; 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 is computed using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Life
	(in years)
Automobiles	5
Buildings	30
Office equipment	5-6
Machinery and equipment	10
Furniture & fixtures	5-6
Leasehold Improvement	3

Construction-in-progress

Construction-in-progress consists of amounts expended for warehouse construction.  Construction-in-progress is not depreciated until such time as the assets are completed and put into service.  Once warehouse construction is completed, the cost accumulated in construction-in-progress is transferred to property, plant, and equipment.

Long-lived assets

The Company applies the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, at least on an annual basis.  ASC 360 requires the impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are 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.

Goodwill and intangible assets

Goodwill is calculated as the purchase premium after adjusting for the fair value of net assets acquired.  Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting unit level.  A reporting unit, as defined under applicable accounting guidance, is a business segment or one level below a business segment.  Under applicable accounting guidance, the goodwill impairment analysis is a two-step test.  The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying amount including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed to measure potential impairment.

F-9

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  Measurement of the fair values of the assets and liabilities of a reporting unit is consistent with the requirements of the fair value measurements accounting guidance, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The adjustments to measure the assets, liabilities, and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidation balance sheet.  If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment.  If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.  An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit.  An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance.  In 2010, goodwill was tested for impairment and it was determined that goodwill was not impaired as of December 31, 2010.  No indication of impairment was noted by management as of September 30, 2011.

For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value.  The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

Fair value measurements

FASB ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  It requires that an entity measure its financial instruments to base fair value on exit price and maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price.  It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.  This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

· Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

· Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

F-10

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

· Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data.  The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

This guidance applies to other accounting pronouncements that require or permit fair value measurements.  On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820).  This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations.

We also analyze all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”).  We have determined ASC 480-10 (formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) has no material effect on our financial position or results of operations.

Revenue recognition

The Company’s revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”).  The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.  The Company recognizes revenue for product sales upon transfer of title to the customer.  Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement.  Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered.  The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

The Company’s revenue is recognized net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period that the related revenue is recorded.  The estimates are based on historical sales returns, analysis of credit memo data, and other factors known at the time.  Commencing from year 2010, the Company’s general policy is to terminate the offering of sales discounts to customers.  However, the Company may offer sales discounts as incentive for early payments from customers, although those should be infrequent.  For the nine months ended September 30, 2011 and 2010, sales discounts were $70,620 and $391,419, respectively.

We offer a right of exchange on our grain products sold through our relationship with grocery store networks.  The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased.  In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes.  For the nine months ended September 30, 2011 and 2010, the returns of our product were not material.

F-11

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs for the nine months ended September 30, 2011 were $1,348,434.  Advertising costs for the nine months ended September 30, 2010 were not material.

Research and development

The Company expenses its research and development costs as incurred.  No material research and development costs were recorded for the nine months ended September 30, 2011 and 2010.

Stock-based compensation

In December 2004, the Financial Accounting Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation – Stock Compensation.”  Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services.  Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies.  SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods.  On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R).  Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS No. 123.

The Company has fully adopted the provisions of FASB ASC 718 and related interpretations as provided by SAB 107.  As such, compensation cost is measured on the date of grant as the fair value of the share-based payments.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

Income taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.”  ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The adoption had no effect on the Company’s consolidated financial statements.

F-12

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Foreign currency translation and comprehensive income

U.S. GAAP requires that recognized revenue, expenses, gains and losses be included in net income.  Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet.  Such items, along with net income, are components of comprehensive income.  The functional currency of the Company is RMB.  The unit of RMB is in Yuan.  Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Statement of cash flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies.  As a result, amounts related to assets and liabilities reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reclassifications

Certain classifications have been made to the prior year financial statements to conform to the current year presentation.  The reclassifications have no impact on the Company’s 2010 consolidated statement of operations and retained earnings.

Recent pronouncements

In January 2010, FASB issued an amendment regarding improving disclosures about fair value measurements.  This new guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  There was no impact from the adoption of this guidance to our consolidated financial position or results of operations as the amendment only addresses disclosures.

In April 2010, FASB issued an amendment to Stock Compensation.  The amendment clarifies that an employee stock-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition.  Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The adoption of this guidance had no impact on our consolidated financial position or results of operations since our stock-based payment awards have an exercise price denominated in the same currency of the market in which our Company shares are traded.

In May 2011, FASB issued an amendment (ASU No. 2011-04) to Fair Value Measurement (ASC Topic 820).  In 2006, the FASB and the International Accounting Standards Board (IASB) published a Memorandum of Understanding, which has served as the foundation of the Board’s efforts to a common set of high quality global accounting standards.  Consistent with the Memorandum of Understanding and the Board’s commitment to achieving the goal, the amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  The adoption of this guidance had no impact on our consolidated financial position or results of operations

In May 2011, FASB issued an amendment (ASU No. 2011-05) to Comprehensive Income (ASC Topic 220).  The amendment require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  The Company had adopted this guidance to our consolidated financial statements as of and for the period ended September 30, 2011.

In September 2011, FASB issued an amendment (ASU No. 2011-08) to Intangibles–Goodwill and Other (ASC Topic 350).  The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairmenttest by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4.  If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.  The Company had adopted this guidance to our consolidated financial statements as of and for the period ended September 30, 2011.

F-13

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3. CONSOLIDATION OF VARIABLE INTEREST ENTITIES

Effective November 16, 2010, the Company included in its consolidated financial statements, the net assets of Junda and Longyue, and their majority-owned and wholly-owned subsidiaries, including Deyufarm, HaoLiangXin and Xinggu Deyufarm, pursuant to the rights and obligations conveyed by the variable interests resulting in the Company absorbing a majority of Junda’s and Longyue’s expected losses and receiving their expected residual returns.  In accordance with ASC 810, “Consolidation”, the net assets of Junda and Longyue were initially measured at their carrying amounts at the date the requirements of the VIE substance first apply.  Carrying amounts refers to the amounts at which the assets and liabilities would have been carried in the consolidated financial statements if the VIE accounting guidance had been effective when the reporting entity first met the conditions to be the primary beneficiary.  The operating results of Junda and Longyue were included in the consolidated income statements of the Company from the effective date of consummating variable interests.

Selected information of the combined balance sheets of Junda and Longyue, including their wholly-owned subsidiaries, as of September 30, 2011 and December 31, 2010, and the combined results of the operations for the nine months ended September 30, 2011 and for the period from November 16, 2010 to December 31, 2010 are summarized as follows:

	September 30,		December 31,
Junda & Longyue Consolidated & Combined	2011		2010
Combined Assets (1)
Cash and cash equivalents	$	459,900	$	489,886
Accounts receivable		2,707,844		5,493
Trade receivable from non-VIE affiliates, net		1,361,022		2,151,942
Inventories		760,032		1,817,506
Advance to suppliers		973,304		2,418,459
Prepaid expense		1,122,381		895,081
Fixed assets and construction-in-progress		3,035,171		830,948
Deferred tax assets		1,240,276		251,632
All other assets		140,305		87,907
Total	$	11,800,235	$	8,948,854
Combined Liabilities (1)
Accounts payable	$	633,659	$	343,944
Accrued expenses		411,693		327,959
Due to related parties		8,576,356		8,030,303
Loan from unrelated parties		-		2,734,309
All other liabilities		3,999,158		218,400
Total	$	13,620,866	$	11,654,915

				Period
				from
	Nine Months			November
	Ended			16, 2010 to
	September 30,			December
	2011				31, 2010
Net sales	$	10,073,867		$	4,000,749
Net loss		(3,848,373	)		(756,480	)

(1) Total assets and liabilities of the combined VIEs are reported net of intercompany balances that have been eliminated within the VIEs.  The net balances due from the non-VIEs are presented in “Trade receivable from non-VIE affiliates, net”.

F-14

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Prior to consummating the variable interests with the Company through Junda and Longyue, on July 24, 2010, Deyufarm, wholly-owned by Junda and Longyue, acquired 100% of the equity interest of HaoLiangXin for cash consideration of $1,212,336 (or RMB 8,220,000).  The acquisition was accounted for as a business combination under the purchase method of accounting.  HaoLiangXin’s results of operations were included in Deyufarm’s results beginning July 24, 2010.  The purchase price has been allocated to the assets acquired and the liabilities assumed based on their fair value at the acquisition date (approximated to their carrying value) as summarized in the following:

Purchase price	$	1,212,336
Allocation of the purchase price:
Cash acquired		21,110
Accounts receivable		508
Inventories		264,641
Advance to suppliers		304,018
Other current assets		42,710
Property, plant and equipment		177,871
Other assets		3,669
Accounts payable		(24,911	)
Advance from customers		(359,617	)
Other current liabilities		(241,635	)
Fair value of net assets acquired		188,364
Goodwill (2)	$	1,023,972

(2) The variance of $64,789 as compared to the $1,088,761 recorded in the Company’s consolidated balance sheet as of September 30, 2011 was mainly the effect of foreign currency translation.

The Company is preparing to terminate its control on Junda and Yongyue as well as their subsidiaries (the "VIEs") by cancelling its VIE agreements as described in Note 20.  The long-lived assets, goodwill and intangible assets of the VIEs were tested for impairment and no impairment loss was noted as of September 30, 2011.

NOTE 4. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	September 30,		December 31,
	2011		2010
Accounts receivable	$	31,164,420	$	11,166,452
Less: Allowance for doubtful accounts		-		-
Accounts receivable, net	$	31,164,420	$	11,166,452

F-15

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5. INVENTORY

Inventory consisted of the following:

	September 30,			December 31,
	2011			2010
Raw materials	$	8,711,532		$	934,681
Work in process		1,586,049			421,858
Finished goods		16,825,888			16,812,946
Supplies		182,089			190,020
Inventory Reserve		(103,213	)		-
Total	$	27,202,345		$	18,359,505

NOTE 6. PREPAID EXPENSES

Prepaid expenses consisted of the following:

	September 30,		December 31,
	2011		2010
Deductible value-added taxes (VAT)	$	857,113	$	1,308,220
Prepaid advertisement		714,960		643,011
Prepaid rent		201,586		180,314
Prepaid bank loan guarantee fee		130,658		-
Prepayment for equipment		-		7,576
Prepaid other expenses		211,525		80,211
Total	$	2,115,842	$	2,219,332

F-16

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7. PROPERTY, PLANT, AND EQUIPMENT

Property, plant and equipment consisted of the following:

	September 30,			December 31,
	2011			2010
Automobiles	$	995,673		$	933,878
Buildings		8,747,378			1,659,116
Office equipment		527,381			447,602
Machinery and equipment		4,622,282			2,786,421
Furniture and fixtures		64,920			58,837
Leasehold Improvement		35,121			-
Total cost		14,992,755			5,885,854
Less: Accumulated depreciation		(2,022,137	)		(1,259,850	)
Property, plant, and equipment, net	$	12,970,618		$	4,626,004

The buildings owned by the Company located in Jinzhong, Shanxi Province, China are used for production, warehousing and offices for our grains business.  The building structure is mainly constructed of light steel and bricks.  During the year ended December, 31 2009, the Company observed a significant decrease in the construction cost of such property structure during its annual impairment testing of long-lived assets.  While future estimated operating results and cash flows are considered, the Company eventually employed the quoted replacement cost of the buildings as comparable market data.  As a result of this analysis, the Company concluded that the carrying amount of the buildings exceeded their appraised fair value, and recorded an impairment of $556,312 for the year ended December 31, 2009.  These charges are classified in the caption “other expenses” within operating expenses.

The construction of a warehousing, processing, and logistics center of Jinzhong Yongcheng (the “Yongcheng Plant”) was completed in June 2011.  Cost of the six (6) warehouses (total 9,525 square meters), one office building (3,860 square meters), and a processing center with five (5) cylinder storages in the amount of RMB 30.1 million ($4.7 million) of the Yongcheng Plant was reclassified from Construction-in-Progress to Property, Plant and Equipment upon the construction completion as of September 30, 2011.  Cost of the land use rights in the amount of RMB 15 million ($2.4 million) of the Yongcheng Plant was reclassified from Construction-in-Progress to Intangible Assets upon the construction completion as of September 30, 2011 (see Note 9).  Depreciation of the warehouses, office building, and processing center commenced in July 2011.

Depreciation expense for the nine month periods ended September 30, 2011 and 2010 was $707,742 and $346,410, respectively.

NOTE 8. CONSTRUCTION-IN-PROGRESS

Construction-in-progress consisted of the following:

	September 30,		December 31,
	2011		2010
Construction of Jinzhong processing and storage center	$	-	$	6,732,189
Remodeling of Beijing Pinggu factory and warehouse		-		492,315
Total cost	$	-	$	7,224,504

The Jinzhong processing and storage center and Jinzhong factory heating system located in Jinzhong City, Shanxi Province, PRC are completed and transferred to fixed assets and land use rights for $4.7 million and $2.3 million as of September 30, 2011, respectively.

F-17

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9. INTANGIBLE ASSETS

Intangible assets consisted of the following:

	September 30,			December 31,
	2011			2010
Software-ERP System and B2C platform	$	1,037,462		$	-
Land use rights		9,663,844			74,715
Less: Accumulated amortization		(105,530	)		(74,715	)
	$	10,595,776		$	-

According to government regulations of the PRC, the PRC Government owns all land.  The Company leases and obtains a certificate of right to use the industrial land of 11,667 square meters with the PRC Government in Jingzhong, Shanxi Province where Jinzhong Deyu’s buildings and production facility are located at.  The term of the right is four to five years and renewed upon expiration.  The right was fully amortized as of December 31, 2010 using the straight-line method.  The term of the right was for the period from March 14, 2007 to March 14, 2011.  The Company has been in the process of renewing the land use right certificate since the expiration date.  According to a Certification issued by the Jinzhong Municipal Bureau of Land and Resources on March 30, 2011, Jinzhong Deyu holds the legal title of the land use rights during the period of the renewal process.

