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, 2012

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.)

Headquarters in China

8th Floor, Block 5, Aolinjiatai Building

1 Kehuiqian Street

Chaoyang District, Beijing, China

Zip Code: 100192

Office in the United States

Columbus Circle 5

1790 Broadway, 8th Floor

New York, New York 10019, USA

(Address, including zip code, of principal executive offices)

(Address of principal executive offices)

In China: 86-10-5224 1802

In the United States: (646) 820-8060

(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 9, 2012, there were 10,658,266 shares outstanding of the registrant’s common stock.

DEYU AGRICULTURE CORP.

FORM 10-Q

SEPTEMBER 30, 2012

INDEX

PART I
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
ITEM 4.	CONTROLS AND PROCEDURES	56
PART II
ITEM 1.	LEGAL PROCEEDINGS	56
ITEM 1A.	RISK FACTORS	56
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	56
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57
ITEM 4.	MINE SAFETY DISCLOSURES	57
ITEM 5.	OTHER INFORMATION	57
ITEM 6.	EXHIBITS	57
SIGNATURES		61

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Item 1. Financial Statements

DEYU AGRICULTURE CORP AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2012

Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited)	4
Consolidated Statements of Income and Comprehensive Income (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7

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DEYU AGRICULTURE CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2012		December 31, 2011
	(Unaudited)		(Audited)
Assets
Current Assets
Cash and cash equivalents	$	11,963,208	$	8,741,703
Restricted cash		982,593		1,850,999
Accounts receivable, net		27,658,431		36,167,136
Due from related parties		196,745		587,108
Inventory		26,741,018		20,314,090
Advance to supplier		5,077,232		7,233,371
Prepaid expenses		379,116		391,537
Assets held for sale		—		1,634,274
Other current assets		440,397		2,204,934
Total Current Assets		73,438,740		79,125,152
Property, plant, and equipment, net		19,621,491		12,355,946
Construction-in-progress		2,638,347		—
Long-term Investment		57,918		—
Other assets		—		727,535
Intangible assets, net		13,335,500		10,651,844
Total Assets	$	109,091,996	$	102,860,477
Liabilities and Equity
Current Liabilities
Short-term loan	$	11,196,379	$	14,413,480
Accounts payable		2,165,152		1,833,190
Note payables		—		1,588,840
Advance from customers		2,278,185		8,488,272
Accrued expenses		1,584,246		1,149,205
Tax payable		253,503		—
Preferred stock dividends payable		113,235		219,721
Due to related parties		7,356,286		5,445,115
Other current liabilities		1,813,668		583,196
Total Current Liabilities		26,760,654		33,721,019
Equity
Series A convertible preferred stock, $.001 par value, 10,000,000 shares authorized,  2,039,970 and 1,997,467 shares outstanding, respectively		2,040		1,997
Common stock, $.001 par value; 75,000,000 shares authorized, 10,658,266 and 10,544,774 shares outstanding, respectively		10,658		10,565
Additional paid-in capital		20,910,876		20,367,138
Other comprehensive income		5,018,518		4,831,354
Retained earnings		55,996,699		43,491,464
Total Stockholders' Equity		81,938,791		68,702,518
Noncontrolling Interests		392,551		436,940
Total Equity		82,331,342		69,139,458
Total Liabilities and Equity	$	109,091,996	$	102,860,477

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

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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,
	2012			2011			2012			2011
Net revenue	$	56,472,324		$	84,379,681		$	175,048,803		$	170,482,201
Cost of goods sold		(46,256,954	)		(71,643,030	)		(141,911,226	)		(140,985,703	)
Gross Profit		10,215,370			12,736,651			33,137,577			29,496,498
Selling expenses		(3,795,367	)		(3,165,190	)		(11,926,786	)		(8,188,037	)
General and administrative expenses		(2,311,508	)		(1,586,847	)		(6,276,679	)		(4,398,667	)
Total Operating Expenses		(6,106,875	)		(4,752,037	)		(18,203,465	)		(12,586,704	)
Operating income		4,108,495			7,984,614			14,934,112			16,909,794
Interest income		7,242			4,387			24,918			30,848
Interest expense		(330,771	)		(269,725	)		(1,260,810	)		(481,549	)
Non-operating income		(7,063	)		26,981			569,587			36,273
Total Other Expenses		(330,592	)		(238,357	)		(666,305	)		(414,428	)
Income from continuing operations before income taxes		3,777,903			7,746,257			14,267,807			16,495,366
Income taxes		(184,485	)		(541,464	)		(1,475,181	)		(28,959	)
Income from continuing operations		3,593,418			7,204,793			12,792,626			16,466,407
Loss from discontinued operations, net of income taxes		—			681,712			—			(2,886,430	)
Net income		3,593,418			7,886,505			12,792,626			13,579,977
Net loss attributable to noncontrolling interests:
Net loss from continuing operations		3,826			1,934			44,695			1,934
Net loss from discontinued operations		—			(247,339	)		—			738,374
Total net loss attributable to noncontrolling interests		3,826			(245,405	)		44,695			740,308
Net income attributable to Deyu Agriculture Corp.		3,597,244			7,641,100			12,837,321			14,320,285
Preferred stock dividends		(112,035	)		(83,404	)		(332,087	)		(313,550	)
Net income available to common stockholders		3,485,209			7,557,696			12,505,234			14,006,735
Foreign currency translation (loss) gain		822,431			917,581			187,472			1,887,420
Comprehensive income		4,307,640			8,475,277			12,692,706			15,894,155
Other comprehensive income attributable to noncontrolling interests		(4,157	)		(47,881	)		(306	)		(91,952	)
Comprehensive income attributable to Deyu Agriculture Corp.	$	4,303,483		$	8,427,396		$	12,692,400		$	15,802,203
Amounts attributable to common stockholders:
Net income from continuing operations, net of income taxes	$	3,485,209		$	7,123,323		$	12,505,234		$	16,154,791
Discontinued operations, net of income taxes		—			434,373			—			(2,148,056	)
Net income attributable to common stockholders	$	3,485,209		$	7,557,696		$	12,505,234		$	14,006,735
Net income attributable to common stockholders per share - basic:
Income from continuing operations	$	0.33		$	0.68		$	1.18		$	1.54
Loss from discontinuing operations		—			0.04			—			(0.20	)
Net income attributable to common stockholders	$	0.33		$	0.72		$	1.18		$	1.34
Net income attributable to common stockholders per share - diluted:
Income from continuing operations	$	0.28		$	0.58		$	1.02		$	1.32
Loss from discontinuing operations		—			0.03			—			(0.17	)
Net income attributable to common stockholders	$	0.28		$	0.61		$	1.02		$	1.15
Weighted average number of common shares outstanding - basic		10,604,081			10,544,774			10,578,570			10,514,243
Weighted average number of common shares outstanding - diluted		12,632,585			12,522,039			12,585,860			12,481,313

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

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DEYU AGRICULTURE CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For The Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income available to common stockholders	$	12,505,234		$	14,006,735
Loss from discontinued operations attributable to Deyu Agriculture Corp.		—			2,886,430
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		1,801,515			676,807
Allowance for doubtful accounts		16,314			—
Reserve for inventory valuation		—			76,963
Share-based compensation		250,290			412,745
Preferred stock dividends accrued		332,087			322,180
Common stocks issued for services		114,400			43,050
Grain on bargain purchase		(499,079	)		—
Deferred income tax expense (benefit)		875,706			26,234
Noncontrolling interests		(44,695	)		(1,934	)
Decrease (increase) in current assets:
Accounts receivable		8,616,800			(16,598,485	)
Related-parties trade receivable		466,980			(206,999	)
Inventories		(5,060,976	)		(9,949,227	)
Advance to suppliers		2,988,738			(1,763,486	)
Prepaid expense and other current assets		907,358			(187,423	)
Increase (decrease) in liabilities:
Accounts payable		8,987			2,087,140
Advance from customers		(6,415,884	)		(2,561,976	)
Accrued expense and other liabilities		517,019			277,194
Net cash provided by (used in) operating activities of continuing operations		17,380,794			(10,454,052	)
Net cash used in operating activities of discontinued operations		—			(2,855,969	)
Net cash provided by (used in) operating activities		17,380,794			(13,310,021	)
CASH FLOWS FROM INVESTING ACTIVITIES
Consideration paid for acquisition		(5,166,095	)		—
Construction and remodeling of factory and warehouses		(312,588	)		(109,287	)
Purchase of machinery and equipment		(47,829	)		(458,214	)
Advances to related parties		(78,604	)		—
Cash held by the Taizihu Group at acquisition date		20,272			—
Net cash used in investing activities of continuing operations		(5,584,844	)		(567,501	)
Net cash used in investing activities of discontinued operations		—			(2,183,644	)
Net cash used in investing activities		(5,584,844	)		(2,751,145	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash released from restriction (restricted) for credit line of bank acceptance notes		1,104,382			(11,676,877	)
Net (repayments of) proceeds from short-term loans from bank and others		(9,690,871	)		9,235,600
Net (repayments of) proceeds from short-term bank acceptance notes		(1,579,604	)		27,971,554
Net proceeds from short-term loans from related parties		1,812,544			5,009,698
Payment of preferred dividends		(266,795	)		(242,418	)
Net proceeds from short-term loan from others		—			(883,591	)
Proceeds from capital contributions		—			461,780
Release of cash restricted held at a trust account		—			125,560
Net cash (used in) provided by financing activities of continuing operations		(8,620,344	)		30,001,306
Net cash provided by financing activities of discontinued operations		—			4,993,433
Net cash (used in) provided by financing activities		(8,620,344	)		34,994,739
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		45,899			547,575
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS		3,221,505			19,481,148
NET DECREASE IN CASH & CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS		—			(29,987	)
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS FROM CONTINUING OPERATIONS		3,221,505			19,511,135
CASH & CASH EQUIVALENTS, BEGINNING BALANCE		8,741,703			5,791,418
CASH & CASH EQUIVALENTS, ENDING BALANCE	$	11,963,208		$	25,302,553
SUPPLEMENTAL DISCLOSURES:
Income tax paid	$	180,705		$	46
Interest paid	$	765,725		$	349,259
NONCASH INVESTING AND FINANCING ACTIVITIES:
Construction completed and transferred to property, plant, and equipment	$	—		$	5,762,034
Construction completed and transferred to land use rights	$	—		$	2,308,900

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

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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 People’s 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.  As a result of the share exchange, City Zone became our wholly-owned subsidiary.  We currently conduct our business primarily through 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”), Shanxi Taizihu Food Co., Ltd. (“Taizihu”), Shanxi Huichun Bean Products Co., Ltd. (“Huichun” and together with Taizihu, the “Taizihu Group”, see Note 20) and Detian Yu Biotechnology (Beijing) Co., Ltd. (“Detian Yu”) and Detian Yu’s subsidiaries.

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

Reverse Acquisition

On April 27, 2010, we entered into a Share Exchange Agreement (“Share Exchange”) pursuant to which we issued 8,736,932 shares of our 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 shares of 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 to serve as our Chief Executive Officer.

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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 to be 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 (“BVI”) on July 27, 2009 under the BVI Business Companies Act of 2004.  In November 2009, pursuant to the restructuring plan set out below, City Zone became the holding company of a group of companies comprising Most Smart International Limited ("Most Smart"), Redsun Technology (Shenzhen) Co. Limited (“Shenzhen Redsun”), Shenzhen JiRuHai Technology Co., Ltd.("Shenzhen JiRuHai"), Detian Yu, Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang.

Restructuring

In November 2009, pursuant to a restructuring plan (“Restructuring”) intended to ensure compliance with PRC rules and regulations, City Zone, through a series of acquisitions and wholly-owned subsidiaries, acquired 100% of the equity interests in 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 exercise 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 our accompanying consolidated financial statements.  For the purpose of a 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.

