UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 FORM
10-K
 
 x
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the fiscal year ended
      December 31, 2008o
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For the transition period
      from  ___________ to
_____________
 
 Commission
File No. 001-33674
 
 AgFeed Industries,
Inc.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Nevada
                
                20-2597168(State
      or Other Jurisdiction
                  of Incorporation
      or Organization)
                
                (I.R.S.
      Employer Identification No.)
 
 Rm.
A1001-1002, Tower 16
 Hengmao
Int'l Center
 333 S.
Guangchang Rd.
 Nanchang, Jiangxi Province,
PRC 330003
 (Address
of Principal Executive Offices, including zip code)
 
 011-86-0791-6669093
 (Registrant’s
Telephone Number, Including Area Code)
 
 Securities
registered under Section 12(b) of the Exchange Act:
 Common
      Stock, $0.001 par value
                
                The
      Nasdaq Stock Market LLC(Title
      of each class)
                
                (Name
      of each exchange on which
registered)
 
 Securities
registered under Section 12(g) of the Exchange Act:  None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  o          No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o           No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes xNo o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions
of  “large accelerated filer," "accelerated filer” and "smaller reporting
company" in Rule 12b-2 of the Exchange Act (check one):
  Large
      accelerated filer o
              
              Accelerated
      filer xNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting company  o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o    No x
 
 On March
10, 2009, 38,300,436 shares of the registrant’s common stock were
outstanding.
 
 The
aggregate market value of the voting stock held by non-affiliates as of June 30,
2008 was approximately $280,527,067.
 
 Documents Incorporated by
Reference: Portions of the registrant’s proxy statement for its 2009
annual meeting of shareholders, which the registrant expects to file with the
Securities and Exchange Commission ("SEC") within 120 days after December 31,
2008 are incorporated by reference into Part III of this annual
report.
  
  TABLE
OF CONTENTS
 PagePART
      IItem
      1.
                  Business
                  1Item
      1A.
                  Risk
      Factors
                  17Item
      1B.
                  Unresolved
      Staff Comments.
                  30Item
      2.
                  Properties
                  30Item
      3.
                  Legal
      Proceedings
                  34Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  34PART
      IIItem
      5.
                  Market
      for Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
                  35Item
      6.
                  Selected
      Financial Data
                  38Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  39Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  48Item
      8.
                  Financial
      Statements and Supplementary Data
                  49Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  49Item
      9A.
                  Controls
      and Procedures
                  49Item
      9B.
                  Other
      Information
                  53PART
      IIIItem
      10.
                  Directors
      and Executive Officers of the Registrant
                  54Item
      11.
                  Executive
      Compensation
                  54Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
                  54Item
      13.
                  Certain
      Relationships and Related Transactions
                  54Item
      14.
                  Principal
      Accountant Fees and Services
                  54PART IVItem
      15.
                  Exhibits
      and Financial Statement Schedules
                  54SIGNATURESEXHIBITS
  