The construction of a warehousing, processing, and logistics center of Jinzhong Yongcheng (the “Yongcheng Plant”) was completed in June 2011.  Cost of the six (6) warehouses (total 9,525 square meters), one office building (3,860 square meters), and a processing center with five (5) cylinder storages in the amount of RMB 30.1 million ($4.7 million) of the Yongcheng Plant was reclassified from Construction-in-Progress to Property, Plant and Equipment upon the construction completion as of June 30, 2011 (see Note 7).  Cost of the land use rights in the amount of RMB 15 million ($2.4 million) of the Yongcheng Plant was reclassified from Construction-in-Progress to Intangible Assets upon the construction completion as of September 30, 2011.  The industrial land underlying the certificate of the land use rights is 46,860 square meters under the title of Jinzhong Deyu.  The term of the rights is fifty (50) years starting from November 26, 2010 to November 25, 2060.  The amortization of the land use right was commenced in July, 2011using the straight-line method over 49.40 years.

On September 30, 2010 and December 20, 2010, we entered into Farmland Transfer Agreements with Shanxi Jinbei Plant Technology Co., Ltd. for the transfer of land use rights (the “Rights”) consisting of 53,000 mu (equivalent to 8,731 acres) and 52,337 mu (equivalent to 8,615 acres), respectively.  We paid RMB 19,415,000 (approximately $2,900,000) and RMB 27,221,000 (approximately $4,066,000) in September 30, 2010 and December 20, 2010, respectively.  The variance in the balance denominated in US Dollars as of September 30, 2011 was the effect of foreign currency translation.  Pursuant to the agreement and the terms of the original land use right certificates, the Rights will continue for 43 years (on average).  The land will be used for agricultural planting of corn and grains. We obtained land use rights certificates dated September 6, 2011 evidencing our ownership of those land use rights.  The terms of the rights stated on the certificates averaged 38.39 years, based on which we commenced the amortization of these land use rights from September, 2011.

Amortization expense for the nine months ended September 30, 2011 was $101,183.

NOTE 10. OTHER ASSETS

Other assets consisted of the following:

	September 30,		December 31,
	2011		2010
Prepaid for acquisition of farmland use rights	$	-	$	7,066,061
Timber, timberland, and farmland use rights		1,612,725		1,558,479
Net deferred tax assets - noncurrent		1,421,415		908,332
Installment payment for ERP system		-		984,848
Others		46,566		35,608
Total	$	3,080,706	$	10,553,328

F-18

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The cost of timber, timberland and farmland amounted to RMB 10,285,960 ($1,612,725 and $1,558,479 as of September 30, 2011 and December 31, 2010, respectively).  The variance in the balances denominated in US Dollars was the effect of foreign currency translation.  According to government regulations of the PRC, the PRC Government owns all timberland and farmland.  The Company leases and obtains a certificate of right to use farmland of approximately 1,605 acres (or 10,032 mu) for the period from August 2005 to December 2031.  For the same farmland, the Company obtained a certificate of the right to timber and 896 acres (or 5,600 mu) of timberland for the period from August 2006 to August 2028.  Timber mainly includes pine trees and poplar trees.  These timber, timberland and farmland were not for operating use or intended for sale.  Based on management’s assessment, there was no impairment for the periods ended September 30, 2011 and December 31, 2010.

NOTE 11. SHORT-TERM LOANS

Short-term loan consisted of the following:

	September 30,		December 31,
	2011		2010
Bank loan payable to Bank of Communications, bearing interest at a floating rate of prime rate plus 30% of prime rate, of which prime rate was based on one-year loan interest rate released by The People's Bank of China.  As of September 30, 2011, the actual interest rate was 8.5280% for this loan.  The term of the loan started from May 10, 2011 with maturity date on May 9, 2012.  The loan was obtained by Detain Yu and guaranteed by Zhongyuan Guoxin Credit Guarantee Co., Ltd., Wenjun Tian and Jianming Hao for a period of one year starting from May 10, 2011.	$	7,839,448	$	-
Bank loan payable to Jinzhong City Yuchi District Rural Credit Union Co., Ltd, bearing interest at a floating rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China.  As of September 30, 2011, the actual interest rate was 15.0840% for this loan.  The term of the loan started from August 8, 2011 with maturity date on August 7, 2012.  The loan was obtained by Jinzhong Deyu and guaranteed by Jinzhong Juntai Automotive Parts Manufacturing Co., Ltd., for a period of two years starting from August 7, 2012.		1,567,890		-
Bank loan payable to Jinzhong City Yuchi District Rural Credit Union Co., Ltd., bearing interest at a floating rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China.  As of September 30, 2011, the actual interest rate was 15.0840% for this loan.  The term of the loan started from August 9, 2011 with maturity date on August 7, 2012.  The loan was obtained by Jinzhong Yongcheng and guaranteed by Yuchi Jinmao Food Processing Factory, for a period of two years starting from August 7, 2012.		1,332,706		-
Bank loan payable to Jinzhong City Yuchi District Rural Credit Union Co., Ltd., bearing interest at a floating rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China.  As of September 30, 2011, the actual interest rate was 15.0840% for this loan.  The term of the loan started from August 9, 2011 with maturity date on August 7, 2012.  The loan was obtained by Jinzhong Yuliang and guaranteed by Yuchi Jinmao Food Processing Factory, for a period of two years starting from August 7, 2012.		1,332,706		-
Loan payable to Hangzhou TianCi Investment Management Co., Ltd., an unrelated party.  The loan was unsecured, bearing no interest and no due date was specified.		57,542		55,606
Bank loan payable to Jinzhong Economic Development District Rural Credit Union, bearing interest at a floating rate of prime rate plus 129.83% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China.  The loan was due March 8, 2011.  The use of proceeds from the loan is for Jinzhong Yuliang and guaranteed by Jinzhong Deyu for a period of two years starting from January 13, 2010.  In January 2011, the Company entered into an agreement with the bank for an extension of the loan.  The new term is from February 1, 2011 to October 1, 2011.  The adjustable interest rate is a rate per annum equal to the Prime Rate plus 117.23 percentage points of prime rate.  The prime rate is based on one- to three-year loan interest rate released by The People's Bank of China.  Jinzhong Deyu continues to provide guarantees on the loan for a period of two years starting from October 1, 2011. This loan was paid off on May 11, 2011.		-		1,287,879
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at a floating rate of prime rate plus 107.00% of prime rate, of which prime rate was based on six-month-to-one-year loan interest rate released by The People's Bank of China and due January 13, 2011.  The use of proceeds from the loan is restricted for purchase of corns. The loan was obtained by Jinzhong Yongcheng and guaranteed by Jinzhong Deyu and Jinzhong Yuliang for a period of two years starting from January 13, 2011.  In January 2011, the Company entered into an agreement with bank with an extension for the bank loan.  The new term of bank loan is from January 14, 2011 to June 11, 2011.  The adjustable interest rate is a rate per annum equal to the Prime Rate plus 107 percentage points of prime rate. The prime rate is based one-to-three-year loan interest rate released by The People's Bank of China.  Jinzhong Deyu and Jinzhong Yuliang remain providing guarantees on the loan for a period of two years starting from June 11, 2011.  This loan was paid off on May 11, 2011.		-		1,287,879
Total	$	12,130,292	$	2,631,364

F-19

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 12. NOTES PAYABLE

	September 30,		December 31,
	2011		2010
Bank notes payable to Shanxi Stored Grain Purchase-Sell of China Co., Ltd. issued by Jinzhong City Commercial Bank at ZhongDu branch, bearing no interest with 0.05% finance charge.  This note is for April 8, 2011 through October 8, 2011.  The note was obtained and issued by Jinzhong Yuliang and guaranteed by Wenjun Tian.	$	15,678,896	$	-
Bank notes payable to Taigu Yonghe Grain Trading Co., Ltd. issued by Jinzhong City Commercial Bank at Dongshun branch, bearing no interest with 0.05% finance charge.This note is for April 13, 2011 through October 12, 2011.The note was obtained and issued by Jinzhong Deyu and guaranteed by Wenjun Tian.		6,020,696		-
Bank notes payable to Taigu Yonghe Grain Trading Co., Ltd. issued by Jinzhong City Commercial Bank at Dongshun branch, bearing no interest with 0.05% finance charge. This note is for May 4, 2011 through November 4, 2011.The note was obtained and issued by Jinzhong Deyu and guaranteed by Wenjun Tian.		5,224,208		-
Bank notes payable to Jinzhong Haida Nongyi Trading Co., Ltd. issued by Bank of Communication at Beijing Gongzhifen branch, bearing no interest with 0.05% finance charge.This note is for August 17, 2011 through February 17, 2012.The note was obtained and issued by Detian Yu Biotechnology (Beijing) Co., Ltd.		1,567,890		-
Total	$	28,491,690	$	-

NOTE 13. ACCRUED EXPENSES

Accrued expenses consisted of the following:

	September 30,		December 31,
	2011		2010
Accrued VAT and other taxes	$	819,459	$	888,542
Accrued payroll		410,944		332,059
Others		424,019		398,585
Total	$	1,654,422	$	1,619,186

NOTE 14. INCOME TAXES

United States

The Company is incorporated in the United States of America and is subject to the U.S. federal and state taxation.  No provision for income taxes have been made as the Company has no taxable income in the U.S.  The applicable income tax rate for the Company for the nine months ended September 30, 2011 and 2010 was 34%.  No tax benefit has been realized since a 100% valuation allowance has offset deferred tax asset resulting from the net operating losses.

F-20

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

British Virgin Islands

City Zone, a wholly-owned subsidiary of the Company, is incorporated in the British Virgin Islands (“BVI”) and, under the current laws of the BVI, is not subject to income taxes.

Hong Kong

Most Smart, a wholly-owned subsidiary of the Company, is incorporated in Hong Kong.  Most Smart is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for income taxes have been made as Most Smart has no taxable income in Hong Kong.

The People’s Republic of China (PRC)

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%.  The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.  According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008.  Three of the Company’s wholly-owned subsidiaries located in the Shanxi Province, China, including Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang are subject to the EIT exemption. All other subsidiaries and consolidated VIEs are subject to the 25% EIT rate.

F-21

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The provision for income taxes from continuing operations on income consists of the following for the nine months ended September 30, 2011 and 2010:

	For the nine Months
	Ended
	September 30,
	2011			2010
Current income tax expense (benefit)
U.S.	$	-		$	-
PRC		-			-
Total current expense (benefit)	$	-		$	-
Deferred income tax expense (benefit)
U.S.	$	-		$	-
PRC		(932,984	)		-
Total deferred expense (benefit)	$	(932,984	)	$	-

The following is a reconciliation of the statutory tax rate to the effective tax rate for the nine months ended September 30, 2011 and 2010:

	For the nine Months
	Ended
	September 30,
	2011			2010
Expected U.S. income tax expense		34.0	%		34.0	%
Increase (decrease) in taxes resulting from:
Tax-exempt income		(53.6	%)		(25.0	%)
Foreign tax differential		4.3	%		(9.0	%)
Change in U.S. federal valuation allowance		7.8	%		-
Total income tax benefit		(7.5	%)		-

Significant components of the Company’s net deferred tax assets as of September 30, 2011 and December 31, 2010 are presented in the following table:

	September 30,			December 31,
	2011			2010
Deferred tax assets
Net operating loss carryforwards (NOL)	$	3,312,468		$	1,458,421
Share-based compensation		326,845			197,126
Gross deferred tax assets		3,639,313			1,655,547
Less: Valuation allowance		(1,455,868	)		(466,649	)
Total deferred tax assets, net	$	2,183,445		$	1,188,898

F-22

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 15. SHAREHOLDERS’ EQUITY

Reverse Acquisition and Private Placement

On April 27, 2010, we completed the acquisition of City Zone by means of a share exchange.  Simultaneously with the acquisition, we completed a private placement for gross proceeds of $8,211,166 from the sale of our securities to accredited investors at $4.40 per unit, with each “Unit” consisting of one share of Series A Convertible Preferred Stock, and a warrant to purchase 0.4 shares of common stock with an exercise price of $5.06 per share.

On April 27, 2010, the (the “Closing Date”), we entered into a Share Exchange Agreement (“Exchange Agreement”) by and among (i) City Zone, (ii) City Zone’s shareholders, (iii) us, and (iv) our principal stockholders.  Pursuant to the terms of the Exchange Agreement, Expert Venture Limited and the other City Zone Shareholders will transfer to us all of the shares of City Zone in exchange for the issuance of 8,736,932 shares of our common stock as set forth in the Exchange Agreement, so that Expert Venture and other minority shareholders of City Zone shall own at least a majority of our outstanding shares.

Our directors approved the Exchange Agreement and the transactions contemplated thereby.  The directors of City Zone also approved the Exchange Agreement and the transactions contemplated thereby.

As a result of the Exchange Agreement effective April 27, 2010, we acquired 100% of the equity interest of City Zone, the business and operations of which now constitutes our primary business and operations through its wholly-owned PRC subsidiaries.  Specifically, as a result of the Exchange Agreement:

· We issued 8,736,932 shares of our common stock to the City Zone Shareholders;

· The ownership position of our shareholders who were holders of common stock immediately prior to the Exchange Agreement changed from 100% to 9.5% (fully diluted) of our outstanding shares; and

· City Zone Shareholders were issued our common stock constituting approximately 65.71% of our fully diluted outstanding shares.

Immediately after the Share Exchange, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”) for the issuance and sale in a private placement of 1,866,174 Units, consisting of 1,866,174 shares of our Series A Convertible Preferred Stock, par value $0.001 per share (the “Investor Shares”) and Series A Warrants to purchase up to 746,479 shares of our Common Stock (the “Warrants”), for aggregate gross proceeds of $8,211,166 (the “Private Placement”).  In connection with the Private Placement, we also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors, in which we agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register for resale the Investor Shares, within 60 calendar days of the Closing Date of the Private Placement, and to use our best efforts to have the Registration Statement declared effective within 180 calendar days of the Closing Date of the Private Placement.  On October 21, 2010, the SEC declared our Form S-1 effective.