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 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 (or RMB 100,000) by Jianming Hao, Chairman and Chief Executive Officer of the Company, 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) Jianming 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 were comprised of a series of agreements with a term of ten (10) years, including:

· Exclusive Management and Consulting Service Agreements, through which Detian Yu provided 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 provided 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.

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· Business Operations Agreements, through which Detian Yu had exclusive authority of all decision-making of ongoing operations, including establishing compensation levels and hiring and firing of key personnel.  In order to ensure the normal operations of Junda and Longyue, Detian Yu acted as the guarantor and provided guarantees 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 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.

· Power of Attorney, signed by each of the shareholders of Junda and Longyue, which authorized a designee appointed by Detian Yu to exercise all of their respective voting rights as a shareholder.

· Equity Acquisition Option Agreements, through which the shareholders of Junda and Longyue granted Detian Yu an irrevocable and unconditional right to purchase, or cause 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 a 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 have invested 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 had 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 have been comprised of 3 directors, and Junda, Longyue and SBCVC shall have each nominated one director. The board of directors shall have nominated a financial administrator agreed to by SBCVC. Forty-eight (48) months after SBCVC completed its investment in Deyufarm, the parties shall have consummated 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 owned 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 45,000,000) to $10,493,516 (RMB 70,000,000).

On December 20, 2011, Detian Yu entered into a series of termination agreements (collectively, the “Termination Agreements”) with each of Junda, Longyue and their shareholders, pursuant to which Detian Yu gave up the control management of the business activities of Junda and Longyue. According to the Termination Agreements, each side agreed to terminate the Contractual Arrangements entered into on November 16, 2010.

The Acquisition of the Taizihu Group

On February 2, 2012, Shenzhen Redsun, a company organized under the laws of PRC and a wholly-owned subsidiary of the Company, entered into a Stock Equity Transfer Agreement (the “Agreement”) whereby Shenzhen Redsun acquired 100% of the issued and outstanding registered share capital of the Taizihu Group. In consideration for the acquisition of Taizihu Group, Shenzhen Redsun paid $2,342,168 (RMB 14,773,222) in cash to Mr. Hao He, an individual, for 50% of Taizihu, $1,522,409 (RMB 9,602,594) in cash to Mr. Qinghe Xu, an individual, for 32.5% of Taizihu and $819,759 (RMB5,170,628) in cash to Mr. Jinqing Xie, an individual, for the remaining 17.5% of Taizihu. Immediately prior to the execution of the Agreement, Taizihu owned 85% of the issued and outstanding registered share capital of Huichun, and pursuant to the terms of the Agreement, Shenzhen Redsun acquired the remaining 15% of the share capital of Huichun from Beijing Kanggang Food Development Co., Ltd. for $817,845 (RMB 5,158,556). The total amount of the consideration paid for the acquisition of the Taizihu Group was $5,502,181 (RMB 34,705,000), and such consideration was determined pursuant to arm’s length negotiations between the parties. As a result of the acquisition, the Company currently owns and controls 100% of the Taizihu Group.

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Consolidation Scope:

Details of our subsidiaries subject to consolidation are as follows:

	Domicile and			Percentage
	Date of	Registered		of
Name of Subsidiary	Incorporation	Capital		Ownership			Principal Activities
City Zone Holdings Limited ("City Zone")	British Virgin Islands, July 27, 2009	$	20,283,581		100	%	Holding company of Most Smart
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, Taizihu and Huichun
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 five 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	$	1,025,787		100	%	Corns preliminary processing and wholesale
Jinzhong Yuliang Agriculture Trading Co., Ltd. ("Jinzhong Yuliang")	The PRC, March 17, 2008	$	1,019,516		100	%	Corns preliminary processing and wholesale distribution.
Tianjin Guandu Food Co., Ltd. ("Tianjin Guandu")	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.
Shanxi Taizihu Food Co., Ltd. (“Taizihu”) (1)	The PRC, July 27, 2003	$	1,208,233		100	%	Producing and selling fruit beverages and soybean products.
Shanxi HuiChun Bean Products Co., Ltd. (“Huichun”)(1)	The PRC, September 2, 2007	$	2,636,192		100	%	Producing and selling fruit beverages and soybean products.
Beijing Jundaqianyuan Investment Management Co., Ltd. ("Junda")(2)	The PRC, June 13, 2010	$	14,637		Variable interest		Shareholding of Deyufarm (14.29%)
Jinzhong Longyue Investment Consultancy Services Co., Ltd. ("Longyue")(2)	The PRC, June 2, 2010	$	4,393		Variable interest		Shareholding of Deyufarm (50%)
Deyufarm Innovation Food (Beijing) Co., Ltd. ("Deyufarm")(2)	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")(2)	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 Food Co., Ltd. ("Xinggu Deyufarm")(2)	The PRC, November 25, 2010	$	1,515,152		Variable interest		Manufacturing of instant grain vermicelli products.

(1)Taizihu and Huichun became the wholly-owned subsidiaries of the Company on February 2, 2012 through a business acquisition. They are within consolidation scope since then.

(2) Detian Yu terminated its control over the Junda, Longyue, Deyufarm, Haoliangxin, Xinggu Deyufarm, (collectively, the “VIE Group”) on December 20, 2011. The operation results of the VIE Group are included in the consolidated financial statements for the nine months and the three months ended September 30, 2011.

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NOTE 2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The unaudited consolidated financial statements of Deyu Agriculture Corp. and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) 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 US GAAP 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, 2011 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. 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 accompanying consolidated financial statements include the financial statements of Deyu Agriculture Corp., its 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 US GAAP.  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 US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 banks and all highly liquid investments with original maturities of three months or less.

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As a result of the financings associated with the reverse merger, we had, as of December 31, 2010, $125,560 in a trust account. The use of these funds required 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, 2012, $263,284 of cash was restricted as the pledge for $2,124,174 (RMB 13,350,000) and $262,538 (RMB 1,650,000) of bank loans obtained from China Merchants Bank, Dongzhimen Branch on November 30, 2011 and January 11, 2012, respectively; $477,342 of cash was restricted as pledge for bank loan of $1,272,912  (RMB8,000,000) obtained from Dah Sing Bank (China) Co. Ltd. on July 18, 2012; $241,967 of cash was restricted as pledges for bank loans of $795,570 (RMB 5,000,000), $1,432,026 (RMB 9,000,000) and $2,386,712 (RMB 15, 000,000) obtained from Agriculture Development Bank of China on November 3, 2011, September 18, 2012 and August 14, 2012, respectively.

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, 2012, the balance of accounts receivable greater than six months was not material. As of December 31, 2011, 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 a moving-average basis.  Costs of inventories include purchase and related costs incurred in delivering 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 a valuation allowance is required.  As of September 30, 2012 and December 31, 2011, slow moving or obsolete inventory identified by management was not material.

Assets held for sales

A long-lived asset to be sold shall be classified as held for sale in the period in which all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset; (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph ASC 360-10-45-11. The term probable refers to a future sale that is likely to occur; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset. A market price that is reasonable in relation to fair value indicates that the asset is available for immediate sale, whereas a market price in excess of fair value indicates that the asset is not available for immediate sale; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group.

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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	10-30
Office equipment	5
Machinery and equipment	5-10
Furniture & fixtures	5

Construction-in-progress

Construction-in-progress consists of amounts expended for a new factory park construction, and the cost of the portion of the land use right that the new factory park occupied. Construction-in-progress is not depreciated until such time as the assets are completed and put into service.  Once factory park 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.

Intangible assets

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, 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

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.  For the nine months ended September 30, 2012 and 2011, sales discounts from continuing operations were $669,831 and $70,620, respectively.

We offer a right of exchange on our grain products sold through our relationships 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, 2012 and 2011, returns of our products were not material.

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Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.  Advertising costs from continuing operations for the nine months ended September 30, 2012 and 2011 were $1,279,682 and $325,698, respectively.

Research and development

The Company expenses its research and development costs as incurred.  Research and development costs from continuing operations for the nine months ended September 30, 2012 and 2011 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.

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.

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.

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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.

Discontinued operations

Certain prior period amounts have been reclassified in these consolidated financial statements to conform to the 2011 presentation of discontinued operations of the VIE Group for the deep processed grain business. See Notes 1 and 3 for additional information.

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 year ended December 31, 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 impairment test 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 year ended December 31, 2011.

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In December 2011, FASB issued an Update (ASU No. 2011-10) to Property, Plant, and Equipment (ASC Topic 360). Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

In December 2011, FASB issued an Update (ASU No. 2011-11) to Balance Sheet (ASC Topic 210) regarding disclosures about offsetting assets and liabilities. Pursuant to this Update, entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

In July 2012, FASB issued an amendment (ASU No. 2012-02) to Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

NOTE 3.            DISCONTINUED OPERATIONS

On December 20, 2011, Detian Yu terminated its control over the VIE Group (see Note 1). The results of the VIE Group for the nine months ended September 30, 2011 have been presented as a discontinued operation in the consolidated statements of income and comprehensive income. Selected operating results for the discontinued business are presented in the following tables:

	For The Nine Months Ended
	September 30,
	2012		2011
Net revenue	$	—	$	9,615,087
Cost of goods sold		—		(8,339,781	)
Selling, general, and administrative expenses		—		(5,108,515	)
Interest income, net		—		811
Other income, net		—		(15,975	)
Loss before income taxes		—		(3,848,373	)
Income taxes benefit		—		961,943
Net loss	$	—	$	(2,886,430	)

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NOTE 4.          BUSINESS COMBINATION

On February 2, 2012, Shenzhen Redsun, a wholly-owned subsidiary of the Company, acquired 100% of the equity interests of the Taizihu Group for cash consideration of $5,502,181 (RMB 34,705,000).  The acquisition was accounted for as a business combination under the purchase method of accounting. The Taizihu Group’s results of operations were included in Deyu’s results beginning February 3, 2012.  The purchase price has been allocated to the assets acquired and the liabilities assumed based on their fair value at the acquisition date as summarized in the following:

Purchase price	$	5,502,181
Allocation of the purchase price:
Cash and cash equivalents		28,867
Restricted cash		240,474
Accounts receivable, net		133,863
Inventory		1,373,222
Advance to supplier		840,849
Prepaid expenses		5,412
Other current assets		445,287
Property, plant, and equipment, net		5,891,772
Construction-in-progress		1,673,997
Long-term Investment		57,705
Other assets		59,448
Intangible assets, net		2,823,087
Short-term loan		(6,499,683	)
Accounts payable		(319,077	)
Advance from customers		(225,819	)
Accrued expenses		(167,453	)
Tax Payable		(65,192	)
Due to related parties		(80,551	)
Other current liabilities		(214,948	)
Fair value of net assets acquired		6,001,260
Gain on bargain purchase	$	(499,079	)

The Taizihu Group contributed net revenues of $15.8 million and net earnings of $1.7 million from February 3, 2012 through September 30, 2012.

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NOTE 5.           ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	September 30,			December 31,
	2012			2011
Accounts receivable	$	27,674,864			36,167,136
Less: Allowance for doubtful accounts		(16,433	)		—
Accounts receivable, net	$	27,658,431		$	36,167,136

NOTE 6.            INVENTORY

Inventory consisted of the following:

	September 30,		December 31,
	2012		2011
Raw materials		6,673,127	$	8,108,503
Work in process		22,675		1,971
Finished goods		19,096,993		12,109,353
Supplies		948,223		94,263
Total Inventory	$	26,741,018	$	20,314,090

NOTE 7.          PREPAID EXPENSES

Prepaid expenses consisted of the following:

	September 30,		December 31,
	2012		2011
Deductible value-added taxes (VAT)	$	80,802	$	92,531
Prepaid rent		55,405		88,889
Prepaid bank loan guarantee fee		—		83,899
Prepaid advertisement		—		46,376
Prepaid other expenses		242,909		79,842
Total	$	379,116	$	391,537

NOTE 8.          ASSETS HELD FOR SALE

Assets held for sale as of December 31, 2011 represent the cost of timber, timberland and farmland (collectively, the “Timberland”) and amounted to $1.6 million (RMB 10.3 million), which management assessed approximating its fair value. The Company exchanged the Timberland for an office building paying cash consideration of $1.1 million (RMB 7.2 million) for the variance between the fair values of the office building and the Timberland on March 19, 2012. No material gain or loss was generated from this exchange transaction.

