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

OVERVIEW

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

Until the sale of Jilin Songyuan City ErMaPao Green Rice Ltd. ("ErMaPao"), completed in October 2008, the Company was mainly engaged in the business of the production, processing, sale, trading and distribution of agricultural products. Our products had been sold only within the People's Republic of China. As a result of the sale of ErMaPao, the Company no longer grows or produces rice. Rather, it is primarily engaged in the acquisition and distribution of agricultural products.

The Company reports its operations under three segments. The first of these focuses on grain processing and trading. There are two operational entities in this segment. The first is Ankang Agriculture (Dalian) Company Limited, which is 100% owned by Hong Kong Ankang Investment Co., Ltd. ("Ankang"), which is 100% owned by COA. The other is Dalian Huiming, of which 60% is indirectly owned by COA through another wholly owned subsidiary. The second segment reflects our prior involvement in rice production through ErMaPao, which operates in Songyuan City of Jilin Province, abutting the Nen River in the Songyuan Plains, where it produces "green" and "organic" rice.

The third segment is our wine production segment. There are three entities in this segment. The first one is Bellisimo vineyard, a 153-acre vineyard located in Sonoma County, California, which is 100% owned by Hong Kong Ankang Investment Co., Ltd., which is 100% owned by COA. The second one is Far East Wine Holding Group Ltd (BVI), which is 100% owned by CNOA. The third one is Polisi Ice Wine Ltd. Co., which is 60% owned by Ankang Agriculture (Dalian) Co., Ltd, which is 100% owned by COA.

In December 2007, the Company entered into a letter of intent to acquire the Dalian Huiming Industry Limited ("Dalian Huiming"). The Company subsequently purchased 60% of the stock of Dalian Huiming for $10,600,000. Dalian Huiming is engaged in grain procurement, trading, wholesale sales, and food delivery logistic services. It focuses on soybeans, corn, and cereal crops, which are major products from the northeastern part of China. Sales to consumers are made in regions including the provinces of Liaoning, Jilin, Heilongjiang, Sichuan, Fujian, and the cities of Beijing and Shanghai.

On September 30, 2008, CNOA entered into a Stock Transfer Agreement with Bothven Investments Limited, pursuant to which the Company sold to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited for US $8,700,000. As noted above, the sale was completed in October 2008. The amount due from Bothven, $8,700,000, is to be paid in three installments, 30% in July 2009, 30% in September 2009 and 40% in October 2009.

On June 10, 2008, the Company established a new subsidiary, Far East Wine Holding Group Limited. This subsidiary represents the Company's initiative to import and distribute California wines within China.

RESULTS OF OPERATIONS

The following tables present certain information from the consolidated statement of operations of China Organic Agriculture, Inc. for fiscal years ended December 31, 2008 and 2007.

------------------------------------- ---------------------- ---------------------- ----------------
                                         For the year ended     For the year ended     Percentage
                                           December 31,2008       December 31,2007     Change
------------------------------------- ---------------------- ---------------------- ----------------
Net Sales                                      $112,695,908            $44,500,003     153.25%
------------------------------------- ---------------------- ---------------------- ----------------
Cost of Net Sales                               $87,329,141            $29,382,399     197.22%
------------------------------------- ---------------------- ---------------------- ----------------
Gross Profit                                    $25,366,767            $15,117,604     67.80%
------------------------------------- ---------------------- ---------------------- ----------------
General and Administrative Expense               $1,755,344             $1,556,350     12.79%
------------------------------------- ---------------------- ---------------------- ----------------
Income from operations                          $23,611,423            $13,561,254     74.11%
------------------------------------- ---------------------- ---------------------- ----------------
Gain on debt conversion                          $3,447,556                     --     --
------------------------------------- ---------------------- ---------------------- ----------------
Other income (expense)                           $(104,592)                $70,295     -248.79%
------------------------------------- ---------------------- ---------------------- ----------------
Interest income (expenses)                      $ (541,972)               $(1,631)     33129.43%
------------------------------------- ---------------------- ---------------------- ----------------
Provision for income taxes                    $ (6,975,212)                     --     --
------------------------------------- ---------------------- ---------------------- ----------------
Net Income                                      $20,476,824            $13,492,590     51.76%
------------------------------------- ---------------------- ---------------------- ----------------
Basic weighted average shares                    58,515,437             46,662,749
Diluted weighted average shares                  59,764,345             46,730,345
Total Basic Earnings Per Shares                       $0.35                  $0.29
Total Diluted Earnings Per Shares                     $0.34                  $0.29