  The
statements contained in this annual report that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial condition, results
of operations and business, which can be identified by the use of
forward-looking terminology, such as “estimates,” “projects,” “plans,”
“believes,” “expects,” “anticipates,” “intends,” or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties.  Management wishes to caution the reader of the
forward-looking statements that such statements, which are contained in this
annual report, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, economic, competitive, regulatory, technological, key employee,
and general business factors affecting our operations, markets, growth,
services, products, licenses and other factors discussed in our other filings
with the Securities and Exchange Commission ("SEC"), and that these statements
are only estimates or predictions.  No assurances can be given
regarding the achievement of future results, as actual results may differ
materially as a result of risks facing us, and actual events may differ from the
assumptions underlying the statements that have been made regarding anticipated
events.
  These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements. Some of these
risks are described in “Risk Factors” in Item 1A of this annual
report.
  These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward-looking statements made in connection with
this annual report that are attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary
statements.  Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any
obligation to review or confirm analysts’ expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this document or to reflect the
occurrence of unanticipated events. Further, the information about our
intentions contained in this document is a statement of our intention as of the
date of this document and is based upon, among other things, the existing
regulatory environment, industry conditions, market conditions and prices, the
economy in general and our assumptions as of such date. We may change our
intentions, at any time and without notice, based upon any changes in such
factors, in our assumptions or otherwise.
  PART
I
  In this
Annual Report on Form 10-K, we will refer to AgFeed Industries, Inc., a Nevada
corporation, as "AgFeed," "our company," "we," "us," and "our."
  Item
1.  Business.
  OVERVIEW
  We are a
Nevada corporation engaged in the feed and commercial hog producing business in
the People's Republic of China ("China" or the “PRC”) through our operating
subsidiaries. Our principal executive offices are located atRm. A1001-1002, Tower
16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, PRC
330003. Our telephone number is +86-0791-6669099. Our website is http://www.agfeedinc.com.
  Our feed
business consists of the research and development, manufacture, marketing and
sale of premix feed and blended feed for use in the domestic animal husbandry
markets, primarily for hog production in China.  Premix is an animal
feed additive that is broadly used in commercial animal production worldwide.
The use of premix feed can significantly reduce an animal’s growth cycle,
enabling the animal to reach market size sooner. We have been in the premix feed
business since 1995 and now operate five premix feed manufacturing facilities
located in the cities of Nanchang, Shandong, Shanghai, Nanning, and
Hainan.
  1
  We
entered the hog breeding and production business in November 2007.  In
this business, we mainly produce hogs for slaughter and sell breeding
stock.  We have one breeder farm and 29 meat hog producing farms in
the Jiangxi, Shanghai, Hainan, Guangxi and Fujian provinces.
  We were
incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in
Nevada.  Since October 31, 2006, our principal place of business has
been based in China.  As a result of a merger into a wholly-owned
subsidiary, we changed our name to AgFeed Industries, Inc. on November 17,
2006.
  FEED
BUSINESS
  We
manufacture, distribute, market and sell two main product lines - additive
premix fodder for use in all stages of a pig’s life, and blended feeds. We
conduct these operations through our subsidiaries Nanchang Best Animal Husbandry
Co., Ltd. (“Nanchang Best”), Shanghai Best Animal Husbandry Co., Ltd. (“Shanghai
Best”), Guangzxi Huijie Sci. & Tech. Feed Co., Ltd., (“Guangxi Huijie”),
Shandong AgFeed Agribusiness Co., Ltd. ("Shandong Feed"), and Hainan HopeJia
Feed Co., Ltd. ("HopeJia"). We also provide extensive technical and veterinary
support free of charge to our customers.
  Nanchang
Best, Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia are collectively
referred to as our "feed operating companies."  They operate
manufacturing facilities in Nanchang, Shanghai, Nanning, Shandong, and Hainan
provinces, respectively.  Nanchang Best and Guangxi Huijie are
primarily responsible for our ongoing research and development efforts and share
their expertise in this area with all of our manufacturing
operations.  There are no formal written agreements relating to these
services as each of these companies are our wholly owned
subsidiaries.  AgFeed has received “Green Certification” from the
Minister of Agriculture of PRC for its premix products under the brand label
“BEST.” This green certification laid the ground for our Hog Farms to produce
hogs providing green pork.
  Products
  Livestock
producers may directly buy animal feed in finished form, referred to as
“blended” feed, which contains a concentrate of additive premix fodder
(“premix”) and the foundational grains blended together, or, they may choose to
buy the premix and then combine it with protein, corn, hay, wheat and other
elements readily available in the market to make their own blended feed.
Additive premix fodder provides the essential amino acids and binder necessary
for proper absorption of protein by pigs. Feeding pigs a balanced diet is an
essential part of the pork profit equation. Management estimates that feed costs
comprise 60-75% of a Chinese piggery’s expenses; therefore the quality of feed
and nutrition has a significant effect on piggery profits.
  Our total
combined feed output in 2008 was approximately 76,324 metric tons, consisting of
41,266 metric tons of premix fodder, 34,098 metric tons of blended feed, and 960
metric tons of other feed products.
  Pork
premix
  According
to the different growth stages of a pig, different additives are necessary to
accelerate the growth of the animal and provide safe products for consumption.
Premix additives are composed mainly of essential amino acids, vitamins,
minerals, antibiotics and growth promoters. We market 21 different brands of
premix fodder that are priced from standard to premium to satisfy wide ranging
customer demand. Within each brand there are 7 different mixes that correspond
to the different stages of a pig’s life cycle: newborn to 15 kg, 15-30 kg, 30-60
kg, market ready, over 60 kg boar, mating/pregnant and lactating. We provide
superior customer service by customizing the premix to the specific needs of
each customer. Large scale pig farms are typically the biggest consumers of our
premix. Our veterinarians work with these large pig farms to determine the
optimal formulation of feed.
  2
  Premix
sales represent approximately 54% of our annual feed revenues and carry a gross
profit margin of approximately 36.8%. Our ability to formulate customized premix
fodder to meet customer specifications enables us to charge a premium for our
products. The average price of our premix is $875/metric ton. We are also able
to justify premium pricing due to the strong brand name recognition of our
operating companies, hands-on after market support, and superior, more effective
products developed as a result of a strong R&D program. Large scale
piggeries are willing to pay a premium for more effective products as they are
concerned with producing healthy piglets, controlling disease and marketing
profitable pork products.
  Piglet
blended feed
  Our
piglet blended feed is designed to both nourish and protect newborns and is
composed primarily of proteins, such as fish meal and soy bean (30%), and raw
material grains, such as corn and chaff (roughly 65%). Local climate and
environment also influence the formulation of the piglet blend.
  We sell
blended feed for an average price of $658/metric ton. Blended feed contributes