F-23

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In connection with the Private Placement, Maxim Group, LLC acted as our financial advisor and placement agent (the “Placement Agent”).  Maxim received a cash fee equal to 7% of the gross proceeds of the Private Placement.  Maxim also received warrants to purchase 171,911 shares of our Common Stock at a price per share of $5.06 (the “Placement Agent Warrants”).  Pursuant to the Original Placement Agreement entered into by Detian Yu on January 27, 2010 with the Placement Agent (the “Original Placement Agreement”), we engaged the Placement Agent to act as the exclusive agent to sell the Units in this offering on a “commercially reasonable efforts basis.”  The Placement Agent received cash fees equal to 7% of our gross proceeds received in connection with an equity financing and a cash corporate finance fee equally to 1% of our gross proceeds raised in the Offering, payable at the time of each Closing; five (5) year warrants to purchase that number of Series A Preferred Shares and Shares equal to 5% of the aggregate number of Series A Preferred Shares and Shares underlying the Units issued pursuant to this Offering; and a non-refundable cash retainer (or restricted shares) of $25,000 payable upon the execution of the retainer agreement.  We also agreed to pay for all of the reasonable expenses the Placement Agent incurred in connection with the Offering.

On May 10, 2010, we closed on the second and final round (the “Final Closing”) of the private placement offering for the issuance and sale of 589,689 Units, consisting of 589,689 shares of Series A Convertible Preferred Stock and 235,883 five-year Series A Warrants with an exercise price of $5.06 per share, to certain accredited investors (the “Investors”) for total gross proceeds of $2,594,607.

We raised an aggregate amount of $10,805,750 in the offering.  As of the Final Closing, we had 9,999,999 shares of common stock issued and outstanding.  In connection with the offering, we issued a total of 2,455,863 shares of Series A Convertible Preferred Shares and 982,362 Series A Warrants to the Investors.  Additionally, the Placement Agent received 171,911 warrants.

Make Good Escrow Agreement

We also entered into a make good escrow agreement with the Investors (the “Securities Escrow Agreement”), pursuant to which the City Zone Shareholders placed a number of shares of common stock equal to 100% of the number of shares of Common Stock underlying the Investor Shares, which are initially convertible into 1,866,174 shares of Common Stock (the “Escrow Shares”) in an escrow account.  The Escrow Shares are being held as security in the event we do not achieve $11 million in audited net income for the fiscal year 2010 (the “2010 Performance Threshold”) and $15 million in audited net income for the fiscal year 2011 (the “2011 Performance Threshold”).  If we achieve the 2010 Performance Threshold and the 2011 Performance Threshold, the Escrow Shares will be released back to the City Zone Shareholders.  If either the 2010 Performance Threshold or 2011 Performance Threshold is not achieved, an aggregate number of Escrow Shares (such number to be determined by the formula set forth in the Securities Escrow Agreement) will be distributed to the Investors, based upon the number of Investor Shares (on an as-converted basis) purchased in the Private Placement and still beneficially owned by such Investor, or such successor, assign or transferee, at such time.  If any Investor transfers Investor Shares purchased pursuant to the Purchase Agreement, the rights to the Escrow Shares shall similarly transfer to such transferee, with no further action required by the Investor, the transferee or us.

Lock-Up Agreement

We also entered into a lock-up agreement with the Investors (the “Lock-Up Agreement”), pursuant to which the common stock owned by the management of City Zone will be locked-up until six (6) months after the Registration Statement is declared effective.

F-24

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Series A Convertible Preferred Stock

The holders of Series A Convertible Preferred Shares (“Series A Preferred”) are entitled to receive cumulative dividends in preference to the holders of common stock at an annual rate of 5% of the applicable per Series A Preferred original purchase price (the “Dividend Preference” and the “Dividends”).  If, after the Dividend Preference has been fully paid or declared and set apart, the Company shall make any additional distributions, then the holders of Series A Preferred shall participate with the holders of common stock on an as-converted basis with respect to such distributions.  Dividends are payable in cash or shares of Series A Preferred, at the Company’s option.

Upon any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will be entitled to receive, out of the assets of the Company available for distribution to its stockholders, an amount equal to $4.40 per share (the amount, the “Liquidation Preference Amount”), before any payment shall be made or any assets distributed to the holders of the common stock (the “Liquidation Preference”).

Each holder of Series A Preferred will have the right, at the option of the holder at any time on or after the issuance of the Series A Preferred, without the payment of additional consideration, to convert Series A Preferred into a number of fully paid and nonassessable shares of common stock equal to: (i) the Liquidation Preference Amount of such share divided by (ii) the Conversion Price in effect as of the date of the conversion.

For a period of two (2) years following the issuance of the Series A Preferred, the conversion price of Series A Preferred will be subject to adjustment for issuances of common stock (or securities convertible or exchangeable into shares of common stock) at a purchase price less than the conversion price of the Series A Preferred.   The Series A Preferred Stock does not contain any repurchase or redemption rights.

Current accounting standards require that we evaluate the terms and conditions of convertible preferred stock to determine (i) if the nature of the hybrid financial instrument, based upon its economic risks, is more akin to an equity contract or a debt contract for purposes of establishing classification of the embedded conversion feature and (ii) the classification of the host or hybrid financial instrument.  Based upon a review of the terms and conditions of the Series A Preferred, the Company has concluded that the financial instrument is more akin to an equity financial instrument.  The major consideration underlying this conclusion is that the Series A Preferred is a perpetual financial instrument with no stated maturity or redemption date, or other redemption that is not within the Company’s control.  Other considerations in support of the equity conclusion included the voting rights and conversion feature into common shares.  While the cumulative dividend feature may, in some instances, be likened to a debt-type coupon, the absence of a stated maturity date was determined to establish the cumulative dividend as a residual return, which does not obviate the equity nature of the financial instrument.  Further, there are no cash redemption features that are not within the control of our management.  As a result, classification in stockholders’ equity is appropriate for the Series A Preferred.

F-25

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Series A Warrants

The warrants issued to the investors and placement agent have strike prices of $5.06 and $4.84, respectively, and expire in five years.  The strike prices are subject to adjustment only for changes in our capital structure, but allow for cashless exercise under a formula that limits the aggregate issuable common shares.  There are no redemption features embodied in the warrants and they have met the conditions provided in current accounting standards for equity classification.

There were 982,362 Series A Warrants sold together with the Series A Preferred to the Investors, which:

(a) entitle the holder to purchase 1 share of common stock;

(b) are exercisable at any time after consummation of the transactions contemplated by the Securities Purchase Agreement and shall expire on the date that is five years following the original issuance date of the Series A Warrants;

(c) are exercisable, in whole or in part, at an exercise price of $5.06 per share of common stock; and

(d) are exercisable only for cash (except that there will be a cashless exercise option if, after twelve months from the Issue Date, (i) the Per Share Market Value of one share of Common Stock is greater than the Warrant Price (at the date of calculation) and (ii) a registration statement under the Securities Act providing for the resale of the Common Stock issuable upon exercise of Warrant Shares is not in effect, in lieu of exercising this Warrant by payment of cash).

Aggregate gross proceeds from the two closing events amounted to $10,805,750.  Direct financing costs totaled $1,742,993 of which $1,555,627 was paid in cash and the balance of $187,366 represents the fair value of warrants linked to 171,911 shares of our common stock that were issued to a placement agent.  The proceeds and the related direct financing costs were allocated to the Series A Preferred and the warrants (classified in paid-in capital) based upon their relative fair values.  The following table summarizes the components of the allocation:

				Paid-in
	Series A			Capital
	Preferred			Warrants			Total
Fair values of financial instruments	$	10,248,092		$	1,039,978		$	11,288,070
Gross proceeds	$	9,810,227		$	995,523		$	10,805,750
Direct financing costs		(1,581,550	)		(161,443	)		(1,742,993	)
Fair value of placement agent warrants		-			187,366			187,366
	$	8,228,677		$	1,021,446		$	9,250,123

Fair value considerations:

Our accounting for the sale of Series A Preferred and warrants, and the issuance of warrants to the Placement Agent required the estimation of fair values of the financial instruments on the financing inception date.  The development of fair values of financial instruments requires the selection of appropriate methodologies and the estimation of often subjective assumptions.  We selected the valuation techniques based upon consideration of the types of assumptions that market participants would likely consider in exchanging the financial instruments in market transactions.  The Series A Preferred was valued based upon a common stock equivalent method, enhanced by the cumulative dividend feature.  The dividend feature was valued as the estimated cash flows of the dividends discounted to present value using an estimated weighted average cost of capital.  The warrants were valued using a Black-Scholes-Merton Valuation Technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.

F-26

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

These fair values were necessary to develop relative fair value calculation for allocations of certain elements of the financing arrangement, principally proceeds and the related direct financing costs.  The following tables reflect assumptions used to determine the fair value of the Series A Preferred:

			Series A			Series A
	Fair Value		Preferred			Preferred
	Hierarchy		April 27,			May 10,
	Level		2010			2010
Indexed common shares				1,866,174			589,689
Components of fair value:
Common stock equivalent value			$	6,631,403		$	2,083,094
Dividend feature				659,821			209,439
			$	7,791,224		$	2,292,533
Significant assumptions:
Common stock price		3	$	3.55		$	3.53
Horizon for dividend cash flow projection		3		2.0			2.0
Weighted average cost of capital ("WACC")		3		15.91	%		15.55	%

Fair value hierarchy of the above assumptions can be categorized as follows:

(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from.  There were no level 1 inputs.

(2) Level 2 inputs are significant other observable inputs. There were no level 2 inputs.

(3) Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety.

· Stock price- Given that management did not believe our trading market price was indicative of the fair value of our common stock at the measurement date, the common stock price value was derived implicitly from an iterative process based upon the assumption that the consideration of the Private Placement was the result of an arm’s length transaction. The Private Placement was composed of Series A Preferred and Series A Warrants which were both indexed to our common stock; accordingly, we used an iterative process to determine the value of our common stock in order for the fair value of the Series A Preferred and Series A Warrants to equal the amount of consideration received in the Private Placement.

· Dividend horizon- We estimated the horizon for dividend payment at 2 years.

· WACC- The rates utilized to discount the cumulative dividend cash flows to their present values were based on a weighted average cost of capital of 18.94% and 18.60% as of April 27, 2010 and May 10, 2010, respectively. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as Deyu Agriculture Corp.. The cost of equity was determined using a build-up method which begins with a risk free rate and adds expected risk premiums designed to reflect the additional risk of the investment. Additional premiums or discounts related specifically to us and the industry are also added or subtracted to arrive at the final cost of equity rate. The cost of debt was determined based upon available financing terms.

F-27

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

· Significant inputs and assumptions underlying the model calculations related to the warrant valuations are as follows:

The following tables reflect assumptions used to determine the fair value of the Warrants:

			April 27, 2010						May 10, 2010
	Fair Value
	Hierarchy		Investor			Agent			Investor			Agent
	Level		warrants			warrants			warrants			Warrants
Indexed shares				746,479			130,632			235,883			41,279
Exercise price			$	5.06		$	4.84		$	5.06		$	4.84
Significant assumptions:
Stock price		3	$	3.55		$	3.55		$	3.53		$	3.53
Remaining term		3	5 years			5 years			5 years			5 years
Risk free rate		2		2.39	%		2.39	%		2.24	%		2.24	%
Expected volatility		2		45.25	%		45.25	%		45.47	%		45.47	%

Fair value hierarchy of the above assumptions can be categorized as follows:

(1) There were no Level 1 inputs.

(2) Level 2 inputs include:

· Risk-free rate- This rate is based on publicly-available yields on zero-coupon Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the warrants

· Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.

(3) Level 3 inputs include:

· Stock price- Given that management did not believe our trading market price was indicative of the fair value of our common stock at the measurement date, the stock price was determined implicitly from an iterative process based upon the assumption that the consideration of the Private Placement was the result of an arm’s length transaction.

· Remaining term- We do not have a history to develop the expected term for our warrants.  Accordingly, we have used the contractual remaining term in our calculations.

F-28

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following is a summary of the status and activity of warrants outstanding as of September 30, 2011:

Outstanding Warrants
Exercise Price	Number of Warrants	Average Remaining Contractual Life
$5.06	982,362	3.58 years
$4.84	171,911	3.58 years
Total	1,154,273

	Number of Warrants
Outstanding as of January 1, 2011		1,154,273
Granted		-
Forfeited		-
Exercised		-
Outstanding as of September 30, 2011		1,154,273

NOTE 16. SHARE-BASED COMPENSATION

As of September 30, 2011, the Company had one share-based compensation plan as described below.  The compensation cost that had been charged against income for the plan was $412,745 for the nine months ended September 30, 2011 and $549,106 for the year ended December 31, 2010.  The related income tax benefit recognized was $326,845 as of September 30, 2011.  A 100% valuation allowance was assessed against the deferred tax assets derived from such tax benefit as of September 30, 2011.

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan (the “Plan”).  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan, including 851,000 options granted to the Company’s executives and key employees (collectively, “Employees”) and 80,000 options granted to consultants and independent directors of the Board (collectively, “Non-employees”), at an exercise price of $4.40 per share.  On December 15, 2010, 40,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share.  The option award granted in 2010 shall vest as follows:

(i) 33 1/3% of the option grants be vested one (1) month after the date of grant;

(ii) 33 1/3% of the option grants be vested twelve (12) months after the date of grant; and

(iii) 33 1/3% of the option grants be vested twenty-four (24) months after the date of grant

The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table.  The model is based on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of stock and selling a call option on the stock.  Any movement in the price of the underlying stock will be offset by an opposite movement in the options value, resulting in no risk to the investor.  This perfect hedge is riskless and, therefore, should yield the riskless rate of return.  As the Black-Scholes option pricing model applies to stocks that do not pay dividends, we made an adjustment developed by Robert Merton to approximate the option value of a dividend-paying stock.  Under this adjustment method, it is assumed that the Company’s stock will generate a constant dividend yield during the remaining life of the options.