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NOTE 9.            PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

	September 30,			December 31,
	2012			2011
Automobiles	$	932,775		$	896,648
Buildings		15,399,153			9,593,679
Office equipment		465,941			408,203
Machinery and equipment		7,314,574			2,954,783
Furniture and fixtures		1,640,823			605,705
Total cost		25,753,266			14,459,018
Less: Accumulated depreciation		(6,131,775	)		(2,103,072	)
Property, plant, and equipment, net	$	19,621,491		$	12,355,946

The buildings owned by the Company located in Jinzhong and Quwo in Shanxi Province, China are used for production, warehousing, and offices for our corn and grains business. The Company exchanged its Timberland for an office building valued at $2.8million (RMB 17.5million) on March 19, 2012, of which depreciation commenced in April 2012.

As of September 30, 2012, $5.7 million (RMB 36 million) of buildings, machinery and equipment owned by the Taizihu Group were pledged as collateral for short-term bank loans.

Depreciation expense from continuing operations for the nine months ended September 30, 2012 and 2011 was $ 1,457,975 and $575,624, respectively.

NOTE 10.          CONSTRUCTION-IN-PROGRESS

Construction-in-progress amounted to $1,849,836 as of September 30, 2012 and mainly represents payment on the construction of a new factory park and the partial cost of the land use right where the new factory park occupies in Huichun. Construction-in-progress amounted to $788,511 represents payment on the construction of a new workshop for flour manufacturing in Jingzhong Deyu.

NOTE 11.          INTANGIBLE ASSETS

Intangible assets consisted of the following:

	September 30,			December 31,
	2012			2011
Land use rights	$	13,043,983		$	9,808,497
Software-ERP System and B2C platform		1,049,787			1,032,746
Less: Accumulated amortization		(758,270	)		(189,399	)
Total	$	13,335,500		$	10,651,844

-20-

According to government regulations of the PRC, the PRC Government owns all land. The Company owns the land use rights of farmland and industrial lands. The Company leases and has obtained a certificate of right of use on 11,667 square meters with the PRC Government in Jinzhong, Shanxi Province where Jinzhong Deyu's buildings and production facility are located. The term of the right is four to five years and is automatically renewed upon expiration. The right was fully amortized as of December 31, 2010 using the straight-line method. On June 18 2012, the Company received the extended land use right certificate and the term of the right has been extended to March 14, 2037.

Taizihu leases and has obtained a certificate of right to use on 100,000 square meters of industrial land with the PRC Government in Quwo County, Shanxi Province where Taizihu Group’s buildings and production facility are located. The term of the right is 50 years from October 28, 2008 to October 27, 2058. The amortization of the land use right was commenced in October 2008 using the straight-line method over 50 years. Of the 100,000 square meters of land, approximately 26,000 square meters amounting to $957,085 were used for the construction of the new factory park and were reclassified from intangible assets to construction-in-progress when the construction commenced in January 2011 and as reported on the consolidated balance sheets of the Company as of September 30, 2012 and December 31, 2011. The land use right used for the construction of the new factory park has been suspended for amortization since January 2011 when the construction commenced.

As of September 30, 2012, $3,842,911 (RMB 24 million) of the land use right owned by Taizihu Group was pledged as collateral for short-term bank loans, of which $958,470 (RMB 6.0 million) was reclassified under construction-in-progress.

Amortization expense of the intangible assets for the nine months ended September 30, 2012 and 2011 was $343,540 and $101,183, respectively

NOTE 12.          OTHER ASSETS

Other assets consisted of the following:

	September 30,		December 31,
	2012		2011
Land use rights	$	—	$	78,776
Net deferred tax assets - noncurrent		—		648,759
Total	$	—	$	727,535

The Company exchanged its Timberland for the buildings with the land use right on March 19, 2012 (see NOTE 8). The title transferring of the land use right has been completed and the Company obtained the land use right certificate on May 10, 2012. As of September 30, 2012, the land use right which amounted to $182,328 (RMB 1.15 million) represents the land use right located at Shanzhuangtou, Jinzhong, Shanxi Province was reclassified to Intangible assets.

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NOTE 13.        SHORT-TERM LOAN

Short-term loan consisted of the following:

	September 30,		December 31,
	2012		2011
Bank loan payable to Agriculture Development Bank of China, bearing interest at the prime rate based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2012 was 6.00%. The term of the loan started from August 14, 2012 with maturity date on August 13, 2013.  The loan was obtained by Taizihu and pledged by its buildings and land use right.	$	2,386,712	$	—
Bank loan payable to  China Merchants Bank Beijing Dongzhimen subbranch, bearing interest at a floating rate of prime rate plus 20% of prime rate, of which prime rate was based on one-year loan interest rate released by The People's Bank of China.  The actual interest rate as of September 30, 2012 and December 31, 2011 were 7.20% and 7.8720%. The term of the loan started from November 30, 2011 with maturity date on November 29, 2012.  The loan was obtained by Detian Yu and guaranteed by China Agriculture Credit Guarantee Co., Ltd. for a period of one year starting from November 30, 2011.		2,124,174		2,121,101
Bank loan payable to Agriculture Development Bank of China, bearing interest at the prime rate, based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2012 was 6.0%. The term of the loan started from September 18, 2012 with maturity date on September 17, 2013.  The loan was obtained by Taizihu and pledged by its buildings and land use right.		1,432,026		—
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed 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.  The actual interest rate as of September 30, 2012 was 15.084%. The term of the loan started from August 31, 2012 with maturity date on August 29, 2013.  The loan was obtained by Jinzhong Yongcheng and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 30, 2013.		1,352,469		—
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed 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.  The actual interest rate as of September 30, 2012  was 15.084%. The term of the loan started from August 31, 2012 with maturity date on August 29, 2013.  The loan was obtained by Jinzhong Yuliang and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 30, 2013.		1,352,469		—
Bank loan payable to Dah Sing Bank (China) Co., Ltd, bearing interest at a fixed rate of prime rate plus 20% 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 actual interest rate as of September 30, 2012 was 7.2%. The term of the loan started from July 18, 2012 with maturity date on July 17, 2013.  The loan was obtained by Detian Yu and guaranteed by Mr. Tian Wenjun for a period of one year starting from July 18, 2012.		1,272,912		—
Bank loan payable to Agriculture Development Bank of China, bearing interest at six-month to one-year prime interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2012 was 6.560%. The term of the loan started from November 3, 2011 with maturity date on October 30, 2012.  The loan was obtained by Taizihu and pledged by the machinery and equipment of Taizihu. As of the date of this filing, the Company has been in negotiation with the lender on renewal of the loan. The Company is not currently able to predict the probability of the success on the renewal and will repay the loan immediately if the loan cannot be renewed.		795,570		—
Bank loan payable to China Merchants Bank Beijing Dongzhimen subbranch, bearing interest at a floating rate of prime rate plus 20% of prime rate, of which prime rate was based on one-year loan interest rate released by The People's Bank of China.  The actual interest rate as of September 30, 2012 was 7.20%. The term of the loan started from January 11, 2012 with maturity date on January 10, 2013.  The loan was obtained by Detain Yu and guaranteed by China Agriculture Credit Guarantee Co., Ltd. for a period of one year starting from November 30, 2011.		262,538		—
Bank loan payable to Bank of Beijing Haidian Branch, bearing interest at a fixed rate of prime rate plus 50% 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 actual interest rate as of September 30, 2012 was 9%. The term of the loan started from September 28, 2012 with maturity date on September 27, 2013.  The loan was obtained by Detian Yu and guaranteed by Mr. Tian Wenjun for a period of one year.		159,114		—
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.		58,395		58,311
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd, bearing interest at a fixed 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.  The actual interest rate as of December 31, 2011 was 15.084%. 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. The loan was paid off on August 20, 2012.		—		1,588,840
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed 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.  The actual interest rate as of December 31, 2011 was 15.084%. 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 Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 7, 2012. The loan was paid off on August 21, 2012.		—		1,350,514
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed 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.  The actual interest rate as of December 31, 2011 was 15.084%. 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 Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 7, 2012. The loan was paid off on August 20, 2012.		—		1,350,514
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. The actual interest rate as of December 31, 2011 was 8.5280%. The term of the loan started from May 10, 2011 with maturity date on May 9, 2012.  The loan was obtained by Detian 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. The loan was paid off on May 9, 2012.		—		7,944,200
Total	$	11,196,379	$	14,413,480

-22-

Loan payable to Hangzhou TianCi Investment Management Co., Ltd. was unsecured, bear no interest and no due date was specified.

NOTE 14.          NOTES PAYABLE

Notes payable consisted of the following:

	September 30,		December 31,
	2012		2011
Bank notes payable to Jinzhong Haida Nongyi Trading Co., Ltd.issued by Bank of Communication at Beijing Gongzhifen branch,bearing no interest and no 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.The note was paid off on March 7, 2012.	$	—	$	1,588,840
Total	$	—	$	1,588,840

NOTE 15.        ACCRUED EXPENSES

Accrued expenses consisted of the following:

	September 30,		December 31,
	2012		2011
Accrued VAT and other taxes	$	668,395	$	412,437
Accrued payroll		270,778		266,983
Others		645,073		469,785
Total	$	1,584,246	$	1,149,205

NOTE 16.        INCOME TAXES

United States

Deyu Agriculture Corp. is incorporated in the State of Nevada 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, 2012 and 2011 was 34%.  No tax benefit has been realized since a 100% valuation allowance has offset deferred tax asset resulting from the net operating losses.

British Virgin Islands

City Zone, a wholly-owned subsidiary of the Company, is incorporated in the 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.

People’s Republic of China

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 variable interest entities are subject to the 25% EIT rate.

-23-

The provision for income taxes from continuing operations on income consists of the following for the nine months ended September 30, 2012 and 2011:

	For The Nine Months Ended
	September 30,
	2012		2011
Current income tax expense (benefit)
U.S.	$	—	$	—
PRC		686,282		—
Total current expense (benefit)	$	686,282	$	—
Deferred income tax expense (benefit)
U.S.	$	—	$	—
PRC		788,899		(932,984	)
Income tax expense (benefit) attributable to discontinued operations		—		(961,943	)
Income tax expense (benefit) attributable to continuing operations	$	1,475,181	$	28,959

The following is a reconciliation of the statutory tax rate to the effective tax rate of the continuing operations for the nine months ended September 30, 2012 and 2011:

	For The Nine Months Ended
	September 30,
	2012			2011
Expected U.S. income tax expense		34.0	%		34.0	%
Increase (decrease) in taxes resulting from:
Tax-exempt income		-32.9	%		-40.2	%
Foreign tax differential		-0.3	%		1.2	%
Change in valuation allowance		10.2	%		5.2	%
Intercompany elimination		-1.2	%		0.0	%
Other		0.5	%		0.0	%
Income tax expense (benefit) attributable to continuing operations		10.3	%		0.2	%

Significant components of the Company’s net deferred tax assets as of September 30, 2012 and December 31, 2011 are presented in the following table:

	September 30,			December 31,
	2012			2011
Deferred tax assets
Net operating loss carryforwards (NOL)	$	2,952,518		$	2,255,365
Share-based compensation		435,997			351,203
Deferred tax assets acquired in business combination		87,441			—
Total		3,475,956			2,606,568
Less: Valuation allowance		(3,475,956	)		(1,813,056	)
Total deferred tax assets, net	$	—		$	793,512

As of September 30, 2012, the Company accrued fully valuation allowance on its deferred tax assets based on the change of assessment on the probability of future reversion.