approximately 45% to our total feed revenues and has a gross margin of
approximately 17.2%. As a result of government policies aimed at enhancing the
commercialization of the hog industry and greater regulation requiring
safeguards to the country’s food supply and food safety, we enjoy strong
competitive edge in the pork premix feed market and the piglet blended feed
market.
  Market
Information
  The feed
industry in China, initially developed during the 1980s, was transformed by the
issuance of the feed and feed additives regulations in the early 1990s. These
regulations emphasized labeling standards for the different grades of product.
These standards assisted in regulating the feed industry’s expansion and aimed
to eliminate substandard products and fraudulent labeling.
  China’s
feed manufacturing industry is second only to the United States in volume. The
feed industry grew to approximately 66 million tons in 1998, after growing at an
annual rate of 15% from 1990 to 1998, and approximately 107 million tons in 2005
and 111 million tons in 2006.  In 2007, China's feed industry grew to
123 million tons, 112 times the size in 1980. As incomes rise in China, annual
meat consumption is expected to rise from the current 53 kg per person
to around 70 kg per person in the coming years. The country's annual
pork consumption almost doubled from 20kg per person in 1990 to 40kg per person
in 2006.  According to a report by the USDA Foreign Agricultural
Services, developing countries average 24 kg per person annually while developed
countries average 75 kg per person annually. It is estimated that 4 kg of feed
grain are needed to produce 1 kg of pork.
  The
animal feed industry in China is highly competitive with many regional players
and locally recognized brands. We believe that the initial capital requirements
with respect to entry into the industry are low, and consequently there is a
great deal of competition between many smaller companies. The animal feed sector
for pork has three primary markets:
  ·
              additive
      premix fodder;
 ·
              proteins;
      and
 ·
              blended
      feed.
  We
predominantly produce premix and blended feeds and do not presently compete in
the protein market. A nutritionally complete feed includes three components:
energy sources, such as course grains; protein sources, such as fish and soy
meals; and premix consisting of essential amino acids, vitamins, minerals,
antibiotics and growth promoters. Premix and proteins together are often
referred to in the industry as “concentrate.” Premix fodders require greater
technology to produce, and are often customized to each customer’s
specifications. As such, premix carries the highest selling price per metric ton
of all feed components. Livestock producers may directly buy animal feed in
finished form, referred to as “blended feed,” or buy the component ingredients
and mix the blend on their own. Typically, large-scale piggeries will purchase
premix, as they have the scale to mix their own blended feeds.
  3
  Blended
Feed Industry
  According
to published reports from the China Feed Industry Association and the Bureau of
Animal Husbandry, Ministry of Agriculture of the PRC, the blended feed market
for pork was approximately $12 and $14 billion for 2004 and 2005, respectively.
The largest player in the market had approximately a 7% market share, and 40
companies shared the top 33% of the market. From 2000 to 2006, blended feed
sales have grown at an average annual rate of 4.5%. From 2005 to 2006, blended
feed sale growth was 4.6%.  Pork blended feed production grew
approximately 0.61%, to 24.1 million metric tons, from 2006 to 2007 and sales
increased 3% over 2006 levels.
  Premix
Industry
  From 2000
to 2006, according published reports from the China Feed Industry Association
and the Bureau of Animal Husbandry, Ministry of Agriculture of the PRC, premix
industry sales grew at an average annual rate of 13.5%. There is no single
dominant participant in China's premix market.  Pork premix production
for 2007 was 2.8 million metric tons, up 5% from 2006, while sales remained
level.
  Sales and
Marketing
  Nanchang
Best and Shanghai Best have aggressively marketed and promoted the “Best” brand
since their inception. Guangxi Huijie markets its products under the “Huijie”
brand name. HopeJia’s feed products are marketed under the brand name “HeJie”
and Shandong markets its products under the “AgFeed” brand name.  Our
feed operating companies send their sales force and technicians to the pig farms
to educate their clients on new product developments and improvements to
existing products. They also conduct educational seminars in pig farming regions
to explain the benefits of a balanced, nutritious diet for pigs in producing a
healthy herd and to educate farmers to properly prepare and mix feed components.
While these services are not unique among premix manufacturers, we believe our
services in this area are superior to our competitors as we have a highly
responsive and experienced technical services team while our sales persons, most
of whom majored in animal or veterinary science, are equipped with general
service capabilities.  As we market and sell directly to pig farmers,
we are able to collect and analyze data which assists in the preparation and
design of new products. We attend agricultural conventions that take place in
the market areas where we conduct business as well as in provinces that we
expect to enter. We also place advertisements and promotional pieces in
agricultural trade journals.
  We sell
our products directly to over 660 large-scale pig farms and to distributors
reaching to the smaller privately-owned farms and backyard farmers. The sales
data of distributors indicates that smaller farms tend to be more sensitive to
price increases than the large-scale piggeries, with large-scale hog farms
placing more emphasis on customer service and other ancillary services we
provide.
  Starting
in January 2007, we began to work with independently-owned and operated premix
feed product distribution stores that exclusively distribute AgFeed brand premix
feed products throughout China. This program allows us to cost-effectively sell
our products to the individual “mom and pop” farmer that may raise only a few
hogs per year for personal consumption or for sale in the marketplace as an
additional source of income. These distribution stores generally sell 3 to 5
metric tons of feed per month.  As of December 31, 2008, there were
more than 1,000 locations open and operating using the AgFeed brand
name.   These distributors do not pay an initiation fee to become
exclusive distributors of our products but do receive marketing and technical
training from our staff. Each distributor signs an exclusive agreement with us,
agreeing not to sell any other brand of animal feed products and to decorate its
store with approved AgFeed marketing materials and
signage.  Additionally, these distributors are encouraged to buy
animal health care products, such as quality vaccines and veterinary drugs that
we sell as agent, benefiting from a diversified product structure.
  4
  In
addition, each distributor must: (i) during a three month probationary period
pass a screening process based on performance benchmarks, (ii) abide by our
rules and receive ongoing training from our sales and technical staff, (iii)
support the sales of new AgFeed products when launched in the distributor’s
territory, and (iv) remain within our guidelines for payment of products
purchased from us.
  Distributors
receive discounted prices from the regular wholesale listed prices and have
payment terms that are typically 15 days from the date of sale. These discounted
prices earn the distributors an increased gross profit margin of approximately
5-10%. They build a relationship with the small farmers that in many cases are
illiterate and continue to do business as they have always done. As part of the
distribution arrangement, they have a specified territory that entitles them to
the exclusive right to sell AgFeed products to small farm owners in that
territory.
  As of
December 31, 2008, each of the feed operating companies has the following
customers for their respective feed products:
  Local
                      Distributors
                    