F-29

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables reflect assumptions used to determine the fair value of the option award:

Options granted on November 8, 2010:

Exercisable Period	12/8/2010 - 11/8/2020		11/8/2011 - 11/8/2020		11/8/2012 - 11/8/2020
Risk-free Rate (%)		1.12		1.27		1.46
Expected Lives (years)		5.04		5.50		6.00
Expected Volatility (%)		46.10		44.49		43.04
Expected forfeitures per year (%)		0.00-5.00		0.00-5.00		0.00-5.00
Dividend Yield (%)		0.00		0.00		0.00

Options granted on December 15, 2010:

Exercisable Period	1/15/2011 - 12/15/2020		12/15/2011 - 12/15/2020		12/15/2012 - 12/15/2020
Risk-free Rate (%)		2.15		2.32		2.50
Expected Lives (years)		5.04		5.50		6.00
Expected Volatility (%)		46.15		44.52		43.09
Expected forfeitures per year (%)		0.00		0.00		0.00
Dividend Yield (%)		0.00		0.00		0.00

Fair value hierarchy of the above assumptions can be categorized as follows:

(1) There were no Level 1 inputs.

(2) Level 2 inputs include:

· Risk-free rate- This rate is based on continuous compounding of publicly-available yields on U.S. Treasury securities with remaining terms to maturity consistent with the expected term of the options at the dates of grant.

· Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model.  As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility.  In developing this model, no one company was weighted more heavily.

F-30

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(3)  Level 3 inputs include:

· Expected lives- The expected lives of options granted were derived from the output of the option valuation model and represented the period of time that options granted are expected to be outstanding.

· Expected forfeitures per year- The expected forfeitures are estimated at the dates of grant and will be revised in subsequent periods pursuant to actual forfeitures, if significantly different from the previous estimates.

The estimates of fair value from the model are theoretical values of stock options and changes in the assumptions used in the model could result in materially different fair value estimates.  The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options are exercised.

A summary of option activity under the Plan as of September 30, 2011, and changes during the nine months then ended September 30, 2011, is presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining
				Exercise		Contractual
Options	Shares			Price		Term
Outstanding as of January 1, 2011		971,000		$	4.40
Granted		-			-
Exercised		-			-
Forfeited		(25,000	)		4.40
Outstanding as of September 30, 2011		946,000			4.40	4.76 years
Exercisable as of September 30, 2011		315,333			4.40	4.56 years
Vested and expected to vest (3)		918,467			4.40	4.76 years

(3) Includes vested shares and unnvested shares after a forfeiture rate is applied.

A summary of the status of the Company’s unvested shares as of September 30, 2011, and changes during the year ended September 30, 2011, is presented below:

				Weighted-
				Average
				Grant-
				Date Fair
Unvested Shares	Shares			Value
Unvested as of January 1, 2011		647,334		$	1,162,373
Granted		-			-
Vested		-			-
Forfeited		(25,000	)		(30,274	)
Unvested as of September 30, 2011		622,334		$	1,132,099

F-31

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 17. RELATED PARTY TRANSACTIONS

Transactions

	For The Nine Months
	Ended Septebmer 30,
	2011		2010
Purchases from Tieling Zhongnong Agriculture Technology Development Co., Ltd.	$	2,288,467	$	-
Sales to Tieling Zhongnong Agriculture Technology Development Co., Ltd.		1,108,817		-
Sales to Beijing Yilian Gifts Tech. Development Co., Ltd.		609,062		-
Sales to Jinshang International Finance Leasing Co., Ltd.		7,882		-

Mr. Yongqin Ren, Vice President of the corn division of the Company is the legal representative of Tieling Zhongnong Agriculture Technology Development Co., Ltd.  Mr. Jianming Hao, Chief Executive Officer of the Company is the Executive Director of Beijing Yilian Gifts Tech. Development Co., Ltd.  Mr. Wenjun Tian, the President and Executive Director of the Company is the Executive Director of Jinshang International Finance Leasing Co., Ltd.  The prices in the transactions with related parties were determined according to market price sold to or purchased from third parties.

Due from related parties

	September 30,		December 31,
	2011		2010
Due from Beijing Yilian Gifts Tech. Development Co., Ltd.	$	235,858	$	-
Due form Jinshang International Finance Leasing Co., Ltd.		9,190		-
Total	$	245,048	$	-

Due to related parties

	September 30,		December 31,
	2011		2010
Advances from -
Dongsheng International Investment Co., Ltd.	$	6,005,017	$	3,484,848
Jinzhong Xinhuasheng Business Trading Co., Ltd.		3,135,780		3,030,303
Mr. Wenjun Tian		4,076,513		1,515,152
Tieling Zhongnong Agriculture Technology Development Co., Ltd.		461,900		-
Total	$	13,679,210	$	8,030,303

Mr. Wenjun Tian, the President and Executive Director of the Company is also the President and Executive Director of Dongsheng International Investment Co., Ltd.  Mr. Hong Wang, a shareholder with over 5% beneficial ownership and a manager of the Company is the President and Executive Director of Jinzhong Xinhuasheng Business Trading Co., Ltd. Those advances as of September 30, 2011 and December 31, 2010 are unsecured, bear no interest and no due date is specified.

Guarantees

As of September 30, 2011, Zhongyuan Guoxin Credit Guarantee Co., Ltd., Wenjun Tian and Jianming Hao provided guarantees on short-term loans obtained by Detain Yu.  Wenjun Tian provided guarantees on bank notes obtained and issued by Jinzhong Yuliang and Jinzhong Deyu. Yuci Jinmao Food Processing Factory of which the legal representative is Junlian Zheng, the wife of Junde Zhang, Vice President of the Company provided guarantees on short-term loans obtained by Jinzhong Yongcheng and Jinzhong Yulian.

As of December 31, 2010, Jinzhong Deyu provided guarantees on short-term loans obtained by Jinzhong Yuliang and Jinzhong Yongcheng.  Jinzhong Yuliang also provided guarantees on a short-term loan obtained by Jinzhong Yongcheng.

NOTE 18.              SEGMENT REPORTING

As defined in ASC Topic 280, “Segment Reporting”, the Company has three reportable segments, including the corn division, the simple-processed grain division, and the deep-processed grain division.  The three segments were identified primarily based on the difference in products.  The corn division is comprised of Jinzhong Yongcheng and Jinzhong Yuliang in the business of bulk purchasing corns from farmers and distributing to agricultural product trading companies through wholesale.  The business of the simple-processed grain division is conducted through Jinzhong Deyu and Detian Yu, by bulk purchasing of grains from farmers and distributing to wholesalers and supermarkets with our own brand names, including “De Yu” and “Shi-Tie” for certified organic grain products.  The deep-processed grain division was newly created in 2010.  Its business is conducted through Detian Yu, Deyufarm and its subsidiaries, by producing and distributing instant grain vermicelli, instant millet beverage, and buckwheat tea to wholesalers and supermarkets with our own brand name, “Deyufang”.  Other entities consolidated under the Company are mainly for holding purposes and do not plan to earn revenues, and may only incur incidental activities.

 

F-32

DEYU AGRICULTURE CORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Information about the three reportable segments is presented in the following tables:

				Simple-			Deep-
				Processed			Processed
Nine Months Ended	Corn			Grain			Grain
September 30, 2011	Division			Division			Division			Others			Total
Revenues from external customers	$	117,386,510		$	57,163,721		$	5,547,057		$	-		$	180,097,288
Intersegment revenues		7,448,554			35,734			-			-			7,484,288
Interest revenue		26,271			1,773			3,466			149			31,659
Interest expense		(377,561	)		(101,375	)		(2,613	)		-			(481,549	)
Net interest (expense) income		(351,290	)		(99,602	)		853			149			(449,890	)
Depreciation and amortization		251,695			305,155			234,307			17,767			808,924
Noncontrolling interest		-			-			-			740,308			740,308
Segment net profit (loss)		14,532,771			7,140,664			(6,243,813	)		(1,422,887	)		14,006,735

				Simple-			Deep-
				Processed			Processed
Three Months Ended	Corn			Grain			Grain
September 30, 2011	Division			Division			Division			Others			Total
Revenues from external customers	$	62,207,751		$	21,657,732		$	2,760,269		$	-		$	86,625,752
Intersegment revenues		2,377,444			17,263			-			-			2,394,707
Interest revenue		26,271			1,643			3,466			85			31,465
Interest expense		(252,946	)		(14,166	)		(2,613	)		-			(269,725	)
Net interest (expense) income		(226,675	)		(12,523	)		853			85			(238,260	)
Depreciation and amortization		335,912			621,504			283,792			29,537			1,270,745
Noncontrolling interest		-			-			-			(245,406	)		(245,406	)
Segment net profit (loss)		5,618,226			8,962,484			(5,826,253	)		(1,196,762	)		7,557,695

				Simple-			Deep-
				Processed			Processed
Nine Months Ended	Corn			Grain			Grain
September 30, 2010	Division			Division			Division		Others			Total
Revenues from external customers	$	44,791,394		$	9,104,535		$	-	$	-		$	53,895,929
Intersegment revenues		-			-			-		-			-
Interest revenue		2,599			2,466			-		-			5,065
Interest expense		(236,148	)		(6,651	)		-		-			(242,799	)
Net interest expense		(233,549	)		(4,185	)		-		-			(237,734	)
Depreciation and amortization		(125,260	)		(212,668	)		-		(8,482	)		(346,410	)
Segment net profit (loss)		6,529,428			1,669,492			-		(649,281	)		7,549,639

				Simple-			Deep-
				Processed			Processed
Three Months Ended	Corn			Grain			Grain
September 30, 2010	Division			Division			Division		Others			Total
Revenues from external customers	$	17,829,881		$	3,150,196		$	-	$	-		$	20,980,077
Intersegment revenues		-			-			-		-			-
Interest revenue		555			1,048			-		(3	)		1,600
Interest expense		(90,180	)		(28	)		-		-			(90,208	)
Net interest (expense) income		(89,625	)		1,020			-		(3	)		(88,608	)
Depreciation and amortization		(42,007	)		(108,785	)		-		(4,532	)		(155,324	)
Segment net profit (loss)		2,503,219			35,972			-		(433,191	)		2,106,000

All of our revenues were generated from customers in China.  All long-lived assets are located in China.  The following tables set forth our three major customers in each segment:

	% of Gross Sales for
	the Nine Months Ended
Corn Division :	September 30, 2011
Chengdu Zhengda Co., Ltd.		6.7	%
Shuanglui Zhengda Co., Ltd.		4.2	%
Neijiang Zhengda Co., Ltd.		3.7	%
Top Three Customers as % of Total Gross Sales:		14.6	%
Simple-Processed Grain Division :
Tianjin Yimingda Grain Division		21.4	%
Shanxi Guchuan Food Co., Ltd.		6.3	%
Hebei Zhuoran Agriculture Technology Co., Ltd.		5.1	%
Top Three Customers as % of Total Gross Sales		32.8	%
Deep-Processed Grain Division :
Tianjin Yimingda Grain Division		8.7	%
Beijing Yilian Gifts Tech. Development Co., Ltd.		8.3	%
Jinzhong Xinkeyuan Trading Co., Ltd.		7.5	%
Top Three Customers as % of Total Gross Sales:		24.5	%

NOTE 19 COMMITMENTS

The Company leases railroad lines, warehouses, and offices under operating leases. Future minimum lease payments under operating leases with initial or remaining terms of one year or more are as follows:

As of September 30,	Operating Leases
2012	$	1,005,987
2013		752,722
2014		463,975
2015		463,282
2016		463,282
Thereafter		6,295,263
	$	9,444,511

NOTE 20. SUBSEQUENT EVENTS

The Company has evaluated events subsequent to the balance sheet date of September 30, 2011 through November 14, 2011, which is the date the consolidated financial statements were available to be issued.

On October 11, 2011, Company announced that it is preparing to terminate its control over Deyufarm, which is currently part of Deyu’s deep processed grain product division, by cancelling its VIE agreements.

F-33

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

Forward-Looking Statements

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the words “we”, “us” and “our” refer to Deyu Agriculture Corp. and all entities owned or controlled by Deyu Agriculture Corp.  All references to “Deyu” or the “Company” in this report mean Deyu Agriculture Corp., a Nevada corporation, and all entities owned or controlled by Deyu Agriculture Corp., except where it is made clear that the term only means the parent or a subsidiary company. References in this report to the “PRC” or “China” are to the People’s Republic of China.

This report contains forward-looking statements.  The words “anticipated”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project,”, “could”, “may” and similar expressions are intended to identify forward-looking statements.  These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow.  Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely affecting demand for the our products; our reliance on our major customers for a large portion of our net sales; our ability to develop and market new products; our ability to raise additional capital to fund our operations; our ability to accurately forecast amounts of supplies needed to meet customer demand; market acceptance of our products; exposure to product liability and defect claims; fluctuations in the availability of raw materials and components needed for our products; protection of our intellectual property rights; changes in the laws of the PRC that affect our operations; inflation and fluctuations in foreign currency rates and various other matters, many of which are beyond our control.  Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated.  Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Summary of our Business

We are a Beijing, China-based producer and seller of organic and non-organic, ready-to-eat and ready-to-drink “simple processed” and “deep processed” grain consumer products which are sold in approximately 16,800, supermarkets and convenient stores throughout China.  We are also one of the dominant organic and non-organic agricultural product distributors in Shanxi Province engaged in procuring, processing, marketing and distributing various grain and corn products and byproducts.

We have experienced high growth in both revenue and net income.  Operating revenue for the year ended December 31, 2010 was $89,175,633, representing a 119% increase from $40,732,447 for the year ended December 31, 2009. Our net income for the year ended December 31, 2010 was $11,502,253, representing a 60% increase from $7,181,132 for the year ended December 31, 2009.  Operating revenue for the nine months ended September 30, 2011 was $180,097,288, representing a 234.2% increase from $53,895,929 for the nine months ended September 30, 2010.  Our net income available to common stockholders for the nine months ended September 30, 2011 was $14,006,735, representing a 85.5% increase from $7,549,639 for the nine months ended September 30, 2010.