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NOTE 17.        NET INCOME PER SHARE

Reconciliation of the basic and diluted net income per share was as follows:

	Amounts		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the nine months ended September 30, 2012:
Net income from continuing operations attributable to common stockholders - basic	$	12,505,234		10,578,570	$	1.18
Preferred dividends applicable to convertible preferred stocks		332,087		2,007,290
Net income from continuing operations attributable to common stockholders - diluted	$	12,837,321		12,585,860	$	1.02
Net income attributable to common stockholders - basic	$	12,505,234		10,578,570	$	1.18
Preferred dividends applicable to convertible preferred stocks		332,087		2,007,290
Net income attributable to common stockholders - diluted	$	12,837,321		12,585,860	$	1.02
For the nine months ended September 30, 2011:
Net income from continuing operations attributable to common stockholders - basic	$	16,154,791		10,514,243	$	1.54
Preferred dividends applicable to convertible preferred stocks		313,550		1,967,070
Net income from continuing operations attributable to common stockholders - diluted	$	16,468,341		12,481,313	$	1.32
Net income attributable to common stockholders - basic	$	14,006,735		10,514,243	$	1.33
Preferred dividends applicable to convertible preferred stocks		313,550		1,967,070
Net income attributable to common stockholders - diluted	$	14,320,285		12,481,313	$	1.15

NOTE 18.          SHAREHOLDERS’ EQUITY

Reverse Acquisition and Private Placement

On April 27, 2010, we completed the acquisition of City Zone by means of a Share Exchange with (i) City Zone, (ii) City Zone’s shareholders and (iii) our principal stockholders (see NOTE 1). Pursuant to the terms of the Share Exchange, Expert Venture and the other City Zone shareholders transferred to us all of the shares of City Zone in exchange for the issuance of 8,736,932 shares of our common stock so that Expert Venture and the other minority shareholders of City Zone shall own at least a majority of our outstanding shares.

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

As a result of the Share Exchange, we acquired 100% of the equity interests of City Zone, the business and operations of which now constitute our primary business and operations through its wholly-owned PRC subsidiaries.  Specifically, as a result of the Share Exchange:

· 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 Share Exchange 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.

-25-

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 at $4.40 per Unit, with each “Unit” consisting of one share of Series A convertible preferred stock, par value $0.001 per share (the “Investor Shares”) and a warrant to purchase 0.4 shares of our common stock with an exercise price of $5.06 per share (the “Warrants”). We initially received gross proceeds from the sale of the 1,866,174 Investor Shares and Warrants to purchase up to 746,479 shares of our common stock 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 April 27, 2010, and use our best efforts to have the Registration Statement declared effective within 180 calendar days of April 27, 2010.  We agreed to pay monthly liquidated damages in cash to each Investor equal to 0.5% of the dollar amount of the purchase price of the Investor Shares, on a pro rata basis, for each 30 day period the Registration Statement is not declared effective, up to a maximum of 8% of the purchase price, however on October 21, 2010, the SEC declared the Registration Statement effective and no liquidated damages were incurred.

In connection with the Private Placement, Maxim Group, LLC acted as our financial advisor and placement agent (the “Placement Agent”).  The Placement Agent 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 $4.84 (the “Placement Agent Warrants”).  Pursuant to the original placement agreement entered into by and between Detian Yu and the Placement Agent on January 27, 2010 (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 also received 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 shares of Series A convertible preferred stock equal to 5% of the aggregate number of shares of Series A convertible preferred stock underlying the Units issued pursuant to the offering; and a non-refundable cash retainer 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 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 Investors for total gross proceeds of $2,594,607.

We raised an aggregate amount of $10,805,750 in the offering in two closing events. 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 our common stock equal to 100% of the number of shares of common stock underlying the Investor Shares, which were initially convertible into 1,866,174 shares of our common stock (the “Escrow Shares”) in an escrow account.  The Escrow Shares were being held as security in the event we did 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 achieved the 2010 Performance Threshold and the 2011 Performance Threshold, the Escrow Shares would be released back to the City Zone Shareholders.  If either the 2010 Performance Threshold or 2011 Performance Threshold was not achieved, an aggregate number of Escrow Shares (such number to be determined by the formula set forth in the Securities Escrow Agreement) would 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.

Common Stock

As of the final closing of the Private Placement, we had 9,999,999 shares of common stock issued and outstanding. Between the final closing of the Private Placement and September 30, 2012, an aggregate of 538,267 shares of Series A convertible preferred stock were converted into 538,267 shares of common stock and an aggregate of 120,000 shares of common stock were issued. As of September 30, 2012, the total number of shares of common stock issued and outstanding was 10,658,266 shares.

-26-

Series A Convertible Preferred Stock

Holders of Series A convertible preferred stock (“Series A Preferred”) are entitled to receive, cumulative dividends in preference to the holders of our 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 “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 the 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 in accordance with the Certificate of Designations of the Series A Preferred.

For a period of two (2) years following the issuance of the Series A Preferred, the conversion price of Series A Preferred 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.

As of September 30, 2012, an aggregate of 538,267 shares of Series A Preferred were converted into 538,267 shares of common stock. On July 29, 2011 and July 26, 2012, 66,379 and 55,995 shares of Series A Preferred were issued as dividends to the shareholders of Series A Preferred, respectively. As of September 30, 2012, the total number of shares of Series A Preferred issued and outstanding was 2,039,970 shares.

For the nine months ended September 30, 2012 and 2011, the Company recorded a $332,087 and $313,550 preferred dividend expenses, respectively.

Series A Warrants

The warrants issued to the Investors and the Placement Agent have strike prices of $5.06 and $4.84, respectively, and expire in five (5) 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, each of which:

(a) entitles 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 the Series A Warrant by payment of cash).

-27-

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 the 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 Series A Warrants, and the issuance of the Placement Agent 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.

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
			$	7,291,224		$	2,292,533
Significant assumptions:
Common stock price		3		3.55			3.53
Horizon for dividend cash flow projection		3		2.00			2.00
Weighted average cost of capital ("WACC")		3		15.91	%		15.55	%

-28-

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 shares 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 Corporation. 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.

● 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	%

-29-

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.

The following is a summary of the status and activity of warrants outstanding as of September 30, 2012:

	Outstanding Warrants
	Exercise Price	Number of Warrants	Average Remaining Contractual Life
$	5.06	982,362	2.57 years
$	4.84	171,911	2.57 years
	Total	1,154,273

	Number of Warrants
Outstanding as of January 1, 2012		1,154,273
Granted		—
Forfeited		—
Exercised		—
Outstanding as of September 30, 2012		1,154,273

NOTE 19. SHARE-BASED COMPENSATION

As of September 30, 2012, the Company had one share-based compensation plan as described below. The compensation cost that had been charged against income for the plan was $250,290 and $412,745 for the nine months ended September 30, 2012 and 2011, respectively. The related income tax benefit recognized was $85,099 and $140,333 for the nine months ended September 30, 2012 and 2011, respectively. A 100% valuation allowance was assessed against the deferred tax assets derived from such tax benefit as of September 30, 2012 and December 31, 2011.

-30-

On November 4, 2010, our Board of Directors approved the Company’s 2010 Share Incentive Plan (the “Plan”).  Under the Plan, 1,000,000 shares of our 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

On March 8, 2012, our Board of Directors allocated to and authorized for use the maximum number of shares allowable pursuant to the terms of the Plan and granted 420,000 options under the Plan, of which 264,000 were new options and 156,000 were re-granted after such options were forfeited by employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the newly granted options vest as follows:

(i) 50% of the options granted will vest six (6) months after the date of the grant; and

(ii) 50% of the options granted will vest twelve (12) months after the date of the 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.

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 (%)		0.00-49.00		0.00-49.00		0.00-49.00
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

Options granted on March 8, 2012:

Exercisable Period	09/08/2012- 03/08/2020		03/08/2013- 03/08/2020
Risk-free Rate (%)		0.94		1.00
Expected Lives (years)		5.25		5.49
Expected Volatility (%)		45.91		45.22
Expected forfeitures per year (%)		0.00		0.00
Dividend Yield (%)		0.00		0.00

-31-

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.

(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, 2012, and changes during the nine-month period then ended is presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding as of January 1, 2012		815,000		$	4.40
Granted		420,000		$	1.45
Exercised		-		$	-
Forfeited		(237,000	)	$	4.40
Outstanding as of June 30, 2012		998,000		$	3.16		4.39 years	$	1,269,843
Exercisable as of June 30, 2012		595,333		$	3.36		4.29 years	$	803,897
Vested and expected to vest (1)		990,001		$	3.15		4.39 years

(1) Includes vested shares and unvested shares after a forfeiture rate is applied.

A summary of the status of the Company’s unvested shares as of September 30, 2012, and changes during the nine months ended September 30, 2012 is presented below:

				Weighted-
				Average
				Grant-
				Date Fair
Unvested Shares	Shares			Value
Unvested as of January 1, 2012		271,667		$	487,813
Granted		420,000			249,669
Vested		(210,000	)		(124,131	)
Forfeited		(79,000	)		(147,405	)
Unvested as of September 30, 2012		402,667		$	465,946

-32-

NOTE 20. RELATED PARTY TRANSACTIONS

Transactions

	For The Nine Months Ended
	September 30,
	2012		2011
Sales to Beijing Yilian Gifts Tech. Development Co., Ltd.	$	—	$	609,062
Sales to Beijing Doukounianhua Biotechnology Co., Ltd.		2,906,361		—
Sales to Tieling Zhongnong Agriculture Technology Development Co., Ltd.		—		1,108,817
Sales to Jinshang International Finance Leasing Co., Ltd.		—		7,882

Mr. Jianming Hao, Chief Executive Officer of the Company is the Executive Director of Beijing Yilian Gifts Tech. Development Co., Ltd. Jianbin Zhou, the Chief Operating Officer of the Company is the legal representative of Beijing Doukounianhua Biotechnology Co., Ltd. The prices in the transactions with related parties were determined according to the market price sold to or purchased from third parties.

Due from related parties

	September 30,		December 31,
	2012		2011
Due from HE Hao	$	149,644	$	—
Due from Beijing Doukounianhua Biotechnology Co., Ltd.		42,806		24,666
Due form Jinshang International Finance Leasing Co., Ltd.		4,295		3,537
Due from Beijing Yilian Gifts Tech. Development Co., Ltd.		—		468,976
Due from Deyufarm Innovation Food (Beijing) Co., Ltd.		—		89,929
Total	$	196,745	$	587,108

Due to related parties

	September 30,		December 31,
	2012		2011
Due to Dongsheng International Investment Co., Ltd.	$	4,547,480	$	2,899,633
Due to Mr. Wenjun Tian		2,545,825		2,542,144
Due to Beijing Yilian Gifts Tech. Development Co., Ltd.		262,981		3,338
Total	$	7,356,286	$	5,445,115

Mr. Wenjun Tian, the former President and Executive Director of the Company, is also the President and Executive Director of Dongsheng International Investment Co., Ltd. and the Executive Director of Jinshang International Finance Leasing Co., Ltd.  Those advances as of September 30, 2012 and December 31, 2011 are unsecured, bear no interest and no due date is specified. Deyufarm Innovation Food (Beijing) Co., Ltd. was no longer considered a related party after the VIE termination on December 20, 2011 (see Note 1) simultaneously accompanied with the key executives of the Company resigning from all management posts in the VIE Group and selling their shares in the VIE Group to an unrelated individual.

-33-

Guarantees

As of September 30, 2012, Mr. Wenjun Tian provided guarantees on short-term loans obtained by Detian Yu. 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 Yuliang.