                    
                    Large
      Scale
                      Pig
      Farm
                    
                    
                    Distribution
                      Chain
      Stores
                    
                    
                    TotalNanchang
      Best
                    
                    
                    85
                    
                    
                    
                    202
                    
                    
                    
                    320
                    
                    
                    
                    607Shanghai
      Best
                    
                    
                    138
                    
                    
                    
                    206
                    
                    
                    
                    191
                    
                    
                    
                    535Guangxi
      Huijie
                    
                    
                    126
                    
                    
                    
                    189
                    
                    
                    
                    301
                    
                    
                    
                    616Shandong
      Feed
                    
                    
                    78
                    
                    
                    
                    15
                    
                    
                    
                    101
                    
                    
                    
                    194HopeJia
                    
                    
                    46
                    
                    
                    
                    57
                    
                    
                    
                    89
                    
                    
                    
                    192
  Suppliers
  Normally,
purchases of raw materials are made on an “as needed” basis each
month. Orders are managed by both our warehouse and purchasing managers
together, each of whom is familiar with on-site inventory levels. We sign
long-term contracts with leading soybean meal suppliers when our purchasing
specialists deem it appropriate.  We have also established long-term
relationships with “accredited key suppliers” by setting up five supply bases in
China’s largest corn production areas which centralize our purchasing and
logistics resources, and reduce and remove agent commissions.
  We have
implemented a "supplier accreditation system."  Regularly, suppliers
of raw materials are jointly selected and rated by our purchasing center and
technical center according to the quality of their supplies, price and credit
record. Generally, all of our purchases are made from qualified suppliers. Raw
materials are generally purchased by our purchasing center to take advantage of
the economies of scale associated with our size.
  Research and
Development
  We engage
in continuous research and development to maintain a competitive advantage in
the marketplace and keep pace with current developments.  We conduct
these activities primarily through Nanchang Best and Guangxi Huijie. Their
research and development results are shared with each of the feed operating
companies. We also sponsor research alliances with Jiangxi Agricultural
University, South China Agricultural University, Nanjing Agricultural University
and Zhejiang Agricultural University.
  In
addition to sponsoring national and provincial academic research projects at
various academic institutions, in November 2004, Nanchang Best launched a fund
called Best Fund contributing RMB 98,000 (US$12,250) to sponsor 12 research
projects at Jiangxi Agricultural University. Nanchang Best retains proprietary
rights to any research findings from these projects.
  5
  Intellectual
Property
  We have
registered the "AgFeed," “Best,” “Huijie,” and "HeJie" trade names used on our
products with the China Trademark Bureau and these names are known in the
provinces in which we conduct business.  We do not hold any patents or
intend to apply for patents on proprietary technology or formulas relating to
our feed products. The formulas for our feed products are considered trade
secrets and are protected as such.
  Government and Environmental
Regulation
  Our feed
products and services are subject to substantial regulation by governmental
agencies responsible for the agricultural and commerce industries.  We
are required to obtain business and company registrations and production
licenses under the laws and regulations of the PRC, the provincial governments
of Jiangxi, Shanghai, Hainan, Shandong, and Guangxi provinces and the Shanghai
City government.  All of our feed products are certified on a regular
basis and must be in compliance with the laws and regulations of provincial and
other local governments and industry agencies.
  Prior to
engaging in any production or marketing of feed products, all products must
receive a earned formal approval production number pursuant to the National Code
of Feed and Feed Additives, promulgated by the National State Council of the PRC
and qualified products reports from the Technology and Supervision
Bureau.  All of our feed products have earned these formal approvals,
which are valid for five years from the date of issuance.
  There is
no material cost in obtaining and maintaining these licenses, but it is
illegal to do business without them.  If any production license or
product permit were lost, production would need to cease until a new license or
permit was obtained, which would likely take a minimum of 30 to 45 days to
receive, and the loss of which would result in the possibility of regulatory
fines.
  We are
also subject to China’s National Environmental Protection Law as well as a
number of other national and local laws and regulations involving pollutant
discharge and air, water and noise pollution.
  The
central government, through the Ministry of Agriculture, issues production
licenses. The Ministry of Agriculture dispatches officials at the local level to
review staff qualifications, production facilities, quality control, and
management departments for competency.  These licenses are valid for
five years from the date of issuance.
  Provincial
production permits are also required for all entities involved in the
manufacture of animal feed and feed components.  Provincial permits
are issued for all products manufactured at each facility. Each facility has the
necessary permits for all products produced at each of our operating facilities.
These permits are valid for five years from the date of issuance.
  Competition
  The
premix market in China is particularly fragmented with many companies and
locally recognized brands. The largest player in the premix industry commands
slightly more than 1% of the national market and no one company has yet taken a
sizable market lead in terms of service, brand, or technology. Nanchang Best
leads the pork premix market in the Jiangxi Province with an approximate 4%
market share and also sells its products in neighboring regions such as Hubei,
Henan and Fujian. Nanchang Best faces price competition from Da Bei Nong, one of
its competitors in the large-scale farm market.  We believe Da Bei
Nong’s service is considered inferior to Nanchang Best’s, which has contributed
to Nanchang Best's ability to maintain its lead in sales.
  6
  Sales
made by Nanchang Best and Shanghai Best in Fujian province face strong
competition in the large-scale piggery market from Fuj Minke Biology Company,
which has well-known service, a flexible credit policy, and prices that are
competitive with, if not lower than, the prices at which Nanchang Best and
Shanghai Best sell their products. While both Nanchang Best and Shanghai Best
are working to further develop and strengthen their connections to large-scale
farms, Fuj Minke Biology Company does not pose a threat to their distributor
sales.
  Zheng Da,
the Sino-Thai joint venture of Charoen Pokphand, the largest business
conglomerate in Thailand, is one of the largest premix
producers.  However, based on informal discussions that we have had
with our customers, its prices tend to be higher than the prices at which
Nanchang Best and Shanghai Best sell their products, though there is not a
significant difference in the quality of their products. Zheng Da focuses only
on the distributor market.
  Based on
our independent investigations in the Shanghai area, Xinnong leads the market in
sales with approximately15,000 metric tons per year, competing directly with Shanghai Best on
both pricing and service to large scale piggeries.
  Guangxi
Huijie has an approximate 13% share of the overall feed market in its home
province of Guangxi and competes directly with Guangxi Provimi. Guangxi Provimi
sells the same products as Guangxi Huijie at similar price points and is
considered by the marketplace to offer a product of similar quality to Guangxi
Huijie’s.  We believe that Guangxi Provimi does not provide the same
quality of after sale technical support to its customers.  Guangxi
Huijie stands out in its market by providing its independently-owned
distribution stores with an all-inclusive product package that includes quality
veterinary drugs, vaccines, raw materials and breeders in addition to animal
feed.
  HopeJia
leads the premix market in Hainan Province with an approximate 25% market
share.  The direct competition facing HopeJia is not its competitors,
but its own ability to upgrade customized products. HopeJia is enhancing its
competitiveness in the blended feed market, benefiting from the economies of
scale resulting from the synergies in our businesses.  It mainly
competes with SBT and JiaDa as they have lower prices and have been in business
in this area longer than HopeJia.
  Shandong
Feed is a newly founded premix feed company in Shandong
Province.  Benefiting from AgFeed’s 14 year experience in the
manufacturing, research and development, sales and marketing of pork premix
feed, it is winning increasingly broader acceptance from the customers with its
quality and high cost performance.
  Employees
  As of
December 31, 2008, our feed operating companies had a total of 459 employees.
The breakdown of our employees by location and department is:
  Nanchang
                        Best
                      