We develop our business through three divisions: corn division, simple processed grain division and deep processed grain division. The simple processed grain division is composed of two parts: packaged and unpackaged grain, and bulk purchase and wholesale of rice, flour, wheat and other products.

We purchase corns from farmers, farmer agents and other suppliers, perform simple processing, and sell to food manufacturers, feed producers and chemical companies.  Corn is the main raw feed material for hogs, cattle, chickens and other livestock, and the raw material for corn oil and other healthy food products.  China is now the second largest feed producer with steady growing demand of corns.  Our corns are purchased primarily from corn fields located in Shanxi Province with unique cultivation environment for corn growth.  We have competitive advantages of developing corn business, including long-term business partnership with the farmers cultivating corns in Shanxi Province, large storage and production capacity, effective logistics support from exclusive railway lines for freight transportation, and ability to finance working capital support from bank loans and bank acceptance notes.  With our warehousing capacity, we are able to purchase corns during the harvesting season when the corn price is low, store in our warehouses, and sell to the market when the price is high prior to the next harvesting season.  We expect that our corn business will continue to grow by enhancing our existing strengths along with sufficient financing to support corn purchasing to meet the increasing market demand.

We sell packaged and unpackaged grain products to consumers through supermarkets and retail stores, which is one of the two primary businesses of our simple processed grain division.  At present, our sales network covers approximately 16,800 supermarkets and convenience stories all over the People’s Republic of China.  We sell various packaged grain products on supermarket shelves, and unpackaged grains at supermarket display counter stands where consumers can scoop the grains into plastic bags  and purchase according to weight.  Additionally, we set up special counters in 49 supermarkets to sell the packaged and unpackaged grain products under the brand name “Deyu”.  As a result of the economic growth and improved living standards in China, health consciousness arises as more people in China are cautious about what they eat and how to eat healthy.  We believe that the increasing public awareness of the value and nutritional benefits of grain products will result in continuous increasing demand for our grain products.

- 4 -

Bulk trading of rice, flour, wheat and other products is a newly-added business in our simple-processed grain division starting in the fourth quarter of 2010.  We conduct business with large food companies and suppliers through bulk purchase and wholesale of rice, flour, wheat and other products, during which customers generally pay in advance or soon after the delivery of goods.  Goods are delivered directly from suppliers to customers, and the transactions from purchasing to delivery can be as short as one or two weeks.  The advantages of conducting bulk trading include, but not limited to: (a) each bulk trade comes with large amount, which can significantly increase the Company’s turnover if we receive proper supporting working capital; (b) the rate of return is high because of high turnover rate of working capital, even though the gross margin is low for each trade; (c) the operation cost is low because we do not need to rent large warehouses and offices, or hire large number of employees as compared to other labor-intensive industries; (d) it will improve our brand recognition and our industrial influence through large sales scale.  We have established sales distribution network through strategic partnerships with large food companies developed from our corn business and the existing grain business.  In addition, we obtained new financing from bank loans and bank acceptance notes this year, which provide us sufficient working capital to support the growth in the bulk trading business.  We will also strive to develop bulk trading business through the development of the new project, the “China Grain Trading Center” as described in the following “Plan and Operation”.

Our deep processed grain business was mainly conducted by Deyufarm and its subsidiaries under the Company’s control through VIE agreements.  We sell new products of instant beverage, instant noodles and other grain products under the brand name of Deyufarm.  It is a new business at development stage which the Company began to conduct at the end of last year and requires substantial amount of capital injection.  Since those variable interest entities have not been receiving capital contribution from other entities within the Company while being funded primarily through personal loans from certain individual members of our management, and considering the shortage and limitation of company resources allocated to those variable interest entities, as well as the adjustment of our business strategies, our management is now preparing to terminate its control over Deyufarm and its subsidiaries by cancelling its VIE agreements, which we made an announcement for on October 11, 2011, even though we believe that the market of deep processed grain products is promising. Although no firm commitment has been obtained, Deyufarm has been in discussion with SBCVC, the non-controlling shareholder of Deyufarm, which expressed intention of injecting additional capital to support Deyufarm’s business as early as the first quarter of next year,

In addition to the existing business model, we are considering importing organic food products from foreign organic food manufacturers, as well as trading organic food products with international and domestic food companies.  We plan to sell organic food by fully utilizing our developed distribution network, including wholesale distributors, supermarkets, convenience stores, and B2C E-Commerce network, and provide marketing services of promotion, exhibition, advertisement and others.  We have already been in the process of product selection, sales analysis, and negotiation with distributors.

Our continuous growth relies on our ability to meet the increasing demand for our current products and our expanded product lines.  Management has developed strategies and taken actions to keep up with demands and foreseeable ones.  Such actions include working with farmers to increase current yields, focusing on our ability to enter into new cooperative agreements, signing contracts with new farmer agents, and expanding geographic coverage in Shanxi Province, land acquisitions, building new production sites and warehouses, and potential mergers and acquisitions of our suppliers, vendors, or competitors.  Meanwhile, we expect that the B2B and B2C E-Commerce platforms that we have established will increase our sales capability by attracting wholesale and retail customers.

Material factors that could affect our operating results are the (a) cost of raw materials, (b) prices and margins of our products to wholesale distributors and supermarkets, and their markup to the end consumers, (c) general economic conditions in China and (d) the changing dietary habits of the people of China towards our organic food and (e) consumer acceptance of our deep processed grain products,

Our goal for the rest of 2011 and 2012 is to focus on corn division and simple processed grain division.  For the deep processed grain division, we are considering trading organic food products through our existing distribution network.  With the completion of construction of the logistic center with six warehouses and five cylinder storages in Shanxi Province as described in the following “Plan of Operation”, our storage and production capacity are expected to be doubled.  We will strive to enhance cooperation relationship with corn farmers by providing them technology services, and improve our inventory turnover efficiency through optimizing logistics chain management as well as working capital management.  The “China Grain Trading Center” as described in the following “Plan and Operation” is expected to strengthen our competitive advantage and contribute to increase in sales for the corn sales and bulk trading of grains.

Plan of Operation

With the corn business maturing and stabilizing yet increasing demand yearly, we have acquired two pieces of farmland of approximately 17,300 acres of ownership rights between 40 to 47 years at the end of 2010 for a total of approximately $7 million to secure the supply and quality of crops for both grains and corn.  The growing season for these parcels commenced in April 2011.  As a result, we believe we have achieved economies of scale through our exclusive rights to use over 109,000 acres of some of China’s most fertile agricultural land, including ownership rights to approximately 19,000 acres.  Since demand of both simple processed and deep processed grain products is increasing through our expanding sales network and brand name recognition, we are increasing the land coverage of our growing base and also our production base for deep processed products. 

- 5 -

During the second quarter of 2011, the construction of a warehousing, processing, and logistics center with six warehouse and five cylinder storages in Shanxi Province was completed and put into use. The new storage center is situated on 70 mu (approximately 46,690 square meters) of land for storage of more than 70,000 tons of food products and annual turnover of greater than 350,000 tons.  These warehouses increase our storage capacity of more than 120,000 tons of food products and annual turnover of greater than 600,000 tons. We have an exclusive lease agreement with three railway lines for freight transportation: (a) Shanxi Cereal & Oil Group, Mingli Reservation Dopt; (b) Shanxi Yuci Cereal Reservation Depot; and (c) Yuci Dongzhao Railway Freight Station. The exclusive agreements help us ensure speedy delivery of our products at low cost, compared to truck transportation. The enhanced warehouse and logistics capacity increase our inventory turnover.

We have been dedicated in developing sales network for the packaged and unpackaged grain products.  We have established distribution network with approximately 16,800 supermarkets and retail stores as compared to approximately 10,000 last year.  We set up special display counter stands in over 49 hypermarkets and supermarkets to sale packaged and unpackaged grain products as well as byproducts under the brand name “Deyu”.

In year 2011, for our sales and marketing strategy, instead of attempting to rapidly increase the number of stores selling our products across Beijing and China as a whole, we have shifted our focus to promoting our brand name and product geographic coverage, and increasing customer purchases on a per store basis.  We hosted several promotion and advertisement activities and events.  On July 22, 2011, we hosted a national product release conference in Beijing to introduce our new packaged and unpackaged grain products and deep processed grain products to wholesale distributors.  Over 200 wholesale distributors and twelve media companies from all over China attended this conference, which was broadcasted on the media multiple times.  Our brand name has been increasingly recognized through these promotion and marketing activities, which contribute to the increase of sales revenue.

During the third quarter of 2011, we launched a new project in Gaocheng City in Hebei Province to establish the “China Grain Trading Center”, a trading center providing multiple services in procurement, storage, processing, logistics, trading, research and development, quarantine inspection, digital data exchange, and financing services.  We plan to develop the center to be the largest processing and trading base of China in the next few years.  China is one of largest grain producer and consumer in the world and a large portion of the grain trading in China is conducted in Hebei Province.  We will generate revenue through bulk trading of grains as well as acting as agent to collect service fee.  Now we have completed the registration of a new company named Hebei YuGu Grain Co., Ltd. and are in the process of applying for the government’s approval of this project and obtaining land use right.  We believe the project will strengthen our competitive advantages of corn sales and bulk trade of grain and increase our impact in the industry contributing to increase in revenue not only from sales of goods but also from service fees in the future.

Additionally, a newly established company Tianjin Detian Yu incorporated in Tianjin in June 2011, which obtained several kind of tax preferences by the agreements with the Administrative Committee of Sino-Singapore Tianjin Eco-city (the “Agency”), the representative organization of the Tianjin Municipal Government. The company is mainly doing business on wholesale distribution of simple-processed and deep-processed packaged food products and staple food. The new company will contribute more revenue and profit to the Company buy expanding our business scale and getting various tax preferences from the government.

Our working capital improved by $15.8 million or 79% from $20.0 million as of December 31, 2010 to $35.8 million as of September 30, 2011, primarily attributed to the $37.2 million of net proceeds obtained from bank loans and bank acceptance notes during the nine-month period ended September 30, 2011. The funds were mainly used to develop corn business and bulk purchase and wholesale of rice, flour, wheat and other products. We have to pay farmers and farmer agencies at the time they deliver corn to us but provide credit term to our customers in corn business, and we also need pay suppliers for bulk purchase before deliver the goods to customers and collect cash from customers in bulk trade business. Both of the two businesses require sufficient working capital support. The debt raised from bank contributes to rapid expanding of our business in this year. The Company will continue to carefully consider and plan an effective and safe capital structure to obtain funds to support our business development at the largest extreme.
 

Since we have been successful with promoting and selling our products through all of our distribution channels and networks, including B2B and B2C E-Commerce, our brand names are becoming widely known. To support this growth, the Company has carefully planned to build more warehouses and plants and to acquire companies in the future that either fit in or expand our product lines. This also helps ease requests by many of our wholesalers and retail stores for providing other non-existing Deyu product lines. Thus, we plan to make a few strategic acquisitions per year vertically or horizontally to sell either under our own brands name or theirs through our distribution networks.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations has been prepared by management based on our consolidated financial statements, which have been prepared in accordance with US GAAP.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates our critical accounting policies and estimates, including those related to revenue recognition, valuation of accounts receivable, property and equipment, long-lived assets, intangible assets, derivative liabilities and contingencies.  Estimates are based on historical experience and on various assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods.  We consider the following accounting policies important in understanding our operating results and financial condition:

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Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted  accounting  principles requires management to make estimates and  assumptions  that  affect  the  reported  amounts  of  assets and liabilities and disclosure of contingent assets and liabilities at the date  of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Management makes its estimates based on historical experience and various other assumptions and information that are available and believed to be reasonable at the time the estimates are made.  Therefore, actual results could differ from those estimates under different assumptions and conditions.

Long-Lived Assets

We apply the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with ASC 360, at least on an annual basis.  ASC 360 requires the impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are 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.

Goodwill and Intangible Assets

Goodwill is calculated as the purchase premium after adjust for the fair value of net assets acquired.  Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting unit level.  A reporting unit, as defined under applicable accounting guidance, is a business segment or one level below a business segment.  Under applicable accounting guidance, the goodwill impairment analysis is a two-step test.  The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying amount including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed to measure potential impairment.

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  Measurement of the fair values of the assets and liabilities of a reporting unit is consistent with the requirements of the fair value measurements accounting guidance, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The adjustments to measure the assets, liabilities, and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidation balance sheet.  If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment.  If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.  An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit.  An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance.  In 2010, goodwill was tested for impairment and it was determined that goodwill was not impaired as of December 31, 2010.  No indication of impairment was noted by management as of September 30, 2011.

For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value.  The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

Fair Value Measurements

FASB ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  It requires that an entity measure its financial instruments to base fair value on exit price and maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price.  It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.  This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

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· Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

· Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data.  The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

This guidance applies to other accounting pronouncements that require or permit fair value measurements.  On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820).  This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations.

We also analyze all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”).  We have determined ASC 480-10 (formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) has no material effect on our financial position or results of operations.

Revenue Recognition

Our revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”).  We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.  We recognize revenue for product sales upon transfer of title to the customer.  Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement.  Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered.  The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

Our revenue is recognized net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period that the related revenue is recorded.  The estimates are based on historical sales returns, analysis of credit memo data, and other factors known at the time.  Commencing from year 2010, the Company’s general policy is to terminate the offering of sales discounts to customers. However, the Company may offer sales discounts as incentive for early payments from customers, although those should be infrequent. For the nine months ended September 30, 2011 and 2010, sales discounts were $70,620 and $391,419, respectively.

We offer a right of exchange on our grain products sold through our relationships with our network of grocery stores.  The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased.  In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes.  For the nine months ended September 30, 2011, the returns of our products were not material.

Stock-Based Compensation

In December 2004, the Financial Accounting Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation – Stock Compensation.”  Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services.  Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies.  SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods.  On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R).  Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS No. 123.