NOTE 21. SEGMENT REPORTING

The Company defined reportable segments according to ASC Topic 280. In the fourth quarter of 2011, our management changed the structure of allocating resources and assessing the performance of the group. The new three segments were identified primarily based on the structure of allocating resources and assessing performance of the group, including corn division, grain division and bulk trading division. The segment reporting information for the three and nine months ended September 30, 2012 was based on these three segments and that for the three and nine months ended September 30, 2011 was restated accordingly.

The corn division is in the business of purchasing corn from farmers, simple processing and distributing to agricultural product trading companies through wholesale.  The business of the grain division is conducted by processing and distributing grains and other products to supermarkets and convenient stories after processing with our own brand names, including “Deyu”, “Shi-Tie”, “Huichun” and “Longquan Villa”.  The business of the bulk trading division is conducted by bulk purchasing and the sale of raw grain.

For The Nine Months Ended	Corn			Grain			Bulk Trading
September 30, 2012	Division			Division			Division			Others			Total
Revenues from external customers	$	115,453,950		$	46,693,753		$	12,901,100		$	—		$	175,048,803
Intersegment revenues		61,507			—			—			—			61,507
Interest revenue		9,481			8,170			7,253			14			24,918
Interest expense		(500,230	)		(530,011	)		(230,569	)		—			(1,260,810	)
Net interest (expense) income		(490,749	)		(521,841	)		(223,316	)		14			(1,235,892	)
Depreciation and amortization		(415,792	)		(1,379,376	)		(269	)		(6,078	)		(1,801,515	)
Noncontrolling interest		—			—			—			44,695			44,695
Segment net profit (loss)		8,231,945			7,011,965			(353,537	)		(2,097,747	)		12,792,626

For The Three Months Ended	Corn			Grain			Bulk Trading
September 30, 2012	Division			Division			Division			Others			Total
Revenues from external customers	$	34,889,078		$	17,424,132		$	4,159,114		$	—		$	56,472,324
Intersegment revenues		61,507			—			—			—			61,507
Interest revenue		2,831			3,171			1,225			15			7,242
Interest expense		(95,222	)		(147,617	)		(87,932	)		—			(330,771	)
Net interest (expense) income		(92,391	)		(144,446	)		(86,707	)		15			(323,529	)
Depreciation and amortization		(140,991	)		(500,737	)		(89	)		11			(641,806	)
Noncontrolling interest		—			—			—			3,826			3,826
Segment net profit (loss)		2,144,346			2,005,020			32,807			(588,755	)		3,593,418

-34-

For The Nine Months Ended	Corn			Grain			Bulk Trading
September 30, 2011	Division			Division			Division			Others			Total
Revenues from external customers	$	117,386,510		$	26,406,846		$	26,688,845		$	—		$	170,482,201
Intersegment revenues		7,448,554			35,734			—			—			7,484,288
Interest revenue		26,271			1,870			2,445			262			30,848
Interest expense		(377,561	)		(51,994	)		(51,994	)		—			(481,549	)
Net interest (expense) income		(351,290	)		(50,124	)		(49,549	)		262			(450,701	)
Depreciation and amortization		(251,695	)		(325,184	)		(82,161	)		(17,767	)		(676,807	)
Noncontrolling interest		—			—			—			1,934			1,934
Segment net profit (loss)		14,532,771			3,521,079			262,201			(1,849,644	)		16,466,407

For The Three Months Ended	Corn			Grain			Bulk Trading
September 30, 2011	Division			Division			Division			Others			Total
Revenues from external customers	$	62,207,751		$	11,998,304		$	10,173,626		$	—		$	84,379,681
Intersegment revenues		2,377,444			17,264			—			—			2,394,708
Interest revenue		340			1,702			2,345			—			4,387
Interest expense		(252,946	)		(8,390	)		(8,389	)		—			(269,725	)
Net interest (expense) income		(252,606	)		(6,688	)		(6,044	)		—			(265,338	)
Depreciation and amortization		(167,478	)		(50,881	)		(43,143	)		(11,919	)		(273,421	)
Noncontrolling interest		—			—			—			1,934			1,934
Segment net profit (loss)		5,618,226			2,154,545			(70,976	)		(497,002	)		7,204,793

-35-

All of our revenues were generated from customers in China, except for sales of certain bean-based products to local exporting agencies in China who export them to Germany, Japan, and other countries. Sales to exporting agencies were denominated in RMB, the Company’s functional currency and were accounted for as domestic sales. All long-lived assets are located in China. The following tables set forth our three major customers in each segment:

	For The Nine Months Ended
	September 30,
Corn Division :	2012			2011
Chongqin Sanwang Feed Co., Ltd.		5.9	%		—
Meishan Whens' Rear Lifestock Co., Ltd.		5.3	%		—
Chengdu Zhengda Co. Ltd.		4.4	%		12.1	%
Top Three Customers as % of Total Gross Sales:		15.6	%		12.1	%
Grain Division :
Deyufarm Innovation Food (Beijing) Co., Ltd.		22.8	%		—
Beijing Suning Appliance Company Ltd.		10.8	%		—
Shanxi Doukounianhua Food Co., Ltd.		6.2	%		—
Top Three Customers as % of Total Gross Sales		39.8	%		—
Bulk Trading Division :
Shanxi Zhengda Co., Ltd.		51.6	%		—
Shanxi Guchuan Food Co., Ltd.		28.3	%		56.5	%
Yunmeng Zhang		5.3	%		—
Top Three Customers as % of Total Gross Sales:		85.2	%		56.5	%

NOTE 22. CONCENTRATION OF CREDIT RISK

As of September 30, 2012 and December 31, 2011, all of the Company’s cash balances in bank were maintained within the PRC where no rule or regulation currently in place to provide obligatory insurance for bank deposits in the event of bank failure.  However, the Company has not experienced any losses in such accounts and believes it is not exposed to such risks on its cash balances in banks.

For the nine months ended September 30, 2012 and 2011, all of the Company’s sales were generated in the PRC.  In addition, all accounts receivable as of September 30, 2012 and December 31, 2011 were due from customers located in the PRC.

No single customer accounted for greater than 10% of the Company’s consolidated gross revenue for the nine months ended September 30, 2012 and 2011 or consolidated accounts receivable as of December 31, 2011. Beijing Suning Appliance Company Ltd. accounted for 19% of the consolidated accounts receivable as of September 30, 2012.

-36-

NOTE 23. COMMITMENTS AND CONTINGENCIES

Lease 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
2013	$	172,098
2014		166,174
2015		106,939
2016		87,194
2017		87,194
Thereafter		862,491
	$	1,482,090

Contingencies

On February 12, 2012, the Company’s former Chief Financial Officer alleged that the Company may have violated certain state and federal laws and regulations and upon receipt of such allegations, the Company's Audit Committee retained K&L Gates LLP to conduct an inquiry into such allegations. On March 27, 2012, the Company received a letter asserting a claim of wrongful termination in violation of public policy wherein the former Chief Financial Officer seeks payment of $250,000 plus the issuance of 60,000 shares of common stock in settlement for the claimed damages therein. Subsequently, on July 23, 2012, the Company was provided a copy of a complaint filed in the Superior Court of California, County of Orange, repeating the same allegations contained in the March 27, 2012 letter. In response, the Company filed a demurrer to the Complaint on September 10, 2012 asserting that the Complaint failed to state a valid claim. Plaintiff then filed and served a First Amended Complaint, and the Company again filed a demurrer to the First Amended Complaint on November 2, 2012. The hearing on the demurrer is scheduled for December 20, 2012.

The Company believes that such allegations and claims are without merit and intends to vigorously defend such allegations and claims. Because the inquiry is in its initial stages, the Company is not currently able to predict the probability of a favorable or unfavorable outcome, or the amount of any possible loss in the event of an unfavorable outcome. Consequently, no material provision or liability has been recorded for such allegations and claims as of September 30, 2012.

NOTE 24. SUBSEQUENT EVENTS

On October 10, 2012, a subsidiary namely Jilin Jinglong Agriculture Development Limited (“Jinglong”) with registered capital of RMB 20 million Yuan, was incorporated in Jilin Province, one of the three provinces of Northeast China. Detian Yu, one of the Company’s wholly-owned subsidiaries and Liu Fen, an unrelated third party hold 99% and 1% of its interests, respectively. Jinglong is primarily engaged in procurement, storage and sales of corn and grain.

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.

-37-

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 vertically integrated agriculture value chain from farmland to consumer market, a producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains operating in Shanxi Province in the People's Republic of China. The Company has access of 20 years to over 109,000 acres of farmland in Shanxi Province for breeding, cultivating, processing, warehousing, and distributing grain and corn products. We have an extensive wholesale network in over 15 provinces and a retail distribution network of approximately 20,000 supermarkets and convenience stores in 29 provinces across China. We are equipped with sophisticated production facilities and warehousing system. The capacity of storage is over 100,000 tons, the annual production capacities for grain products and corn products are over 105,000 tons and over 700,000 tons, respectively.

Operating revenue from continuing operations for the nine months ended September 30, 2012 was $175,044,803, representing a 2.7 % increase from $170,482,201 for the nine months ended September 30, 2011. Our net income available to common stockholders for the nine months ended September 30, 2012 was $12,302,005, representing a 12.2% decrease from $14,006,735 for the nine months ended September 30, 2011.

We conduct our business through three divisions:

· Corn Division –acquires unprocessed corn for value-added processing such as cleaning, drying packaging, etc. the main consumers for this division range from livestock feed companies to corn oil/corn starch manufacturing companies as well as governmental procurement agencies in China.

· Grain Division –acquires unprocessed grains including millet, green bean, soy bean, black rice and many other varieties of grains traditionally grown and consumed in China for value-added processing such as peeling, cleaning, grinding, packaging, etc. The Grain Division also produces and distributes deep processed grain products, such as bean based products, fruit vinegars and juices, noodles and other grain products. Over 200 types of finished products from this division are sold through supermarkets and convenience stores in China and overseas, as well as to institutional clients for various commercial sales and promotion sales.

Bulk Trading Division –conducts bulk trading through procuring and wholesales of rice, flour, wheat, kidney beans, green beans and other agricultural products. The majority customers of this division include food manufacturers, grain trading companies, wholesalers and governmental procurement agencies in China.

We operate based on the business model of “Company + Farmers + Cultivation Base” supported by long term strategic engagement with farmers, sophisticated production facilities, large warehousing capacity and exclusive logistic infrastructure. Based on our supply base, we have developed the “Deyu” vertical agriculture value chain of breading, cultivating, processing, warehousing and distributing our products from farmland to consumer market.

We have access to over 109,000 acres (650,000 mu) farmland in the center of Shanxi Province as our core cultivation base with long term partnerships with over 60,000 farmers to cultivate high quality grains and corn. Our grains are mainly grown in the hilly area next to Taihang Mountain, 5,000 to 8,000 feet above sea level. This region has a wide day to night temperature fluctuation and a long daily exposure to sunlight. These geographic characteristics produce grains that are rich in nutrients, especially minerals, rutin, cellulose, amino acids, chlorophyll, lecithin and linoleic acid.

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Our main processing center for corn, completed in 2011, consists of five drying cylinders and six warehouses. Our total storage capacity and annual turnover of corn exceed 100,000 tons and 700,000 tons, respectively. Our grain processing facilities future sophisticated production lines automation to achieve high quality by preserving the product nutritional values during processing.

Our production bases are located in Jinzhong and Quwo regions in Shanxi Province with convenient transportation. The Jinzhong facilities and warehouses are in proximity to Shitai Railway and Provincial Highway 317. The Quwo facilities are only several kilometers away from Houma, a transportation hub. We have three dedicated railway lines for exclusive freight transportation service in Jinzhong: (a) Shanxi Cereal & Oil Group, Mingli Reservation Depot; (b) Shanxi Yuci Cereal Reservation Depot; and (c) Yuci Dongzhao Railway Freight Station. The strategic geographical locations and exclusive use of dedicated freight lines agreements enable us deliver the products fast at a low cost.