                      
                      Shanghai
                        Best
                      
                      
                      Guangxi
                        Huijie
                      
                      
                      Shandong
                        Feed
                      
                      
                      HopeJiaManagement
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      2General
      Administration and Human Resources
                      
                      
                      9
                      
                      
                      
                      10
                      
                      
                      
                      8
                      
                      
                      
                      2
                      
                      
                      
                      7Production
                      
                      
                      39
                      
                      
                      
                      21
                      
                      
                      
                      50
                      
                      
                      
                      12
                      
                      
                      
                      36Sales
                      
                      
                      56
                      
                      
                      
                      31
                      
                      
                      
                      42
                      
                      
                      
                      29
                      
                      
                      
                      23Purchasing
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      3
                      
                      
                      
                      1
                      
                      
                      
                      1Finance
                      
                      
                      7
                      
                      
                      
                      6
                      
                      
                      
                      5
                      
                      
                      
                      3
                      
                      
                      
                      3Technical
      Services
                      
                      
                      7
                      
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      3Quality
      Control
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      7
                      
                      
                      
                      3
                      
                      
                      
                      5Research
      and Development
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      4
                      
                      
                      
                      1
                      
                      
                      
                      1
  7
  Facilities
  Nanchang
Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi
province. It owns three buildings, one each for the office, manufacturing and an
employee dormitory. Nanchang Best has been granted the right to use the land in
Nanchang by the Municipal Administration of State-Owned Land through December,
2049.
  Shanghai
Best is located in Qingcun Town, Fengxian District, Shanghai. It rents two
workshop buildings and office space on which it conducts all manufacturing and
business operations. The annual rent on the Shanghai property is approximately
$80,000 and the lease runs through December 2017.
  Guangxi
Huijie is located in Coastal Industrial Park, Liangqin District, Nanning City,
Guangxi Province. Guangxu Huijie owns three buildings, an office building,
production plant and an employee dormitory. The right to use the land was
granted by Housing Bureau and Land Administrative Bureau of Langqin District,
Nanning City through October, 2056.
  Shandong
Feed is located at No. 4 Chuangye Street, East New Area, in the city of Taian,
Shandong Province.  This facility consists of four buildings, one each
for manufacturing, offices, warehouse and dormitory facilities. Shandong Feed
has been granted the right to use this land by the Shandong Provisional
Government through July, 2052.
  HopeJia
is located on South Wuting Road, Laocheng Development Zone, Chengmai County,
Hainan Province.  HopeJia owns three buildings, an office building,
production plant and an employee dormitory. The right to use the land was
granted by Housing Bureau and Land Administration Bureau of Hainan Province
through Januar,y 2056.
  Commercial
Hog Producing Business
  We raise,
breed and sell hogs for use in China's pork production and hog breeding
markets.  We own one breeder farm and 29 meat hog producing farms
located in Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces, which are
strategically located in or near the largest pork consumption areas in the
PRC.
  We
entered the hog farming business on November 9, 2007 as a result of our
acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig
Farm Co., Ltd. ("Lushan").  Lushan owns and operates a breeder hog
farm occupying 258,000 square meters located in the town of Hualin in Xingzi
County, Jiangxi Province.  Lushan is a mid-scale hog farm engaged in
the business of raising, breeding and selling hogs in the PRC for use in the
pork production market in the PRC.  Lushan operates as a
majority-owned subsidiary of Nanchang Best.  In 2008, we acquired at
least a majority interest in 29 meat hog producing farms in the Jiangxi,
Shanghai, Hainan, Guangxi, and Fujian provinces through our subsidiaries -
Nanchang Best, Shanghai Best, Guangxi Huijie and Jiangxi Best Swine Development
Co. ("Best Swine").
  Hog
Production
  Our 29
meat hog producing farms generate revenue primarily from the sale of meat hogs
to slaughterhouses.  Our meat hogs are sold primarily in Jiangxi,
Shanghai, Hainan, Guangxi, Fujian, Guangdong and other neighboring
provinces.
  Lushan
generates revenue primarily from the sale of breeder hogs to commercial hog
farms and, to a lesser extent, the sale of meat hogs to hog
slaughterhouses.  It also generates revenue by providing consulting
services to hog farmers in the areas of feed production, feed formulation and
veterinary services.  Lushan's customers include large-scale hog
farms, mid-scale hog farms and small-scale farms.  Our breeder hogs
are sold throughout the PRC, primarily in southeastern China.
  8
  Breeder
hogs are either purebred hogs or crossbred hogs that have the genetic trait for
mating.  Lushan uses hogs that contain this trait for breeding and it
also sells them to commercial meat hog farms throughout the PRC so that the
commercial farms may use the hogs in their own reproduction
programs.  Commercial sows (parent stock) are used for gestating and
producing piglets.
  Among the
purebred hogs, Lushan’s primary varieties are the Yorkshire, the Landrace and
the Duroc.  The Yorkshire, which originated in England, is known for
its rapid growth, high rate of lean meat and its reproductive
capacity.  The Landrace, originated in Denmark, is also known for its
rapid growth and its high rate of lean meat.  The Duroc, which
originated in the United States, is considered a highly-successful male parent