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We have fully adopted the provisions of FASB ASC 718 and related interpretations as provided by SAB 107.  As such, compensation cost is measured on the date of grant as the fair value of the share-based payments.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.”  ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The adoption had no effect on the Company’s consolidated financial statements.

Foreign Currency Translation and Comprehensive Income

U.S. GAAP requires that recognized revenue, expenses, gains and losses be included in net income.  Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet.  Such items, along with net income, are components of comprehensive income.  The functional currency of the Company is Renminbi (RMB).  The unit of RMB is in Yuan.  Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Recent Pronouncements

In January 2010, FASB issued an amendment regarding improving disclosures about fair value measurements.  This new guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  There was no impact from the adoption of this guidance to our consolidated financial position or results of operations as the amendment only addresses disclosures.

In April 2010, FASB issued an amendment to Stock Compensation.  The amendment clarifies that an employee stock-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition.  Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The adoption of this guidance had no impact on our consolidated financial position or results of operations since our stock-based payment awards have an exercise price denominated in the same currency of the market in which our Company shares are traded.

In May 2011, FASB issued an amendment (ASU No. 2011-04) to Fair Value Measurement (ASC Topic 820).  In 2006, the FASB and the International Accounting Standards Board (IASB) published a Memorandum of Understanding, which has served as the foundation of the Board’s efforts to a common set of high quality global accounting standards.  Consistent with the Memorandum of Understanding and the Board’s commitment to achieving the goal, the amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  The adoption of this guidance had no impact on our consolidated financial position or results of operations

In May 2011, FASB issued an amendment (ASU No. 2011-05) to Comprehensive Income (ASC Topic 220).  The amendment require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  The Company had adopted this guidance to our consolidated financial statements as of and for the period ended September 30, 2011.

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In September 2011, FASB issued an amendment (ASU No. 2011-08) to Intangibles–Goodwill and Other (ASC Topic 350).  The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairmenttest by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4.  If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.  The Company had adopted this guidance to our consolidated financial statements as of and for the period ended September 30, 2011.

Results of Operations for the Three Months Ended September 30, 2011 as compared to the Three Months Ended September 30, 2010

	For The Three Months
	Ended
	September 30,
	2011			2010			Change in $			Change in %
Net revenue	$	86,625,752		$	20,980,077		$	65,645,675			312.9	%
Cost of goods sold		(73,108,061	)		(16,102,399	)		(57,005,662	)		354.0	%
Gross Profit		13,517,691			4,877,678			8,640,013			177.1	%
Selling expenses		(3,919,748	)		(1,485,481	)		(2,434,267	)		163.9	%
General and administrative expenses		(1,933,506	)		(1,077,210	)		(856,296	)		79.5	%
Total Operating Expense		(5,853,254	)		(2,562,691	)		(3,290,563	)		128.4	%
Operating income		7,664,437			2,314,987			5,349,450			231.1	%
Interest income		31,465			1,600			29,865			1866.6	%
Interest expense		(269,725	)		(90,208	)		(179,517	)		199.0	%
Non-operating income		15,552			14,693			859			5.8	%
Total Other Expense		(222,708	)		(73,915	)		(148,793	)		201.3	%
Income before income taxes		7,441,729			2,241,072			5,200,657			232.1	%
Income tax benefit		444,776			-			444,776
Net income		7,886,505			2,241,072			5,645,433			251.9	%
Less: Net income attributable to noncontrolling interest		(245,406	)		-			(245,406	)
Net income attributable to Deyu Agriculture Corp.		7,641,099			2,241,072			5,400,027			241.0	%
Preferred stock dividends		(83,404	)		(135,072	)		51,668			(38.3	)%
Net income available to common stockholders	$	7,557,695		$	2,106,000		$	5,451,695			258.9	%

Net Revenue

Our revenue for the three months ended September 30, 2011 was $86.6 million compared with $21.0 million for the three months ended September 30, 2010, an increase of $65.6 million, or 312.9%, of which $44.4 million was attributable to corn sales, $18.5 million to simple processed grain sales and the remaining $2.7 million from deep processed grain sales. 

 The following table breaks down the distribution of our sales volume and amount by division and as a percentage of gross sales:

	For the Three Months Ended September 30, 2011									For the Three Months Ended September 30, 2010
	Sales		Less							% of			Sales		Less						% of
	Volume		Sales							total			Volume		Sales						total
	(ton)		Gross Sales		Discount			Net Sales		sales			(ton)		Gross Sales		Discount		Net Sales		sales
Corn Division		191,819	$	62,207,751	$	-		$	62,207,751		72	%		62,760	$	17,829,881	$	-	$	17,829,881		85	%
Simple Processed Grain		35,609		21,658,903		(1,171	)		21,657,732		25	%		1,539		3,150,196		-		3,150,196		15	%
Deep Processed Grain		-		2,770,806		(10,537	)		2,760,269		3	%		-		-		-		-		-
Total		227,428	$	86,637,460	$	(11,708	)	$	86,625,752		100	%		64,299	$	20,980,077	$	-	$	20,980,077		100	%

Revenue from our corn division for the three months ended September 30, 2011 was approximately $62.2 million, an increase of $44.4 million, or approximately 248.9%, as compared to the same period in 2010.  This growth in revenue was attributable to continuous strong demand of corn in China, our expanding capacity of production and warehouse, our efficient management of inventory turnover, our ability to obtain sufficient and prompt supply as well as sufficient support of working capital.  Our six new warehouses and a processing center with five cylinders storage in Shanxi Province were put into use in the late second quarter of 2011 which at least doubles our capacity of production and storage.  Inventory turnover was accelerated and turnover days was reduced to 34 days for the three months ended September 30, 2011 from 50 days for the three months ended September 30, 2010, which was due to the company’s effort to improve operation  and logistics efficiency by efficiently utilizing the warehouses and exclusive railway lines for freight transportation.  We have developed farmer-agent relationship dealing with corn harvested in over 109,000 acres of fertile farmland to provide sufficient, steady and quality supply. Our growth of corn depends upon our cash flow capital utilization since we have to pay our farmers or agents first before we can collect from our customers.  The obtaining bank loans and bank notes of $37.2 million in 2011 also provide sufficient working capital for corn purchase to support revenue growth.

Revenue from our simple processed grain division for the three months ended September 30, 2011 was $21.7 million, an increase of $18.5 million, or 587.5%, as compared to the same period in 2010. The increase in revenues was attributable to business expansion of packaged and unpackaged grain sold in supermarket and retail stores and our new business of bulk purchase and wholesales of rice, flour, wheat and other products.

Our packaged and unpackaged grain business sold in supermarkets, grouped into a part of our Simple Processed Grain division, generated revenues of $10.0 million, 45.9% of the total revenue from simple-processed grains division for the three months ended September 30, 2011.  The revenue increased by $6.8 million as compared to the three months in 2010, primarily due to our marketing initiatives such as promotion and new product press conference, our increase distribution from 10,000 to 16,800 stores, our sales expanding strategies by discounting selling prices.  Additionally, the company also created 49 special counters in supermarkets selling packaged and unpackaged grain products under our brand name in 2011, which increased our brand name recognition and contributed to increase in revenue.

Bulk purchase and wholesale of  rice, flour, wheat and other products, a newly-added business in the fourth quarter of 2010, generated revenue of approximately $11.7 million, 54.1% of the total revenue from simple-processed grains division for the three months ended September 30, 2011.  The new generation of revenue was attributable to the company’s strategies of expanding this new business of bulk sales with low maintenance by fully utilizing its strengths and distribution network resources.  The obtaining bank loans and bank notes of $37.2 million in 2011 also provide sufficient working capital to support bulk sales expanding.  This business section has gradually become a stable part of the Company’s revenue and net income.  We believe this business will gradually develop into one of our core business parts with the development of the new project entitled the “China Grain Trading Center" which will be established to be the largest grain trading center in the next few years.

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Revenue from our deep processed grain division for the three months ended September 30, 2011 was $2.7 million.  This division is still in a development stage in terms of business development, product development, market research, branding, consumers’ understanding and acceptance of our products.  The division is still under construction and adjustment according to the Company’s strategies and its revenue is not stable.

Cost of Goods Sold

Cost of goods sold mainly consists of cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs.  Our cost of goods sold increased by 354.0% from $16.1 million in the three months ended September 30, 2010 to $73.1 million in the three months ended September 30, 2011, due to increases in sales volume and purchase prices.  As a percentage of net revenue, cost of goods increased by 760 basis points from 76.8% in the three months ended in September 30, 2010 to 84.4% in the three months ended in September 30, 2011.  We experienced a purchase cost increase on both coin and grains caused by the inflation of raw material in China.  The increase of the selling price of corn, packaged and unpackaged grain could not catch up with that of purchase price due to market price limited by the Chinese government as well as the sales expanding strategies we implemented by lowering average selling price compared with market price.  Besides, the company conducted bulk purchase and wholesale trading of rice, flour, wheat and other products from the fourth quarter of 2010, of which the low margin of 5% negatively affected our overall profit margin.

Gross Profit

Our gross profit increased by $8.6 million or 177.1% from $4.9 million for the three months ended September 30, 2010 to $13.5 million for the three months ended September 30, 2011 due to the increase of sales volume.  The increase was attributable to the increase of $5.7 million in corn division, $1.8 million in simple processed grain division and $1.1 million in deep processed grain division.  The gross margin decreased from 23.2% in the three months ended September 30, 2010 to 15.6% in the three months ended September 30, 2011.  The decrease in gross margin was the combined results of the drop of gross margin in corn division, packaged and unpackaged grain sales and low margin contributed by bulk purchase and wholesale of rice, flour, wheat and other products, a newly-added business in the fourth quarter of 2010.

Gross profit for our corn division was $9.2 million, contributing to 68.3% of total gross profit for the three months ended September 30, 2011.  Gross margin was 14.8% for the three months ended September 30, 2011, down by 520 basis points from 20.0% for the three months ended September 30, 2010.  The decrease of gross profit was mainly due to quantity and pricing suggested by Chinese Government.  Gross margin of corn in 2010 is higher because we procured large amount of corn before the price sharply increased due to supply shortage caused by drought and floods in some regions of China in 2010.  The price of corn still kept rising during 2011, but we could not keep the same gross margin as that in 2010 for we can’t procure corn at low price.  The government took some measures to control the increase of selling price of corn in the third quarter of 2011, which reduce our gross margin as the purchasing price still kept rising.  Additionally, as a percentage of total purchase, the amount purchase from wholesale suppliers more than doubled in the three months ended September 30, 2011 as compared to  the same period in 2010, of which the purchase price was usually 10% higher than that of corns purchased directly from farmers.  We anticipate the decrease of gross margin of corn to be temporary.  There will still be significant shortage of corn supply in the market for the next few years.  We expect that the margin will be improved with our strengths of inventory quantity, warehousing capacity, improved procurement, and security of supply.

Gross profit for our simple processed grain division was $3.1 million, contributing to 23.0% of total gross profit for the three months ended September 30, 2011.  Gross margin for our simple-processed grain division was 14.4% for the three months ended September 30, 2011, compared with 41.6% for the three months ended September 30, 2010.  The decrease was mainly attributable to the lower margin at approximately 5.0% in our newly added business of bulk trading of rice, flour, wheat and other products, and the margin decrease of 1670 basis points of our business of selling packaged and unpackaged grain products in supermarkets included in this division.

Our business of selling packaged and unpackaged grain products in supermarkets was grouped into our simple processed grain division and generated gross profit of $2.5 million, contributing to 18.0% of the total consolidated gross profit for the three months ended September 30, 2011, with a gross margin of approximately 24.8%.  The drop of gross margin by 1670 basis points from the same period of 2010 was primarily caused by several reasons: (a) we implemented sales expanding strategies by offering promotional price reduction for entering new supermarkets in 2011, (b) we increased the sales percentage of some types of grains with lower margins such as millet and flour, (c) our selling prices of grain remained stable or increased slightly while the purchase price kept continuously rising.

As a newly-added business in first quarter of 2011, the bulk trading of rice, flour, wheat and other products generated gross profit of $0.6 million, contributing to 4.8% of the total consolidated gross profit for the three months ended September 30, 2011, having a gross margin of approximately 5.5%.  The lower gross margin of bulk trading is in line with its nature of low risk and high turnover rate, which diluted and caused the gross margin decrease in the simple-processed grain division.  The margin for the three months ended September 30, 2011 decreased by 400 basis points from the margin of 9.5% for the six months ended June 30, 2011.  The decrease was primarily the results of the continuous increase of purchase cost of rice and flour in the third quarter of 2011, while the selling price of these consumer agriculture products cannot reflect price increases of purchase costs in time.

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Gross profit for our deep processed grain division was $1.1 million, contributing to 8.7% of total gross profit for the three months ended September 30, 2011.  Gross margin for our deep processed grain division was approximately 42.5% for the three months ended September 30, 2011.  The Company established its deep processed grain division during the second half of 2010 through acquisitions and research and development.  The gross margin for the three months ended September 30, 2011 increased by 2496 basis points from 17.54% for the six months ended June 30, 2011.  The increase was largely attributed to sales of moon cakes with high gross margin of 65% during the Chinese Moon Festival in the third quarter of 2011.  The division is still under development and adjustment according to the Company’s strategies and its gross margin is not stable.

Selling Expenses

Selling expenses increased by $2.4 million, or 163.9%, for the three months ended September 30, 2011 as compared to $1.5 million for the three months ended September 30, 2010.  Such increase is attributable to increased freight charges of $1.3 million related to sales increase, and increased marketing personnel expenses of $0.2 million.  Because most of the new slotting activities for entering retail stores and supermarkets for simple and deep processed grain products in this year were completed in the first half year of 2011, most of other selling expense except freight changes and marketing personnel expenses increased slightly in the three months ended September 30, 2011 while most of selling expenses increased significantly for the six months ended June 30, 2011.  Compared to 7.1% for three months ended September 30, 2010, as a percentage of revenue, selling expenses decreased to 4.5% for three months ended September 30, 2011.  The decrease of percentage is because most of increased revenue generated from corn sales and bulk trade of grain, which don’t rely on advertisement and market promotion, the expense spent on selling activities depend on the marketing strategy and didn’t always increase at the same percentage as revenue.