We have established an extensive wholesale network for corn and bulk trading with customers ranging from livestock feed companies, food manufacturers, corn oil/corn starch manufacturing companies, grain trading companies, wholesalers, governmental procurement agencies, etc. in approximately 15 provinces across China. Our retail sales network for processed grain covers approximately 20,000 supermarkets and convenience stores with distribution in over 29 provinces in China, including the key metropolitan areas of Beijing, Tianjin, Jinan, Fuzhou, Chengdu and Shijiazhuang, and are presented in some supermarket chains under major global brands. We also sell our grain products through exporting agencies to foreign counties, including Germany, Japan, Canada, etc.

We have over 200 types of branded products for grain and other food products marketed under the house brands of “Deyu”, “Shi-Tie”, “Huichun” and “Taizihu”, which are well recognized by customers in China as green, ecological, organic foods.

Recent Developments

In February 2012, we acquired the Taizihu Group, which has a well-established grain product line of over 100 types of organic and non-organic bean-based products, vinegar-based fruit juices and other grain products under well recognized brand names “Huichun” and “Taizihu”. By leveraging the Taizihu Group's product lines, we believe we can capture a more substantial market share for healthy food and beverages through integrating the 20,000 supermarkets and retail stores under Deyu’s existing sales network with the Taizihu Group's sales channels of 100 distributors in more than 10 provinces, plus foreign export channels. The Taizihu Group has a production base of over 1,076,000 square feet size of which 234,000 square feet area has been fully constructed, in proximity to Houma, a transportation hub. This base is equipped with advanced production lines. More than two thirds of the land still can be developed to expand the production facility, to accommodate the potential rise in future demand without acquiring more land use rights.

In April 2012, we began working with leading noodle OEM (Original Equipment Manufacturing) producers to introduce a new product line under “Deyu” brand featuring a variety of noodle products through our extensive distribution in channels in China. That new noodle product line includes smooth surfaced noodles, fragrant mushroom noodles, chicken egg noodles and high gluten noodles. Noodles, a longtime staple of the Chinese diet, experienced a compound annual growth rate of 20.5% during 2003 to 2009 from about $762 million (or RMB 4.8 billion) to $2.3 billion (or RMB 14.4 billion) according to China Food Industry Association,. We believe this noodles product line is quickly gaining popularity in China as our brand name becomes well recognized among customers to capture more share of China’s growing noodle market.

In June 2012, we formed a supply relationship with Guangdong Wen's Food Group Co., Ltd. (“WFG”) in which we shall provide raw corn to four feed mills that WFG operates in Southwestern China on a non-exclusive basis. Founded in 1983, WFG is a large-scale modern multi-industry and trans-regional livestock enterprise that is engaged mainly in the feed, poultry and pig industries. WFG's business operations also involve bio-pharmaceutical and food processing in 20 Provinces with over 110 integrated companies. In 2010, WFG achieved sales revenue of $3.5 billion (RMB 21.94 billion) and its feed production amounted to 5.14 million tons. By working closely with WFG to meet its demands, we believe we can foster further progress in our corn division.

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In August 2012, we reached an agreement with Beijing Suning Appliance Co., Ltd. (Suning) to supply Suning with refined packaged grain goods valued at RMB115.9 million, or $18.4 million. Suning is one of the largest electrical and electronic appliance retailers in China, with 1,700 chain stores of annual sales of $15 billion (RMB 93.9 billion) in 2011. With the fast growing demand in commercial sales market for health foods, particularly refined packaged products, we intend to continue to develope more strategic institutional clients to explore more in the commercial sales segment by working with Suning on the current sales.

Plan of Operation

During the past several years, we have accumulated ample resources and advantages through Deyu’s vertical value chain from farmland to consumer market, built by advanced production capacities, large warehousing facilities, exclusive logistic infrastructures and an extensive sale network. Our mission is to grow to be a global leader in vertical agriculture value chain to provide diversified product lines delivered to commercial and consumer markets.

We plan to continue to grow our business through extending Deyu’s operation to other producing areas of corn and grain such as Hebei and Jilin Provinces. We plan to increase commercial sales to institutional clients, particularly in the grain products for the consumer market. In the meantime, we intend on continuing to develop a diversified vertical agricultural value chain by adding more food products to Deyu’s product lines and utilize available global resources and organic certifications to expand by exporting into the US and other regions. We plan to carefully consider vertical or horizontal acquisitions for our business growth, although we do not currently have any agreements in place to do so.

In 2012, we shifted our business strategy away from rapidly growing our business through supplementing our working capital needs with bank loans towards a more stable developmental approach by focusing on maintaining our sales network resources, improving cash flow and adopting a stable capital structure. We now focus on developing our main businesses by: (a) exploring more well established and branded livestock feed manufacturers to maintain our leading position in the market; (b) promoting our brand name of grain products instead of rapidly increasing the number of stores selling our products as a whole; (c) increasing commercial sales to institutional clients, particularly the refined packaged grain products for the consumer market; (d) increasing gross margin by reducing the low price strategies we implemented last year; (e) expanding our export business through export agents or strategic partnerships with foreign food companies; and (f) strategically reducing certain portions of our bulk trade business which yield relatively lower gross margins and longer turnover time.

Results of Operations for the Three Months Ended September 30, 2012 as Compared to the Three Months Ended September 30, 2011

	For The Three Months Ended
	September 30,
	2012			2011			Change			%
Net revenue	$	56,472,324		$	84,379,681		$	(27,907,357	)		-33.1	%
Cost of goods sold		(46,256,954	)		(71,643,030	)		25,386,076			-35.4	%
Gross Profit		10,215,370			12,736,651			(2,521,281	)		-19.8	%
Selling expenses		(3,795,367	)		(3,165,190	)		(630,177	)		19.9	%
General and administrative expenses		(2,311,508	)		(1,586,847	)		(724,661	)		45.7	%
Total Operating Expense		(6,106,875	)		(4,752,037	)		(1,354,838	)		28.5	%
Operating income		4,108,495			7,984,614			(3,876,119	)		-48.5	%
Interest income		7,242			4,387			2,855			65.1	%
Interest expense		(330,771	)		(269,725	)		(61,046	)		22.6	%
Non-operating income		(7,063	)		26,981			(34,044	)		-126.2	%
Total Other Expense		(330,592	)		(238,357	)		(92,235	)		38.7	%
Income from continuing operations before income taxes		3,777,903			7,746,257			(3,968,354	)		-51,2	%
Income taxes		(184,485	)		(541,464	)		356,979			-65.9	%
Income from continuing operations		3,593,418			7,204,793			(3,611,375	)		-50.1	%
Loss from discontinued operations, net of income taxes		—			681,712			(681,712	)		-100.0	%
Net income		3,593,418			7,886,505			(4,293,087	)		-54.4	%
Net loss attributable to noncontrolling interests		3,826			(245,405	)		249,231			-101.6	%
Net income attributable to Deyu Agriculture Corp.		3,597,244			7,641,100			(4,043,856	)		-52.9	%
Preferred stock dividends		(112,035	)		(83,404	)		(28,631	)		34.3	%
Net income available to common stockholders	$	3,485,209		$	7,557,696		$	(4,072,487	)		-53.9	%

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Net Revenue

Our net revenue for the three months ended September 30, 2012 was $56.5 million compared with $84.4 million for the three months ended September 30, 2011, a decrease of $27.9 million, or 33.1%. This was the combined result of a decrease of $27.3 million in corn sales, a decrease of $6.0 million in bulk trading sales and an increase of $5.4 million in grain sales. Sales derived from our Corn Division, Grain Division and Bulk Trading Division for the three months ended September 30, 2012 were $34.9 million, $17.4 million and $4.2 million, accounting for 61.8%, 30.9% and 7.4% of total net revenue, respectively.

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,
	2012							2011
	Volume (ton)		Net Revenue		% of total sales			Volume (ton)		Net Revenue		% of total sales			Changes			%
Corn Division		94,069	$	34,889,078		61.8	%		184,276	$	62,207,751		73.7	%	$	(27,318,673	)		-43.9	%
Grain Division		11,041		17,424,132		30.9	%		18,874		11,998,304		14.2	%		5,425,828			45.2	%
Bulk Trading Division		14,320		4,159,114		7.4	%		18,530		10,173,626		12.1	%		(6,014,512	)		-59.1	%
Total		119,430	$	56,472,324		100.0	%		221,680	$	84,379,681		100.0	%	$	(27,907,357	)		-33.1	%

Net revenue from our Corn Division for the three months ended September 30, 2012 was approximately $34.9 million, a decrease of $27.3 million, or approximately 43.9%, as compared to the three months ended September 30, 2011. This decrease was the combined result of a 10.1% increase in the average sales price due to inflation in China, partially offset by a decrease of 49.0% in sales volume due to the decrease in working capital supported by bank loans and bank notes. Being an agriculture company, our business especially the corn business is capital intensive. For example, we need to grant credit to customers for 2 to 3 months while we are required to make immediate cash payments to farmers and their agents for purchasing inventory before our accounts receivable can be collected from customers. For the three months ended September 30, 2011, we obtained an average balance of bank loans of $38.1 million, which supported the demand of working capital for a significant growth of corn sales revenue. But for the three months ended September 30, 2012, we reduced the bank loans to an average balance of $6.0 million (excluding the bank loans increased by the newly acquired Taizihu Group) after the repayment of the bank loans, which caused the decrease of sales revenue by the reduction of working capital.

Net revenue from our Grain Division for the three months ended September 30, 2012 was $17.4 million, an increase of $5.4 million, or 45.2%, as compared to the three months ended September 30, 2011. The increase is a combined result of an increase of $5.7 million of sales revenue added by the Taizihu Group offset by a decrease of $0.3 million or 2.5% of sales revenue from the sustaining Grain business. The sales decrease of our sustaining business was primarily due to the reduction of working capital supplemented by bank loans.

Net Revenue from our Bulk Trading Division for the three months ended September 30, 2012 was $4.2 million, a decrease of $6.0 million, or 59.1% as compared to the three months ended September 30, 2011. This decrease was mainly attributable to the strategic reduction of certain portions of our bulk trade business which yield relatively low margins or which have long credit terms and thus longer turnover time by shifting more financial resources to our Corn Division and Grain Division.

Cost of Goods Sold

Cost of goods sold mainly consisted of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. Our cost of goods sold decreased by $25.4 million or 35.4% from $71.6 million in the three months ended September 30, 2011 to $46.3 million for the three months ended September 30, 2012. This decrease was primarily attributable to the decrease of sales revenue.

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Gross Profit

The following table breaks down the gross profit and gross margin by division:

	For The Three Months Ended September 30,
	2012								2011
	Gross Profit		% of total Gross Profit			Margin			Gross Profit		% of total Gross Profit			Margin
Corn Division	$	5,365,120		52.5	%		15.4	%	$	9,228,450		72.5	%		14.8	%
Grain Division		4,602,730		45.1	%		26.4	%		3,048,994		23.9	%		25.4	%
Bulk Trading Division		247,520		2.4	%		6.0	%		459,207		3.6	%		4.5	%
Total		10,215,370		100.0	%		18.1	%	$	12,736,651		100.0	%		15.1	%

Our gross profit decreased by $2.5 million, or 19.8%, from $12.7 million for the three months ended September 30, 2011 to $10.2 million for the three months ended September 30, 2012. The decrease was a combined result of a decrease of $3.9 million in the Corn Division, an increase of $1.6 million in the Grain Division and a decrease of $0.2 million in the Bulk Trading Division. Our gross margin increased from 15.1% in the three months ended September 30, 2011 to 18.1% in the three months ended September 30, 2012. The increase in gross margin was the combined result of an increase of 54 basis points, 100 basis points and 144 basis points in gross margin in our Corn Division, Grain Division and Bulk Trading Division, respectively.