in crossbreeding.
  Market
Description
  General
  China is
the world’s biggest hog producer and pork consumer; the global pig meat market
is dominated by China.  According to statistics from the US Department
of Agriculture, China produces 50% of all the pig meat production in the world.
For 2009, China is expected to produce close to 47.0 million metric tons of an
estimated world production of approximately 95.0 million metric
tons.
  According
to a 2008 Agricultural Report published by Purdue University, China’s pork
production in 2009 is forecast to recover 3% to 46.8 million metric tons up from
the 2008 production of approximately 45.6 million metric tons.  China
had approximately 592 million head of hogs at the end of 2008, up from 2006 and
2007.  Production in those years was affected by PRRS (Blue Ear
Disease).  This disease is now effectively under control and is not
anticipated to have a negative effect on China's hog production in
2009.  During late 2007 and the first half of 2008, short pork
supplies pushed prices up sharply. Increased food prices were major factors in
the rise of China's consumer price index.
  China
consumes over 500 million pigs a year.  In terms of meat consumption
in China, beef accounts for approximately 9%, poultry for approximately 21% and
pork for approximately 65% of total Chinese consumption, according to the
National Statistics Bureau of China.  China’s pork consumption is
forecast to increase to 47.0 million metric tons up from 44.9 million metric
tons in 2008, an increase of about 3%. Projected pork demand by 2015 is
estimated to approach 68.0 million metric tons, an increase of 45%.
  Urbanization
and the growth of the middle class (250 million people in 2008) along with PRC
policies protecting the swine industry reflect the importance of hog production
as a social, economic and security issue for the consumer market in China. The
PRC instituted a number of laws to induce swine production. On January 1, 2008,
the State Council announced a new regulation exempting companies involved in hog
rearing from corporate income tax. Additionally, the Food Safety Law, which
becomes effective on June 1, 2009, allows the government to take affirmative
action that will strengthen food safety control “from the production line to the
dining table.” The PRC Government is creating a hog futures exchange to permit
hedging of contracts.  This is expected to be operational in the
latter half of 2009.  Further, the Government has developed a
"Strategic Meat Reserve" that is stocked predominantly with pork reserves and a
live herd of 500,000 pigs.  These policies and programs stress the
value the central PRC Government places on hog production.
  Meat
Hogs
  According
to the Foreign Agricultural Services, the PRC is the world’s largest producer of
pork and pork is the most widely-consumed meat in the PRC.  The
Foreign Agricultural Services determined that pork accounted for 65% of the
total meat production in the PRC in 2008. A 2008 Agricultural Report published
by Purdue University forecasts that China’s pork imports in 2009 may increase by
nine percent to 555,000 million metric tons slightly up from 505,000 million
metric tons in 2008. Strong demand and short supply are forecast to drive
imports, although it appears the recent downturn in the global economic picture
will curtail the Chinese import of both frozen and live swine.  There
are over 40 local pig breeds in China.  Chinese farms are looking to
import foreign breeds that may improve the genetic profile of the PRC's hog
population, with the result being healthier animals and lower production
costs.
  9
  Meat hog
production in the PRC is dominated by backyard farms (those that sell 5-10 hogs
annually) and small farms (those that sell less than 100 hogs
annually).  These farms accounted for an estimated 75% of all PRC hog
production during 2008.  These farms sell their products to local
rural markets.  The remaining 25% of the PRC's hog production comes
from larger farms - those that sell between 100 and 500 head a year account for
21% of the production, those that sell between 500 and 10,000 head account for
an additional 3% and those that sell between 10,000 and 50,000 hogs account for
the remaining 2% of the annual production.
  Suppliers
  Feed is
the most significant cost of operating a hog farm.  Historically, our
Hog Farms purchased feed products and raw materials such as corn and soybeans
from several feed suppliers under short-term contracts.  Under our
ownership, the Hog Farms primarily use our premix as the base of their feed
supply and enter into long-term contracts with the suppliers of feed additives
in order to meet their feed requirements.  The use of our premix laid
the groundwork for our Hog Farms to produce hogs that are accredited as "green"
pork.
  Research and
Development
  We have a
seven member research and development team devoted to hog
farming.  Two members of the team have doctorate degrees and three
have masters degrees in veterinary science and/or animal breeding and
genetics.  We are participants in two ongoing research
programs.  We have been selected into the National Hog Production
System, where individuals from China's top 52 hog farms share their expertise
and research and development results.  We are also a member of the
National Pig Genetics Association which focuses on the selection of high-lean
meat breeder hogs and the other program focuses on improving the reproductive
traits of breeder hogs.
  Intellectual
Property
  Lushan
has developed advanced mating technologies that are designed for foreign and
domestic breeder hogs.  It employs proprietary techniques to manage
mating patterns.  We do not hold any patents covering these
technologies and have no present intention to apply for patents on
them.
  Government
Regulation
  Hog
breeding is subject to substantial licensing requirements and
regulation.  In order to sell breeder hogs in the PRC a breeder hog
farm must be awarded a breeder’s license by the local government
authorities.  Only those breeder hog farms that have qualified staff,
specialized equipment and are in segregated locations to avoid the spread of
disease are eligible for licensing.  Meat hog farms do not require a
license.
  The
Agricultural Department of Jiangxi Province issued a Breeder Hog Farm License to
Lushan which is valid until April 1, 2010 and is renewable in three-year
increments.
  Competition
  The hog
production business in the PRC is highly segmented.  As we discussed
above, about 75% of the hogs produced in the country are produced by smaller
farms, who sell their inventory to rural markets.  Of the remaining
25% of hog producers, they are spread throughout the entirety of the PRC and the
market for their inventory tends to be within their geographic
territory.  AgFeed primarily markets its products within Jiangxi,
Shanghai, Hainan, Guangxi and Fujian provinces and the territory of the
surrounding provinces that is close in proximity to our Hog Farms.  As
a result, we compete broadly with the producers in these geographic
regions.  However, none of our Hog Farms face competition from one or
two single, significant customers.  Our hog production business
occupies the whole of southeastern China, including the metropolitan areas of
Shanghai and Hong Kong.
  10
  Employees
  As of
December 31, 2008, our hog farms had a total of 1,398 employees, 51 of whom are
employed by Lushan. The breakdown of our employees by location and department
is:
  Lushan
                          