General and Administrative Expenses

General and administrative expenses increased by $0.8 million to $1.9 million in the three months ended September 30, 2011, or 79.5%, compared to $1.1 million for the three months ended September 30, 2010.  The increase was attributable to business expansion.  Such increase is attributable to an increase of professional managers (or higher level) as a result of our Company becoming a public company in the US, including accounting, legal and consulting fees; the increase of rent and utilities mainly due to newly rented offices in Shanxi Province and Beijing; increases in travel and lodging expenses were attributable to increases of sales and business development activities during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.  As a percentage of net revenues, general and administrative expenses were 2.2% and 5.1% for the three months ended September 30, 2011 and September 30, 2010, respectively, which represents a decrease of 290 basis points.  The decrease of percentage is due to most of the general and administrative expense doesn’t increase in line with the increase of net revenue.  Our management team and facilities expanded efficiently and economically to meet the requirement of business development, but not as sharply as the expanding scale revenue.

Interest Expense

Interest expense for the three months ended September 30, 2011 was $269,725, compared to interest expense of $90,208 for the comparable period in 2010, an increase of $179,517, or 199.0%.  This increase was mainly due to a 297.3% increase in the average short-term loan balance of $12.4 million in the three months ended September 30, 2011 as compared with approximately 3.1 million in the same period of 2010 as well as increased interest rate.  We increase our borrowing to fulfill capital demand resulting from the following: (a) the increase of our inventory on hand in anticipation of future price increases; (b) the increase of accounts receivable from customers; (c) the increase in cash used to purchase of corn and grains resulting from growing demand.

Provision for Income Taxes

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%.  Our PRC subsidiaries are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.  According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008.  Three of the Company’s wholly-owned subsidiaries located in Shanxi Province, including Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang, are subject to the EIT exemption.  All of our other subsidiaries and consolidated VIEs are subject to the 25% EIT rate.  The operations of Detian Yu, Deyufarm, HaoLiangXin and Xinggu Deyufarm commenced late in the second half of 2010 and as a result, those entities had not been in a profitable position during the three months ended September 30, 2011 and therefore, were entitled to income tax benefits derived from net operating losses carryover as tax credits for a 5-year period according to the PRC tax rules.

Net Income

As a result of the above, we had a net income available to common stockholders of $7.6 million for the three months ended September 30, 2011 compared to a net income of $2.1 million for the three months ended September 30, 2010, an increase of $5.5 million or 258.9%.

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Results of Operations for the Nine Months Ended September 30, 2011 as compared to the Nine Months Ended September 30, 2010

	For The Nine Months
	Ended
	September 30,
	2011			2010			Change in $			Change in %
Net revenue	$	180,097,288		$	53,895,929		$	126,201,359			234.2	%
Cost of goods sold		(149,325,484	)		(40,760,575	)		(108,564,909	)		266.3	%
Gross Profit		30,771,804			13,135,354			17,636,450			134.3	%
Selling expenses		(11,214,800	)		(3,083,142	)		(8,131,658	)		263.7	%
General and administrative expenses		(6,480,419	)		(2,048,409	)		(4,432,010	)		216.4	%
Total Operating Expense		(17,695,219	)		(5,131,551	)		(12,563,668	)		244.8	%
Operating income		13,076,585			8,003,803			5,072,782			63.4	%
Interest income		31,659			5,065			26,594			525.1	%
Interest expense		(481,549	)		(242,799	)		(238,750	)		98.3	%
Non-operating income		20,298			14,693			5,605			38.1	%
Total Other Expense		(429,592	)		(223,041	)		(206,551	)		92.6	%
Income before income taxes		12,646,993			7,780,762			4,866,231			62.5	%
Income tax benefit		932,984			-			932,984
Net income		13,579,977			7,780,762			5,799,215			74.5	%
Add: Net loss attributable to noncontrolling interest		740,308			-			740,308
Net income attributable to Deyu Agriculture Corp.		14,320,285			7,780,762			6,539,523			84.0	%
Preferred stock dividends		(313,550	)		(231,123	)		(82,427	)		35.7	%
Net income available to common stockholders	$	14,006,735		$	7,549,639		$	6,457,096			85.5	%

Net Revenue

Our revenue for the nine months ended September 30, 2011 was $180.1 million compared with $53.9 million for the nine months ended September 30, 2010, an increase of $126.2 million, or 234.2%, of which $72.6 million was attributable to corn sales, $48.1 million to simple processed grain sales and the remaining $5.5 million to deep processed grain sales. 

 The following table breaks down the distribution of our sales volume and amount by division and as a percentage of gross sales:

	For the Nine Months Ended September 30, 2011									For the Nine Months Ended September 30, 2010
	Sales		Less							% of			Sales		Less							% of
	Volume		Sales							total			Volume		Sales							total
	(ton)		Gross Sales		Discount			Net Sales		sales			(ton)		Gross Sales		Discount			Net Sales		sales
Corn Division		360,477	$	117,386,510	$	-		$	117,386,510		65	%		161,355	$	44,791,394	$	-		$	44,791,394		83	%
Simple Processed Grain		78,871		57,170,783		(7,062	)		57,163,721		32	%		6,376		9,495,954		(391,419	)		9,104,535		17	%
Deep Processed Grain		-		5,610,615		(63,558	)		5,547,057		3	%		-		-		-			-		-
Total		439,348	$	180,167,908	$	(70,620	)	$	180,097,288		100	%		167,731	$	54,287,348	$	(391,419	)	$	53,895,929		100	%

Revenue from our corn division for the nine months ended September 30, 2011 was approximately $117.4 million, an increase of $72.6 million, or approximately 162.1%, as compared to the same period in 2010.  This growth in revenue was attributable to continuous strong demand for corn in China, our expanding capacity of production and storage, our management of inventory turnover, and our ability to obtain sufficient and prompt supply as well as sufficient support of working capital. Our six new warehouses and a processing center with five cylinders storage units in Shanxi Province were put into use in the second quarter of 2011 which at least doubles our capacity of production and storage. Inventory turnover was accelerated and turnover was reduced to 32 days for the nine months ended September 30, 2011 from 46 days for the nine months ended September 30, 2010, which was due to the company’s effort to improve operation and logistics efficiency by utilizing the warehouses and our exclusive railway lines for freight transportation. We have developed farmer-agent relationships for dealing with corn harvested in over 109,000 acres of fertile farmland to obtain a sufficient, steady and quality supply. Our growth of corn depends upon our cash flow capital utilization since we have to pay our farmers or agents first before we can collect cash from our customers. Obtaining bank loans and bank notes of $37.2 million in 2011 also provided sufficient working capital for corn purchase to support our revenue growth.

Revenue from our simple processed grain division for the nine months ended September 30, 2011 was $57.2 million, an increase of $48.1 million, or 527.9%, as compared to the same period in 2010. The increase in revenues was attributable to business expansion of packaged and unpackaged grain products sold in supermarket and retail stores and our new business of bulk purchase and wholesales of rice, flour, wheat and other products.

Our packaged and unpackaged grain business sold in supermarkets, grouped into a part of our Simple Processed Grain division, generated revenues of $23.9 million, 41.9% of the total revenue from simple-processed grains division for the nine months ended September 30, 2011. Revenue increased by $14.8 million as compared to the nine months ended September 30, 2010, and such increase is primarily due to our marketing initiatives such as promotion and new product press conference, our increase distribution from 10,000 to 16,800 stores, and our sales expansion strategies of discounting selling prices. Additionally, the company also created 49 special counters in hypermarkets and supermarkets to sell our packaged and unpackaged grain products under our brand name Deyu in 2011, which increased our brand name recognition and contributed to an increase of revenues.

Bulk purchase and wholesale of rice, flour, wheat and other products, a newly-added business in the fourth quarter of 2010, generated revenue of approximately $33.2 million, 58.1% of the total revenue from our simple-processed grains division for the nine months ended September 30, 2011. This new generation of revenue was attributable to the company’s strategies of expanding our new business of bulk sales with low maintenance and by fully utilizing our strengths and distribution network resources. Obtaining bank loans and bank notes of $37.2 million in 2011 also provided sufficient working capital to support our bulk sales expansion. This business section has gradually become a stable part of the Company’s revenue and net income. We believe this business will gradually develop into one of our core business parts with the development of the new project entitled the “China Grain Trading Center" which will be established to be the largest grain trading center in the next few years.

Revenue from our deep processed grain division for the nine months ended September 30, 2011 was $5.5 million. This division is still in a development stage in terms of business development, product development, market research, branding, consumers’ understanding and acceptance of our products. The division is still under construction and adjustment according to the Company’s strategies and its revenue is not stable.

Cost of Goods Sold

Cost of goods sold mainly consists of cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. Our cost of goods sold increased by 266.3% from $40.8 million in the nine months ended September 30, 2010 to $149.3 million in the nine months ended September 30, 2011, due to increases in sales volume and purchase prices. As a percentage of net revenue, cost of goods increased by 730 basis points from 75.6% in the nine months ended in September 30, 2010 to 82.9% in the nine months ended in September 30, 2011. We experienced a purchase cost increase on both coin and grains caused by the inflation of raw material in China. As a result of the increase of the selling price of corn, packaged and unpackaged grain could not catch up with the purchase price due to pricing suggested by the Chinese government as well as our sales expansion strategies we implemented by lowering average selling price compared with market price. We also conducted bulk purchase and wholesale trading of rice, flour, wheat and other products from the fourth quarter of 2010, of which the low margin of 7.7% negatively affected our overall profit margin.

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Gross Profit

Our gross profit increased by $17.6 million or 134.3% from $13.1 million for the nine months ended September 30, 2010 to $30.8 million for the nine months ended September 30, 2011 due to the increase of sales volume. The increase was attributable to the increase of $10.9 million in corn division, $5.1 million in simple processed grain division and $1.6 million in deep processed grain division.  Our gross margin decreased from 24.4% in the nine months ended September 30, 2010 to 17.1% in the nine months ended September 30, 2011. The decrease in gross margin was the combined results of a drop of gross margin in our corn division, packaged and unpackaged grain sales and low margin contributed by bulk purchase and wholesale of rice, flour, wheat and other products, a newly-added business in the fourth quarter of 2010.

Gross profit in our corn division was $20.2 million, contributing to 65.5% of total gross profit for the nine months ended September 30, 2011.  Gross margin for our corn division was 17.2% for the nine months ended September 30, 2011, down by 340 basis points from 20.6% for the nine months ended September 30, 2010.  The decrease of gross profit was mainly due to quantity and pricing suggested by Chinese Government.  Gross margin of corn in 2010 is higher because we procured large amount of corn before the price sharply increased due to supply shortage caused by drought and floods in some regions of China in 2010.  The price of corn still kept rising during 2011, but we could not keep the same gross margin as that in 2010 for we can’t procure corn at low price.  The government took some measures to control the increase of selling price of corn in the third quarter of 2011, which reduced our gross margin as the purchasing price still kept rising.  Additionally, as a percentage of total purchase, the amount purchase from wholesale suppliers more than doubled as compared to the same period in 2010, of which the purchase price was usually 10% higher than that of corns purchased directly from farmers.  We anticipate the decrease of gross margin of corn to be temporary.  There will still be significant shortage of corn supply in the market for the next few years.  We expect that the margin will be improved with our strengths of inventory quantity, warehousing capacity, improved procurement, and security of supply.

Gross profit in our simple processed grain division was $9.0 million, contributing to 29.1% of total gross profit for the nine months ended September 30, 2011.  Gross margin for our simple-processed grain division was 15.7% for the nine months ended September 30, 2011, compared with from 42.7% for the nine months ended September 30, 2010.  The decrease was mainly attributable to the lower margin at approximately 7.7% in our newly added business of bulk trading of rice, flour, wheat and other products, and the margin decrease of 1630 basis points of our business of selling packaged and unpackaged grain products in supermarkets included in this division.

Our business of selling packaged and unpackaged grain products in supermarkets was grouped into our simple processed grain division and generated gross profit of $6.4 million, contributing to 21% of the total consolidated gross profit for the nine months ended September 30, 2011, with a gross margin of approximately 26.7%.  The decrease of gross margin by 1630 basis points primarily was caused by the following factors: (a) we implemented sales expansion strategies by offering promotional price reduction for entering new supermarkets in 2011, (b) we increased the sales percentage of certain types of grains with lower margins such as millet and flour, and (c) our selling prices of grain remained stable or increased slightly while the purchase price continued to rise.

As a newly-added business in first quarter of 2011, the bulk trading of rice, flour, wheat and other products generated gross profit of $2.6 million, contributing to 8.4% of the total consolidated gross profit for the nine months ended September 30, 2011, having a gross margin of approximately 7.7%.  The lower gross margin of bulk trading is in line with its nature of low risk and high turnover rate, which diluted and caused the gross margin decrease in our simple processed grain division.  The margin for the nine months ended September 30, 2011 decreased by 180 basis points from the margin of 9.5% during the six months ended June 30, 2011.  The decrease was primarily the result of the continuous increase of the purchase cost of rice and flour in the third quarter of 2011, while the selling price of these consumer agricultural products cannot reflect price increases of purchase costs in time.

Gross profit for our deep processed grain division was $1.7 million, contributing to 5.4% of total gross profit for the nine months ended September 30, 2011.  Gross margin for our deep processed grain division was approximately 30.0% for the nine months ended September 30, 2011.  The Company established its deep processed grain division during the second half of 2010 through acquisitions and research and development.  The gross margin for the nine months ended September 30, 2011 increased by 1360 basis points from 16.4% for the six months ended June 30, 2011.  The increase was largely attributed to moon cakes sold during the Chinese Moon Festival in the third quarter of 2011 yielding a high gross margin of 65%.  The division is still under development and adjustment according to the Company’s strategies and its gross margin is not stable.