Gross profit in the Corn Division was $5.4 million, contributing to 52.5% of total gross profit for the three months ended September 30, 2012.  Gross margin for our Corn Division was 15.4% for the three months ended September 30, 2012, up by 54 basis points from 14.8% for the three months ended September 30, 2011. The slight increase in gross margin was mainly attributable to the fluctuation of selling prices of processed corn and purchase prices of raw corn.

Gross profit in the Grain Division was $4.6 million, contributing to 45.1% of total gross profit for the three months ended September 30, 2012. Gross margin for the Grain Division was 26.4% for the three months ended September 30, 2012, increased by 100 basis points from 25.4% for the three months ended September 30, 2011. The increase in gross margin was mainly attributable to the additions of new product portfolios containing mixed gross margins, which targeted a wider scope of end consumers.

Gross profit in the Bulk Trading Division was $0.2 million, contributing to 2.4% of total gross profit for the three months ended September 30, 2012. Gross margin for the Bulk Trading Division was 6.0% for the three months ended September 30 2012, relatively lower compared to our other Divisions, which was mainly due to its business nature of high turnover rate and relatively lower cost maintenance. Gross margin increased by 144 basis points for the three months ended September 30, 2012 from 4.5% for the three months ended September 30, 2011. The increase was mainly attributable to the trading of grain varieties with higher gross margins driven by anticipation of the demand and pricing trends in the market.

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Selling Expenses

Selling expenses increased by $0.6 million, or 19.9% to $3.8 million, for the three months ended September 30, 2012 as compared to $3.2 million for the three months ended September 30, 2011. This increase was primarily a combined result of an increase of $1.0 million in freight charges caused by the rising of railway freight charge and an increase of $0.2 million in advertisement expenses spent on brand promotion, partially offset by a decrease of $0.7 million in slotting fees for initial product display in supermarkets.

General and Administrative Expenses

General and administrative expenses increased by $0.7 million to $2.3 million in the three months ended September 30, 2012, or 45.7%, compared to $1.6 million for the three months ended September 30, 2011. This increase was mainly attributable to increased expenses added by the Taizihu Group, increased depreciation and amortization caused by newly-acquired buildings, which commenced depreciation in January 2012, as well as increased payroll and other expenses caused by inflation.

Interest Expense

Interest expense for the three months ended September 30, 2012 was $330,771 compared to $269,725 for the three months ended September 30, 2011, an increase of $61,046, or 22.6%. This increase was mainly due to the increase in interest rate and balance of interest-bearing bank loans. Decrease in the average loan balance of $38.1 million for the three months ended September 30, 2011 to $6.0 million for the three months ended September 30, 2012 (excluding the bank loans increased as a result of consolidating the newly acquired Taizihu Group) was primarily due to a decrease in non-interest-bearing bank acceptance notes, which had no effect to interest expense.

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, namely Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption.  All of our other subsidiaries are subject to the 25% EIT rate. 

Income tax expenses were $192,225 for the three months ended September 30, 2012, which was derived from Taizihu Group. Income before income taxes incurred at Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang are subject to the EIT exemption. Income tax expenses for the current quarter were mainly attributable to the Taizihu Group, which was subject to the 25% EIT rate. We recorded income tax expenses of $541,464 for the three months ended September 30, 2011, mainly for deferred income tax expenses primarily derived from Detian Yu for an additional valuation allowance for deferred tax assets generated in previous years due to uncertainty of realization of net operating losses carryover.

Income from discontinued operations, net of income taxes

Income from discontinued operations, net of income taxes for the three months ended September 30, 2011 was $0.68 million, derived from the VIE Group over which our control was terminated on December 20, 2011. The VIE Group was no longer within the consolidation scope after the control termination.

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Net Income

As a result of the above, we had net income available to common stockholders of $3.5 million for the three months ended September 30, 2012 compared to a net income of $7.6 million for the three months ended September 30, 2011, a decrease of $4.1 million, or 53.9%.

Results of Operations for the Nine Months Ended September 30, 2012 as Compared to the Nine Months Ended September 30, 2011

	For The Nine Months Ended
	September 30,
	2012			2011			Change			%
Net revenue	$	175,048,803		$	170,482,201		$	4,566,602			2.7	%
Cost of goods sold		(141,911,226	)		(140,985,703	)		(925,523	)		0.7	%
Gross Profit		33,137,577			29,496,498			3,641,079			12.3	%
Selling expenses		(11,926,786	)		(8,188,037	)		(3,738,749	)		45.7	%
General and administrative expenses		(6,276,679	)		(4,398,667	)		(1,878,012	)		42.7	%
Total Operating Expense		(18,203,465	)		(12,586,704	)		(5,616,761	)		44.6	%
Operating income		14,934,112			16,909,794			(1,975,682	)		-11.7	%
Interest income		24,918			30,848			(5,930	)		-19.2	%
Interest expense		(1,260,810	)		(481,549	)		(779,261	)		161.8	%
Non-operating income		569,587			36,273			533,314			1470.3	%
Total Other Expense		(666,305	)		(414,428	)		(251,877	)		60.8	%
Income from continuing operations before income taxes		14,267,807			16,495,366			(2,227,559	)		-13.5	%
Income taxes		(1,475,181	)		(28,959	)		(1,446,222	)		4994.0	%
Income from continuing operations		12,792,626			16,466,407			(3,673,781	)		-22.3	%
Loss from discontinued operations, net of income taxes		—			(2,886,430	)		2,886,430			-100.0	%
Net income		12,792,626			13,579,977			(787,351	)		-5.8	%
Net loss attributable to noncontrolling interests		44,695			740,308			(695,613	)		-94.0	%
Net income attributable to Deyu Agriculture Corp.		12,837,321			14,320,285			(1,482,964	)		-10.4	%
Preferred stock dividends		(332,087	)		(313,550	)		(18,537	)		5.9	%
Net income available to common stockholders	$	12,505,234		$	14,006,735		$	(1,501,501	)		-10.7	%

Net Revenue

Our net revenue for the nine months ended September 30, 2012 was $175.0 million compared with $170.5 million for the nine months ended September 30, 2011, an increase of $4.6 million, or 2.7%. This was the combined result of an increase of $20.3 million of grain sales, offset by a decrease of $13.8 million of bulk trading sales and a decrease of $1.9 million of corn sales. Sales derived from our Corn Division, Grain Division and Bulk Trading Division for the nine months ended September 30, 2012 were $115.5 million, $46.7 million and $12.9 million respectively, accounting for 66.0%, 26.7% and 7.4% of total net revenue, respectively.

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,
	2012							2011
	Volume  (ton)		Net Revenue		% of Total sales			Volume  (ton)		Net Revenue		% of Total sales			Changes			%
Corn Division		315,506	$	115,453,950		66.0	%		360,477	$	117,386,510		68.9	%	$	(1,932,560	)		-1.6	%
Grain Division		29,589		46,693,753		26.7	%		36,430		26,406,846		15.5	%		20,286,907			76.8	%
Bulk Trading Division		37,995		12,901,100		7.4	%		46,960		26,688,845		15.7	%		(13,787,745	)		-51.7	%
Total		383,090	$	175,048,803		100.0	%		443,867	$	170,482,201		100.0	%	$	4,566,602			2.7	%

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Net revenue from our Corn Division for the nine months ended September 30, 2012 was approximately $115.5 million, a decrease of $1.9 million, or approximately 1.6%, as compared to $117.4 million for the nine months ended September 30, 2011. This decrease was the combined result of an increase of an average sales price of 12.4% due to inflation in China and a decrease of sales volume of 12.5%, which is mainly attributable to a decrease of working capital supported by bank loans and bank notes from average balance of $22.1 million for the nine months ended September 30, 2011 to $10.4 million (excluding the bank loans increased by the newly acquired Taizihu Group), and offset by the double increase of storage and turnover capacity by the new logistics center with the five drying cylinders and six warehouses put into use in June 2011.

Net revenue from our Grain Division for the nine months ended September 30, 2012 was $46.7 million, an increase of $20.3 million, or 76.8%, as compared to $26.4 million for the nine months ended September 30, 2011. The increase consisted of an increase of $4.5 million or 17.0% attributable to our sustaining Grain Division sales and $15.8 million of sales revenue added by the Taizihu Group acquired in February 2012. The sustaining grain sales increase was primarily due to growth of our market share through the expansion of our sales network and increasing brand awareness among customers

Revenue from our Bulk Trading Division for the nine months ended September 30, 2012 was $ 12.9 million, a decrease of $13.8 million, or 51.7%, as compared to the nine months ended September 30, 2011. This decrease was mainly attributable to the strategic reduction of certain portions of our bulk trade business which yield relatively low margins or which have long credit terms and thus longer turnover time by shifting more financial resources to our Corn Division and Grain Division.

Cost of Goods Sold

Cost of goods sold mainly consisted of cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. Our cost of goods sold increased by $0.9 million or 0,7% from $141.0 million in the nine months ended September 30, 2011 to $141.9 million for the nine months ended September 30, 2012. This increase was primarily attributable to the increase of sales revenue.

Gross Profit

The following table breaks down the gross profit and gross margin by division:

	For The Nine Months Ended September 30,
	2012								2011
	Gross Profit		% of total Gross Profit			Margin			Gross Profit		% of total Gross Profit			Margin
Corn Division	$	18,291,142		55.2	%		15.8	%	$	20,153,843		68.3	%		17.2	%
Grain Division		13,722,398		41.4	%		29.4	%		7,420,210		25.2	%		28.1	%
Bulk Trading Division		1,124,037		3.4	%		8.7	%		1,922,445		6.5	%		7.2	%
Total	$	33,137,577		100.0	%		18.9	%	$	29,496,498		100.0	%		17.3	%

Our gross profit increased by $3.6 million, or 12.3%, from $29.5 million for the nine months ended September 30, 2011 to $33.1 million for the nine months ended September 30, 2012. The increase was a combined result of a decrease of $1.9 million in the Corn Division, an increase of $6.3 million in the Grain Division, and a decrease of $0.8 million in the Bulk Trading Division. Our gross margin increased from 17.3% for the nine months ended September 30, 2011 to 18.9% in the nine months ended September 30, 2012. The increase in gross margin was the combined result of an increase of 129 basis points in gross margin in our Grain Division and an increase of 151 basis points in gross margin in our Bulk Trading Division, partially offset by a decrease of 133 basis points in gross margin in our Corn Division.

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Gross profit in the Corn Division was $18.3 million, contributing to 55.2% of total gross profit for the nine months ended September 30, 2012.  Gross margin for our Corn Division was 15.8% for the nine months ended September 30, 2012, down by 133 basis points from 17.2% for the nine months ended September 30, 2011. The decrease in gross margin was mainly attributable to the continuous increase in the purchase price of raw corn and supplemental procurement from suppliers. The purchase price of raw corn increased by approximately 14% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, however the selling price did not increase consistently. In addition, due to our rapid growth in corn sales, we supplemented the supply of raw materials from farmers by purchasing from other corn traders whose purchase prices were usually higher which negatively affected the gross margin of the Corn Division.

Gross profit in the Grain Division was $13.7 million, contributing to 41.4% of total gross profit for the nine months ended September 30, 2012. Gross margin for the Grain Division was 29.4% for the nine months ended September 30, 2012, increased by 129 basis points from 28.1% for the nine months ended September 30, 2011. The increase in gross margin was mainly attributable to the additions of new product portfolios containing mixed gross margins, which targeted a wider scope of end consumers.