Business Segment Information

Set forth below is information relating to the financial performance of the
Company's three business segments in 2008 and 2007. Because the sales of ErMaPao
decreased significantly in 2008 and expenses related to such sales were borne by
our agricultural products segment, in the table below these sales and expenses
have been included with those of our agricultural products segment.

                                                   Year ended December 31, 2008
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
                                 Agricultural products     Rice production and     Wine production       Others            Total
                                                               processing
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
Sales, net                                 112,695,908              -                         -                  -      112,695,908
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
Cost of sales                             (87,329,141)              -                         -                  -      (87,329,141)
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
Gross Profit                                25,366,767              -                         -                  -       25,366,767
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
Other operation income                               -              -                   500,000                  -          500,000
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------
Income(loss) from operations                29,034,952              -                 (954,232)        (1,168,292)       26,912,428
------------------------------ ------------------------- ----------------------- ------------------- --------------- ---------------

                                                   Year ended December 31, 2007
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------
                                 Agricultural products     Rice production and     Wine production       Others            Total
                                                               processing
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------
Sales, net                                -                     44,500,003               -                  -            44,500,003
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------
Cost of sales                             -                   (29,382,399)               -                  -           (29,382,399)
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------
Gross Profit                              -                     15,117,604               -                  -            15,117,604
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------
Income from operations                    -                     13,561,254               -                  -            13,561,254
------------------------------ ------------------------- ----------------------- -------------------- ------------- ----------------

Sales for the twelve months ending December 31, 2008 totaled $112,695,908 compared to $44,500,003 for the twelve months ending December 31, 2007. This increase of $68,195,905, or approximately 153%, is attributable to the Company's change of its operational strategy. During 2008, nearly all of the Company's sales were generated by the Company's Agricultural Products Trading segment, reflecting the new initiative of purchasing rice from other rice producers and then reselling this rice to retailers and wholesalers. As the Agricultural Products Trading departments were established in 2008, there were no comparable sales in 2007.

The ErMaPao segment showed a significant decrease in sales of both green and organic rice in 2008, which together declined to $4,536,142 in 2008 as compared to $44,500,003 in fiscal year 2007. This decline reflects the shift of the Company's primary focus to trading opportunities in the agricultural industry, increased competition from other rice producers which resulted in price declines and the fact that the Company only recorded revenue from ErMaPao until September 30th 2008, when it was sold. There was rental income from leasing the properties on Bellisimo Vineyard of $85,666 during fiscal year 2008. As the Bellisimo Vineyard was acquired in February of 2008, there are no comparable figures for 2007. The Company's gross profit for the twelve months ending December 31, 2008 was $25,366,767 (or 22.5% of revenue) compared to $15,117,604 (or 66% of revenue) for the twelve months ending December 31, 2007. The increase in the gross profit in the 2008 period was due to the higher level of sales. The decrease in the gross profit margin is due to the lower profit margin on Ankang's and Dalian Huiming's trading activity, which did not exist in the 2007 period.

ErMaPao's gross profit for the twelve months ending December 31, 2008 was $1,577,893 (or 35% of revenue) compared to $15,117,604 (or 34% of revenue) for the twelve months ending December 31, 2007. The decrease in the gross profit reflects the substantial reduction in ErMaPao's sales.