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Selling Expenses

Selling expenses increased by $8.1 million, or 263.7%, for the nine months ended September 30, 2011 as compared to$3.1 million for the nine months ended September 30, 2010.  Such increase was mainly attributable to increased freight charges of $2.6 million related to an increase in sales, increased slotting fees of $1.8 million associated with entering retail stores and supermarkets for simple and deep processed grain products, an increase in marketing personnel expenses of $1.3 million and an increase of advertising expense of $1.4 million.  During this year, we made a large effort to expand our existing business of packaged and unpackaged grain sales as well as our newly-added business of deep processed grain sales by paying more slotting fees in order to enter more stores, increasing our advertising in order to increase our brand name recognition and increasing promotional activities through our marketing personnel.  Compared to 5.7% for the nine months ended September 30, 2010, as a percentage of revenue, selling expenses increased to 6.2% for the nine months ended September 30, 2011.  This increase of percentage is due to the efforts we placed on marketing and promotional activities for our simple processed and deep processed gain products especially in the first half of 2011.

General and Administrative Expenses

The following table breaks down our General and Administrative Expense:

	For The Nine Months
	Ended
	September 30,
	2011		2010		Change in $			Change in %
Payroll, welfare, and bonuses	$	2,740,185	$	577,893	$	2,162,292			374.2	%
Professional service expense		856,955		157,214		699,741			445.1	%
Rent and utilities		709,725		179,187		530,538			296.1	%
Travel and lodging expense		591,061		236,490		354,571			149.9	%
Depreciation & amortization		423,645		151,713		271,932			179.2	%
Office expense		422,725		125,382		297,343			237.1	%
Meals and Entertainment expense		286,694		123,879		162,815			131.4	%
Others		449,429		496,651		(47,222	)		(9.5	)%
Total	$	6,480,419	$	2,048,409	$	4,432,010			216.4	%

General and administrative expenses increased by $4.4 million to $6.5 million in the nine months ended September 30, 2011, or 216.4%, compared to $2.1 million for the nine months ended September 30, 2010.  This increase was attributable to our business expansion.  For example, such increase is attributable to an increase of professional managers (or higher level) as a result of our Company becoming a public company in the United States, including accounting, legal and consulting fees; the increase of rent and utilities mainly due to newly rented offices in Shanxi Province and Beijing; increases in travel and lodging expenses were attributable to increases of sales and business development activities during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.  As a percentage of net revenues, general and administrative expenses were 3.6% and 3.8% for the nine months ended September 30, 2011 and September 30, 2010, respectively, which represents a decrease of 20 basis points.  The decrease of percentage is due to the fact that most of the general and administrative expense did not increase in line with the increase of net revenue.

Interest Expense

Interest expense for the nine months ended September 30, 2011 was $481,549, compared to interest expense of $242,779 for the comparable period in 2010, an increase of $238,250, or 98.3%.  This increase was mainly due to a 195.5% increase in the average short-term loan balance of $7.4 million in the nine months ended September 30, 2011 as compared with approximately 2.5 million in the same period of 2010 as well as increased interest rate.  We increase our borrowing to fulfill capital demand resulting from the following: (a) the increase of our inventory on hand in anticipation of future price increases; (b) the increase of accounts receivable from customers; and (c) the increase in cash used to purchase of corn and grains resulting from growing demand.

Provision for Income Taxes

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%.  Our PRC subsidiaries are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.  According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008.  Six of the Company’s wholly-owned subsidiaries located in Shanxi Province, including Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang, are subject to the EIT exemption.  All of our other subsidiaries and consolidated VIEs are subject to the 25% EIT rate.  The operations of Detian Yu, Deyufarm, HaoLiangXin and Xinggu Deyufarm commenced late in the second half of 2010 and as a result, those entities had not been in a profitable position during the nine months ended September 30, 2011 and therefore, were entitled to income tax benefits derived from net operating losses carryover as tax credits for a 5-year period according to the PRC tax rules.

Net Income

As a result of the above, we had a net income available to common stockholders was $14.0 million for the nine months ended September 30, 2011 compared to a net income of $7.5 million for the nine months ended September 30, 2010, an increase of $6.5 million or 85.5%.

Liquidity and Capital Resources

The following summarizes the key components of our cash flows for the nine months ended September 30, 2011 and 2010:

	For The Nine Months
	Ended Septebmer 30,
	2011			2010
Net cash (used in) provided by operating activities	$	(13,310,021	)	$	3,965,872
Net cash used in investing activities		(2,751,145	)		(6,311,589	)
Net cash provided by financing activities		34,994,739			10,330,756
Effect of exchange rate change on cash and cash equivalents		547,575			192,772
Net increase in cash and cash equivalents	$	19,481,148		$	8,177,811

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For the nine months ended September 30, 2011, net cash used in operating activities totaled approximately $13.3 million, while net cash provided in operating activities was $4.0 million for the nine months ended September 30, 2010. This increase of net cash used in operating activities is primarily attributable to an increase of cash used in expanding sales by granting credit to customers and purchasing inventory as a result of the continuous sales growth of our corn and simple processed grain business. Our corn business requires cash payments to farmers and their agents before accounts receivable can be collected. As our business continued to grow, more cash was used in inventory purchases accordingly. The increase in accounts receivable was $19.3 million for the nine months ended September 30, 2011 as compared to $4.2 million in the nine months ended September 30, 2010 as a result of growth of our net revenue and credit offered to new retailers and wholesalers. The increase in inventory was $8.1 million for the nine months ended September 30, 2011 as compared to $0.33 million in the nine months ended September 30, 2010, which also contributed to the increase in net cash used in our operating activities.

For the nine months ended September 30, 2011, net cash used in investing activities was approximately $2.8 million, a decrease of approximately $3.5 million, or 56.4%, from approximately $6.3 million for the nine months ended September 30, 2010.  The decrease was the result of the completion of the construction of a warehouse, office building and cylinder units in Shanxi Province which commenced construction in 2010.  Cash used in investing activities was primarily for purchasing machinery and equipment. 

Net cash provided by financing activities for the nine months ended September 30, 2011 was approximately $35.0 million, an increase of approximately $24.7 million, or 238.7%, from approximately $10.3 million for the nine months ended September 30, 2010.  This net cash provided by financing activities mainly consisted of $28.0 million of net proceeds from short term bank acceptance notes, $9.2 million from short term bank loans, $4.3 million from capital contributions by non-controlling shareholders, and $5.3 million from short term loans from related parties net of $11.7 million restricted for credit lines of bank acceptance notes.

We believe that our current levels of cash, cash flows from operations, and bank, related party and unrelated party borrowings will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we ever determine that our cash requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue debt or equity securities or obtain a credit facility. Any future issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is possible that, when we need additional cash resources, financing will only be available to us in amounts or on terms that would not be acceptable to us, if at all.

Summary of Certain Liquidity Events

In connection with an exchange agreement, on April 27, 2010, we issued an aggregate of 8,736,932 shares of our common stock to the shareholders of City Zone.  We received in exchange from the City Zone shareholders 100% of the shares of City Zone, which exchange resulted in City Zone becoming our wholly owned subsidiary.  Immediately after the share exchange, we entered into a purchase agreement with certain accredited investors for the issuance and sale in a private placement of units, consisting of, 2,455,863 shares of our Series A convertible preferred stock and Series A warrants to purchase up to 982,362 shares of our common stock, for aggregate gross proceeds of approximately $10,805,750.

On November 4, 2010, our Board of Directors approved the Company’s 2010 Share Incentive Plan.  Under that Plan, 1,000,000 shares of our common stock have been allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:

33 1/3% of the option grants vested one (1) month after the date of grant;

33 1/3% of the option grants will vest twelve (12) months after the date of grant; and

33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

On November 5, 2010, we filed a registration statement with the SEC on Form S-8 covering the shares underlying the options set forth above.  As of September 30, 2011, none of the options issued pursuant to the Plan have been exercised.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide this information.

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Item 4. Controls and Procedures.
 

(a)           Evaluation of disclosure controls and procedures. At the conclusion of the period ended September 30, 2011 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2011, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. 

(b)       Changes in internal controls.  There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. To our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or any of our companies or our companies’ subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

Smaller reporting companies are not required to provide this information.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.

2.1 Share Exchange Agreement Dated April 27, 2010 (1)

3.1 Articles of Incorporation of Deyu Agriculture Corp. (2)

3.2 Certificate of Amendment of Articles of Incorporation of Deyu Agriculture Corp. (3)

3.3 Bylaws of Deyu Agriculture Corp. (2)

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4.1 Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock (1)

4.2 Form of Series A Warrant (1)

10.1 Securities Purchase Agreement Dated April 27, 2010 (1)

10.2 Registration Rights Agreement Dated April 27, 2010 (1)

10.3 Form of Lock-Up Agreement Dated April 27, 2010 (1)

10.4 Securities Escrow Agreement Dated April 27, 2010 (1)

10.5 Placement Agent Agreement between the Company and Maxim Group, LLC dated January 27, 2010(6)

10.6 Share Transfer Agreement between Hong Wang and Yam Sheung Kwok dated April 26, 2010 (6)

10.7 Share Transfer Agreement between Jianming Hao and Yam Sheung Kwok dated April 26, 2010 (6)

10.8 Share Transfer Agreement between Wenjun Tian and Yam Sheung Kwok dated April 26, 2010 (6)

10.9 Share Transfer Agreement between Yongqing Ren and Yam Sheung Kwok dated April 26, 2010 (6)

10.10 Share Transfer Agreement between Junde Zhang and Yam Sheung Kwok dated April 26, 2010 (6)

10.11 Employment Agreement between David Lethem, as Chief Financial Officer, and the Company dated June 18, 2010 (4)

10.12 Certificate from China Organic Food Certification Center dated December 21, 2009 (6)

10.13 Corn Purchase Letter of Intent between Shanghai Yihai Trading Co., Ltd., Shanxi Office and Jinzhong Yuliang Agricultural Trading Co., Limited dated December 20, 2009 (6)

10.14 Warehouse Lease Agreement between Shanxi 661 Warehouse and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 21, 2006 (6)

10.15 Warehouse Lease Agreement between Shanxi Means of Production Company, Yuci Warehouse (formerly, the 671 Warehouse) and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 28, 2008 (6)

10.16 Railway Lease Agreement between Shanxi Cereal & Oil Group, Mingli Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)

10.17 Railway Lease Agreement between Shanxi Yuci Cereal Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated November 15, 2007 (6)

10.18 Railway Lease Agreement between Yuci Dongzhao Railway Freight Station and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)

10.19 Agricultural Technology Cooperation Agreement between Jinzhong Deyu Agriculture Trading Co., Ltd. and Millet Research Institute, Shanxi Academy of Agricultural Science dated October 2007 (6)

10.20 Agricultural Technology Cooperation Agreement between Sorghum Institute, Shanxi Academy of Agricultural Sciences and Jinzhong Deyu Agriculture Trading Co., Ltd. dated August 24, 2008 (6)

10.21 Certificate of Forest Rights for the Yuci Forest Right Certificate (2005) No. 01518 dated August 11, 2006 (6)

10.22 Farmland Transfer Agreement between Detian Yu Biotechnology (Beijing) Co. Ltd. and Shanxi Jinbei Plant Technology Co, Ltd. dated September 30, 2010 (6)

10.23 Land Use Rights Acquisition Contract Dated September 30, 2010 (5)

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10.24 Deyu Agriculture Corp. 2010 Share Incentive Plan (7)

10.25 Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)

10.26 Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)

10.27 Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English Translated Version) (8)

10.28 Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Beijing Jundaqianyuan Investment Management Co., Ltd. and each of the shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)

10.29 Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Jinzhong Longyue Investment Consulting Co., Ltd. and both of the shareholders of Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)

10.30 Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)

10.31 Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8) 

10.32 Form of Power of Attorney (English translated version) (8)

10.33 Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)

10.34 Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)

10.35 Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English Translated Version) (8)

10.36 Village Collective Farmland Transfer Agreement, dated December 20, 2010, by and between Detian Yu Biotechnology (Beijing) Co., Ltd. and Shanxi Jinbei Plant Technology Development Co., Ltd. (English Translated and Mandarin Versions) (9)

10.37 Contract of Agreement, effective as of January 10, 2011,  by and between Deyu Agriculture Corp. and Charlie Lin (10)

10.38 Cooperation Agreement, by and between the Administration Committee of Sino-Singapore Tianjin Eco-city and Tianjin Detian Yu (Tianjin) Co., Ltd., dated June 16, 2011 (English translated and Chinese versions) (13)

14.1 Code of Conduct (6)

16.1 Letter from Auditor (11)

21 List of Subsidiaries (12)

31.1 Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2 Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002*

32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002*

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99.1 Audit Committee Charter adopted August 19, 2010 (6)

(1)	Incorporated by reference to our Form 8-K filed on May 3, 2010.
(2)	Incorporated by reference to our Registration Statement on Form S-1 filed on July 8, 2009.

(3)	Incorporated by reference to our Form 8-K filed on June 4, 2010.
(4)	Incorporated by reference to our Form 8-K filed on June 18, 2010.

(5)	Incorporated by reference to our Form 8-K filed on October 6, 2010.
(6)	Incorporated by reference to our Form S-1/A filed on October 21, 2010.

(7)	Incorporated by reference to our Form S-8 filed on November 5, 2010.
(8)	Incorporated by reference to our Form 8-K filed on November 17, 2010.

(9)	Incorporated by reference to our Form 8-K filed on December 21, 2010.
(10)	Incorporated by reference to our Form 8-K filed on January 10, 2011.

(11)	Incorporated by reference to our Form 8-K filed on May 3, 2010.
(12)	Incorporated by reference to our Form 10-K filed on March 31, 2011

 (13) Incorporated by reference to our Form 8-K filed on June 21, 2011

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this  Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

DEYU AGRICULTURE CORP.

Signature	Title	Date
/s/ Jianming Hao	Chief Executive Officer, Principal Executive Officer	November __, 2011
Jianming Hao
/s/ Charlie Lin	Chief Financial Officer, Principal Financial and Accounting Officer	November __, 2011
Charlie Lin

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