Gross profit in the Bulk Trading Division was $1.1 million, contributing to 3.4% of total gross profit for the nine months ended September 30, 2012. Gross margin for the Bulk Trading Division was 8.7% for the nine months ended September 30 2012, relatively lower compared to our other Divisions, which was mainly due to its business nature of high turnover rate and relatively lower cost maintenance. Gross margin increased by 151 basis points for the nine months ended September 30, 2012 from 7.2% for the nine months ended September 30, 2011. The increase was mainly attributable to the trading of grain varieties with higher gross margins driven by anticipation of the demand and pricing trends in the market.

Selling Expenses

Selling expenses increased by $3.7 million, or 45.7% to $11.9 million, for the nine months ended September 30, 2012 as compared to $8.2 million for the nine months ended September 30, 2011.  This increase was primarily a combined result of an increase of $3.8 million in freight charges caused by rising freight railway costs, an increase of $1.0 million in subsidies to farmers and an increase of $1.0 million in advertisement expenses spent on brand promotion, offset by a decrease of $1.7 million of slotting fees for initial product display in supermarkets.

General and Administrative Expenses

General and administrative expenses increased by $1.9 million to $6.3 million in the nine months ended September 30, 2012, or 42.7%, compared to $4.4 million for the nine months ended September 30, 2011. This increase was mainly attributable to increased expenses added by the Taizihu Group, as well as increased depreciation and amortization caused by newly-acquired buildings, which commenced depreciation from January 2012, as well as increased payroll and other expenses caused by inflation. 

Interest Expense

Interest expense for the nine months ended September 30, 2012 was $1,260,810 compared to interest expense of $481,549 for the nine months ended September 30, 2011, an increase of $779,261, or 161.8%. This increase was mainly due to the increase in interest rate and balance of interest-bearing bank loans. The decrease in the average loan balance of $22.1 million for the nine months ended September 30, 2011 to $10.4 million for the nine months ended September 30, 2012 (excluding the bank loans increased as a result of consolidating the newly acquired Taizihu Group) was primarily due to decrease in non-interest-bearing bank acceptance notes, which had no effect to interest expense.

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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, namely Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption.  All of our other subsidiaries are subject to the 25% EIT rate. 

Income tax expenses were $1,482,921 for the nine months ended September 30, 2012, which consisted of $686,282 of current income tax expenses derived from Taizihu Group and $788,899 of deferred income tax expenses primarily derived from Detian Yu for additional valuation allowance for deferred tax assets generated in previous years due to uncertainty of realization of net operating losses carryover. Income before income taxes incurred at Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang are subject to the EIT exemption. Income tax expenses for the current quarter were mainly attributable to the Taizihu Group, which was subject to the 25% EIT rate. We recorded income tax benefit of $28,959 for the three months ended September 30, 2011 mainly because of the tax credits derived from net operating losses from taxable entities that can be carried forward for next five years according to the PRC tax law.

Loss from discontinued operations, net of income taxes

Loss from discontinued operations, net of income taxes for the nine months ended September 30, 2011 was $2.9 million, derived from the VIE Group over which our control was terminated on December 20, 2011. The VIE Group was no longer within the consolidation scope after the control termination.

Net Income

As a result of the above, we had net income available to common stockholders of $12.5 million for the nine months ended September 30, 2012 compared to a net income of $14.0 million for the nine months ended September 30, 2011, a decrease of $1.5 million, or 10.7%.

Liquidity and Capital Resources

The following summarizes the key components of our cash flows for the nine months ended September 30, 2012 and 2011:

	For the Nine Months Ended September 30,
	2012			2011
Net cash provided by (used in) operating activities of continuing operations	$	17,380,794		$	(10,454,052	)
Net cash used in investing activities of continuing operations		(5,584,844	)		(567,501	)
Net cash (used in) provided by financing activities of continuing operations		(8,620,344	)		30,001,306
Effect of exchange rate change on cash and cash equivalents of continuing operations		45,899			531,382
Net (decrease) increase in cash and cash equivalents of continuing operations	$	3,221,505		$	19,511,135

For the nine months ended September 30, 2012, net cash provided by operating activities of continuing operations totaled approximately $17.4 million, while net cash used in operating activities of continuing operations was $10.5 million for the nine months ended September 30, 2011. The net cash flow from operating activities shifted from outflow to inflow, and was primarily attributable to the reduction of cash used to expand business. Being an agriculture company, it is necessary for us to pay out a large amount of cash along with rapid sales growth. This is due to the fact that we need to grant credit for about 2 to 3 months to customers and at the same time we are required to make immediate cash payments to farmers and their agents for purchasing inventory before our accounts receivable can be collected from customers. In contrast, we believe we can collect cash while our business grows stably. We experienced rapid growth by using cash in increasing accounts receivable of $16.6 million and increasing inventory of $10.0 million and for the nine months ended September 30, 2011, as compared to the usage of an immaterial amount of cash in accumulating current assets for stable business development for the nine months ended September 30, 2012.

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For the nine months ended September 30, 2012, net cash used in investing activities of continuing operations was approximately $5.6 million, an increase of approximately $5.0 million from approximately $0.6 million for the nine months ended September 30, 2011. The increase was mainly due to the payment of $5.2 million for the acquisition of the Taizihu Group.

For nine months ended September 30, 2012, net cash used in financing activities of continuing operations was approximately $8.6 million, while net cash provided by financing activities of continuing operations for the nine months ended September 30, 2011 was $30.0 million. We repaid $9.7 million of a bank loan for the nine months ended September 30, 2012, while we received net proceeds of $37.2 million from bank loans and bank acceptance notes for the nine months ended September 30, 2011.

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 a change in 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.

Contractual Obligations

The following table presents the Company’s material contractual obligations as of September 30, 2012:

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Bank Loans	$	11,196,379	$	11,196,379	$	—	$	—	$	—
Operating Lease Obligations		1,482,090		172,098		273,113		174,388		862,491
	$	12,678,469	$	11,368,477	$	273,113	$	174,388	$	862,491

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 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, the Company’s Board of Directors approved the Company’s 2010 Share Incentive 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 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 vested 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.

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On March 8, 2012, the Company’s Board of Directors allocated to and authorized for use the maximum number of shares allowable pursuant to the terms of the Plan and granted 420,000 options under the Plan, of which 264,000 were new options and 156,000 were re-granted after such options were forfeited by employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the newly granted options vest as follows:

50% of the options granted will vest six (6) months after the date of the grant; and

50% of the options granted will vest twelve (12) months after the date of the grant.

On November 5, 2011, we filed a Registration Statement with the SEC on Form S-8 covering up to 1,000,000 shares underlying options which may be granted under the Plan. As of September 30, 2012, none of the options granted 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”.

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 U.S. 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 initial accounting policies to be the most important in understanding our operating results and financial condition:

Use of estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 banks 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 a trust account. The use of these funds required 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.

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As of September 30, 2012, $263,284 of cash was restricted as the pledge for $2,124,174 (RMB 13,350,000) and $262,538 (RMB 1,650,000) of bank loans obtained from China Merchants Bank, Dongzhimen Branch on November 30, 2011 and January 11, 2012, respectively; $477,342 of cash was restricted as pledge for bank loan of $1,272,912(RMB8,000,000) obtained from Dah Sing Bank (China) Co. Ltd. on July 18, 2012; $241,967 of cash was restricted as pledges for bank loans of $795,570 (RMB 5,000,000), $1,432,026 (RMB 9,000,000) and $2,386,712 (RMB 15, 000,000) obtained from Agriculture Development Bank of China on November 3, 2011, September 18, 2012 and August 14, 2012, respectively.

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, 2012, the balance of accounts receivable greater than six months was not material. As of December 31, 2011, 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 a moving-average basis.  Costs of inventories include purchase and related costs incurred in delivering 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 a valuation allowance is required.  As of September 30, 2012 and December 31, 2011, slow moving or obsolete inventory identified by management was not material.

Assets held for sales

A long-lived asset to be sold shall be classified as held for sale in the period in which all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset; (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph ASC 360-10-45-11. The term probable refers to a future sale that is likely to occur; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset. A market price that is reasonable in relation to fair value indicates that the asset is available for immediate sale, whereas a market price in excess of fair value indicates that the asset is not available for immediate sale; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group.

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.

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 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		10-30
Office equipment		5
Machinery and equipment		5-10
Furniture & fixtures		5

Construction-in-progress

Construction-in-progress consists of amounts expended for a new factory park construction, and the cost of the portion of the land use right that the new factory park occupied. Construction-in-progress is not depreciated until such time as the assets are completed and put into service.  Once factory park 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.

Intangible assets

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, 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

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.   For the nine months ended September 30, 2012 and 2011, sales discounts from continuing operations were $669,831 and $70,620, respectively.

We offer a right of exchange on our grain products sold through our relationships 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, 2012 and 2011, returns of our products were not material. 

Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.   Advertising costs from continuing operations for the nine months ended September 30, 2012 and 2011 were $1,279,682 and $325,698, respectively.

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Research and development

The Company expenses its research and development costs as incurred.  Research and development costs from continuing operations for the nine months ended September 30, 2012 and 2011 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.

  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.

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.

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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.

Discontinued operations

Certain prior period amounts have been reclassified in these consolidated financial statements to conform to the 2011 presentation of discontinued operations of the VIE Group for the deep processed grain business. See Notes 1 and 3 for additional information.

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 year ended December 31, 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 impairment test 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 year ended December 31, 2011.

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In December 2011, FASB issued an Update (ASU No. 2011-10) to Property, Plant, and Equipment (ASC Topic 360). Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

In December 2011, FASB issued an Update (ASU No. 2011-11) to Balance Sheet (ASC Topic 210) regarding disclosures about offsetting assets and liabilities. Pursuant to this Update, entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

In July 2012, FASB issued an amendment (ASU No. 2012-02) to Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this Update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance had no impact on our consolidated financial position or results of operations.

Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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, 2012, 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, 2012, 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.

On February 12, 2012, the Company’s former Chief Financial Officer alleged that the Company may have violated certain state and federal laws and regulations and upon receipt of such allegations, the Company's Audit Committee retained counsel to conduct an inquiry into such allegations. On March 27, 2012, the Company received a letter asserting a claim of wrongful termination in violation of public policy wherein the former Chief Financial Officer seeks payment of $250,000 plus the issuance of 60,000 shares of common stock in settlement for the claimed damages therein. Subsequently, on July 23, 2012, the Company was provided a copy of a complaint filed in the Superior Court of California, County of Orange, repeating the same allegations contained in the March 27, 2012 letter. In response, the Company filed a demurrer to the Complaint on September 10, 2012 asserting that the Complaint failed to state a valid claim. Plaintiff then filed and served a First Amended Complaint, and the Company again filed a demurrer to the First Amended Complaint on November 2, 2012. The hearing on the demurrer is scheduled for December 20, 2012.The Company believes that such allegations and claims are without merit and intends to vigorously defend such allegations and claims. Because the inquiry is in its initial stages, the Company is not currently able to predict the probability of a favorable or unfavorable outcome, or the amount of any possible loss in the event of an unfavorable outcome. Consequently, no material provision or liability has been recorded for such allegations and claims as of September 30, 2012.

Except as set forth above, 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.

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

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)
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)

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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)
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)

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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)
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**
99.1	Audit Committee Charter adopted August 19, 2010 (6)
101. INS	XBRL Instance Document*
101. CAL	XBRL Taxonomy Extension Calculation Link base Document*
101. DEF	XBRL Taxonomy Extension Definition Link base Document*
101. LAB	XBRL Taxonomy Label Link base Document*
101. PRE	XBRL Extension Presentation Link base Document*
101. SCH	XBRL Taxonomy Extension Scheme Document*

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(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 30, 2012.

*   Filed herewith.

** Furnished, not 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 13, 2012
Jianming Hao
/s/ Amy He	Chief Financial Officer, Principal Financial and Accounting Officer	November 13, 2012

Amy He

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