                          
                          Meat
      Hog
                            Producing FarmsGeneral
      Management
                          
                          
                          1
                          
                          
                          
                          90Production
      Administration and Technicians
                          
                          
                          6
                          
                          
                          
                          238Research
      and Development
                          
                          
                          1
                          
                          
                          
                          5Farm
      Labor
                          
                          
                          31
                          
                          
                          
                          747Finance
                          
                          
                          4
                          
                          
                          
                          86Administration
                          
                          
                          8
                          
                          
                          
                          181
  Facilities
  Breeder
Farm
  Lushan’s
primary facility is a breeder hog farm located in the town of Hualin in Xingzi
County, Jiangxi Province.  The facility, which is situated on 258,000
square meters of developed land, is leased from the Chinese government for a
period of 29 years and is scheduled to expire on April 13, 2034. Lushan’s
breeder hog farm contains two separated areas, one for sows and the other for
boars and gilts, with a total of 15,800 square meters of
buildings.  Lushan pays a nominal annual rent under the terms of the
lease.
  Meat
Hog Producing Farms
  Wannian
Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), a wholly owned
subsidiary of Nanchang Best, is located in Nanyan village in the town of Peimei
in Wannian county, Jiangxi Province.  Wannian subleases the property
from the former shareholders and includes the land, pig houses, office
buildings, heating system, power and water supply system.   The lease
runs for 10 years from January 3, 2008.
  Jiangxi
Huyun Livestock Co., Ltd. (“Huyun”), a majority owned subsidiary of Nanchang
Best, is located in the town of Huyun in Wannian county, Jiangxi Province. Huyun
subleases the property from the other shareholders of Huyun and includes
the land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from January 3,
2008.
  Ganzhou
Green Animal Husbandry Develop. Co., Ltd. (“Ganzhou”), a majority owned
subsidiary of Nanchang Best, is located in Yuliang village in the town of
Hengshui in Chingyi County, Ganzhou City, Jiangxi Province.  Ganzhou
subleases the property from the other shareholders of Ganzhou and includes
the land, pig houses, office buildings, heating system, power and water supply
system.   The lease runs for 10 years from January 4,
2008.
  Gang Feng
Animal Husbandry Co., Ltd. (“Gang Feng”), a wholly owned subsidiary of Nanchang
Best, is located in the town of Fenglin in Dean county, Jiangxi Province. Gang
Feng subleases the property from the former shareholders and includes the land,
pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 6 and 1/2 years from January 7,
2008.
  11
  Yichun
Tianpeng Domestic Livestock Farm, Ltd. ("Yichun"), a majority owned subsidiary
of Nanchang Best, is located in Nanmiao Township, Yichun City, Jiangxi
Province.  Yichun subleases the property from the
other shareholders of Yichun and includes the land, pig houses, office
buildings, heating system, power and water supply system.  The lease
runs for 10 years from January 9, 2008.
  Zhejiang
Pinghu Yongxin Hog Farm (“Zhejiang Yongxin”), a wholly owned subsidiary of
Nanchang Best, is located in Pinghu City, Zhejiang Province.  Zhejiang
Yongxin subleases the property from the former shareholders and includes the
land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 12 years from April 18, 2008.
  Shanghai
Fengxian Hog Farm (“Shanghai Fengxian”), a wholly owned subsidiary of Nanchang
Best, is located in Yuantong Village, Qianqiao Town, Fengxian District, Shanghai
City.  Shanghai Fengxian subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 14 years
from May 1, 2008.
  Shanghai
Tuanxi Hog Farm (“Shanghai Tuanxi”), a wholly owned subsidiary of Nanchang Best,
is located in Tuanxi Village, Datuan Town, Nanjiang District,
Shanghai.  Shanghai Tuanxi subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system. The lease runs for 10 years from May 1,
2008.
  Shanghai
Senrong Hog Farm (“Shanghai Senrong”), a wholly owned subsidiary of Nanchang
Best, is located in Wanglong Village, Xinnong Town, Jinshan District,
Shanghai.  Shanghai Senrong subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years
from May 1, 2008.
  Fujian
Xiamen Muxin Hog Farm (“Fujian Muxin”), a wholly owned subsidiary of Nanchang
Best, is located in Tongan District, Xiamen City, Fujian
Province.  Fujian Muxin subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.   The lease runs for 10 years
from April 30, 2008.
  Xiamen
Yuanshengtai Food Co., Ltd. (“Fujian Yuanshengtai”), a wholly owned subsidiary
of Nanchang Best, is located in Xiamen, Fujian Province.  Fujian
Yuanshengtai subleases the property from the former shareholders and includes
the land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from April 30, 2008.
  Jiangxi
Zhiliang Hog Farm (Jiangxi Zhiliang”), a wholly owned subsidiary of Nanchang
Best, is located in Gancaoqian Village, Dayangzhou, Xingan County, Jiangxi
Province. Jiangxi Zhiliang subleases the property from the former shareholders
and includes the land, pig houses, office buildings, heating system, power and
water supply system.   The lease runs for 22 years from April 30,
2008.
  Shanghai
WeiSheng Hog Raising Co., Ltd.(“Shanghai Weisheng”), a wholly owned subsidiary