Selling, General and Administrative Expense

Selling, general and administrative expense for the twelve months ending December 31, 2008 totaled $1,755,344 or approximately 1.6% of sales, compared to $1,556,350 or approximately 3.5% of sales for the twelve months ending December 31, 2007. This $198,994 increase is largely due to the amortization of warrant expense recorded in fiscal year 2008 of $280,100 as well as increases in professional fees and expenses for the parent company and Vineyard expenses.

Interest Expense

Interest expenses were $541,972 for fiscal year 2008. These expenses result from the debt incurred to finance the February 2008 acquisition of the Bellisimo Vineyard, which totals about $14.7 million.

Provision for Income Taxes

The Company is governed by the income tax laws of the People's Republic of China ("PRC"). The Enterprise Income Tax to which it is subject to is now at a statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this tax because of its participation in both agricultural production and in the PRC Urban Labor and Employment Services Program designed to encourage companies to increase their employment of target groups. Thus it did not record an expense for income taxes nor did it paid income taxes in 2007.

According to China's new tax policy, the Company no longer benefits from tax exemption. For the twelve months ending December 31, 2008, the Company accrued $6,975,212 in income taxes. The effective tax rates represented by these accruals are significantly higher than the statutory rate as expenses incurred in the US, including those pertaining to the Bellisimo Vineyard, are not deductible for PRC tax purposes.

Net Income (Loss)

Net income was $20,476,824 for the twelve months ending December 31, 2008, compared to net income for $13,492,590 for the twelve months ending December 31, 2007. This increase was due to the rapid expansion in sales of our Ankang segment and Dalian Huiming segment and quarter three and four being the harvest period. The increase in net income reflects the increase of sales revenue and relatively lower increase on selling, general and administrative costs.

Liquidity and Capital Resources

Cash has historically been generated from operations. Operational and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. As of December 31, 2008, cash and cash equivalents were $7,338,817, current assets totaled $54,402,799, and current liabilities were $13,384,016. Working capital at December 31, 2008 was $41,018,783, as compared to 14,241,857 as of December 31, 2007. The components of the $2,358,976 decrease of cash and cash equivalents from $9,697,793 as of December 31, 2007 to $2,620,021as of December 31, 2008 are reflected below.

Cash Flow

NINE MONTHS ENDED SEPTEMBER 30
                                                                                        2008                     2007
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities                                        $8,633,461               $9,559,590
Net cash used by investing activities                                                   ($25,324,623)            ($852,041)
Net cash provided by financing activities                                               $13,350,038              $364,865
Effects of exchange rates on cash                                                       $982,148                 $316,061
====================================================================================================================================
Net change in cash and cash equivalents                                                 ($2,358,976)             $9,381,732

Net Cash Used by Operating Activities

During the twelve months ended December 31, 2008, we had positive cash flow from operating activities of $8,633,461, primarily attributable to the net income provided by the operation of Dalian Ankang and Daling Huiming. Our cash position also benefitted from an increase in accounts payable of approximately $4,900,000. These positive cash flow factors were partially offset by an increase in accounts receivable of approximately $24,500,000, the existence of consideration receivable of $8,700,000, deposits made for acquisitions of approximately $2,600,000 and advances and loans of approximately $1,800,000.

Net Cash Used in Investing Activities and Financing Activities

The Company used $25,324,623 largely to purchase the Bellisimo Vineyard during the first quarter of 2008, and 60% of Dalian Huiming in the fourth quarter of 2008. In connection with the acquisition of the assets of Bellisimo Vineyard, which amount to $14.6 million, we incurred two debt obligations, the first in the amount of $8,515,000 for which we granted the lender a first lien on the Vineyard's assets. This debt bears interest at an initial rate of 7.7% per annum and is repayable over a period of 20 years. The second obligation is a note payable from a related party (a shareholder) of $6,216,000, which bears 4% annual interest over its five year term, with both principal and interest payable in February, 2013. The Company used approximately $10.6million to purchase the new subsidiary Dalian Huiming.

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