of Nanchang Best, is located in the Jinshan District, Shanghai
City.  Shanghai Weisheng subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 30 years
from June 1, 2008.
  Nanping
Minkang Hog Farm (“Nanping Minkang”), a wholly owned subsidiary of Shanghai
Best, is located in the Fujian Province.  Nanping Minkang subleases
the property from the former shareholders and includes the land, pig houses,
office buildings, heating system, power and water supply system.  The lease
runs for 15 years from September 17, 2008.
  Guangdong
Lianjiang Xinfa Hog Farm (“Guangdong Xinfa”), a majority owned subsidiary of
Guangxi Huijie, is located in Lianjiang City, Guangdong
Province.  Guangdong Xinfa subleases the property from the other
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.   The lease runs for 10 years
from May 30, 2008.
  12
  Guangxi
Nanning Wanghua Hog Farm (“Guangxi Wanghua”), a wholly owned subsidiary of
Guangxi Huijie, is located in Nanning City, Guangxi Province.  Guangxi
Wanghua subleases the property from the former shareholders and includes the
land, pig houses, office buildings, heating system, power and water supply
system.   The lease runs for 10 years from May 30, 2008.
  Guangxi
Linxing Hog Farm (“Guangxi Linxing”), a wholly owned subsidiary of Guangxi
Wanghua, is located in Guangxi Province.  Guangxi Linxing subleases
the property from the former shareholders and includes the land, pig houses,
office buildings, heating system, power and water supply system.  The
lease runs for 10 years from September 20, 2008.
  Nanning
Shunhua Hog Farm Co., Ltd. (“Nanning Shunhua”), a wholly owned subsidiary of
Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunhua
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from October 28,
2008.
  Nanning
Shunan Hog Farm Co., Ltd.(“Nanning Shunan”), a wholly owned subsidiary of
Guangxi Wanghua, is located in Guangxi Province.  Nanning Shunan
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from October 29,
2008.
  Guangxi
Guigang Gangda Hog Farm (“Guangxi Gangda”), a wholly owned subsidiary of Guangxi
Huijie, is located in Guigang City, Guangxi Province.  Guangxi Huijie
acquired all of the rights to the land, pig houses, office buildings, heating
system, power and water supply system in our acquisition of Guangxi Gangda. The
right to use the land was granted by Housing Bureau and Land Administration
Bureau of Guangxi Province through March 31, 2025
  Guangxi
Gangxuan Hog Farm Co., Ltd. (“Guangxi Gangxuan”), a wholly owned subsidiary of
Guangxi Gangda, is located in Guangxi Province.  Guangxi Gangxuan
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply system. The
lease runs for 11 years from September 20, 2008.
  Guangxi
Xingye Guihong Hog Farm (“Guangxi Guihong”), a wholly owned subsidiary of
Guangxi Huijie, is located in Kuiyang Town, Xingye County, Yulin City, Guangxi
Province.  Guangxi Huijie acquired all of the rights to the land, pig
houses, office buildings, heating system, power and water supply system in our
acquisition of Guangxi Guihong. The right to use the land was granted by Housing
Bureau and Land Administration Bureau of Guangxi Province through May
30,2025.
  Hainan
Haikou Meilan Hog Farm (“Hainan Meilan”), a wholly owned subsidiary of Guangxi
Huijie, is located in Xianlai Village, Dazhipo Town, Haikou City, Hainan
Province.  Guangxi Huijie acquired all of the rights to the land, pig
houses, office buildings, heating system, power and water supply system in our
acquisition of Hainan Meilan.  The right to use the land was granted
by Housing Bureau and Land Administration Bureau of Guangxi Province through
April 12, 2033.
  Hainan
Haikou Wohao Hog Farm (“Hainan Wohao”), a wholly owned subsidiary of Guangxi
Huijie, is located in Fuan Village, Shishan Town, Xiuying District, Haikou City,
Hainan Province.  Guangxi Huijie acquired all of the rights to the
land, pig houses, office buildings, heating system, power and water supply
system in our acquisition of Hainan Wohao. The right to use the land was granted
by Housing Bureau and Land Administration Bureau of Guangxi Province through
April 18, 2038.
  Guangxi
Guilin Fuzhi Hog Farm (“Guangxi Fuzhi”), a majority owned subsidiary of Guangxi
Huijie, is located in Sujia Village, Zhalin Town, Yanshan District, Guilin City,
Guangxi Province.  Guanxi Fuzhi subleases the property from the other
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 20 years
from May 30, 2008.
  13
  Best
Swine is currently being constructed on land situated in Futian Township, Wuning
County, Jiangxi Province.
  Fujian
Jianhua Hog Farm (“Fujian Jianhua”), a wholly owned subsidiary of Best Swine, is
located in Xudun Town, Jian’ou City, Fujian Province.  Fujian Jianhua
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply
system.  The lease runs for 15 years from April 22, 2008.
  Fujian
Fengxiang Agribusiness Co., Ltd. (“Fujian Fengxiang”), a wholly owned subsidiary
of Best Swine, is located in Mawei District, Fuzhou City, Fujian
Province.  Fujian Fengxiang subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years from
April 30, 2008.
  Nanping
Kangda Animal Husbandry Co., Ltd. (“Nanping Kangda”), a wholly owned subsidiary
of Best Swine, is located in Yanping District, Nanping City, Fujian
Province.  Nanping Kangda subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years from
May 27, 2008.
  Fujian
Jianxi Breeder Hog Farm Co., Ltd. (“Fujian Jianxi”), a wholly owned subsidiary
of Best Swine, is located in Zhishan District, Jianou City, Fujian
Province.  Fujian Jianxi subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years
from May 25, 2008.
  History
  From
incorporation to October 31, 2006, the business of our company, then known as
Wallace Mountain Resources Corp., consisted of 18 unit mineral claims known as
the South Wallace Mountain Project having a total surface area of approximately
946 acres. At that time the property was without known reserves and the proposed
program was exploratory in nature. We paid a $3,000 retainer to the geologist to
commence the Phase 1 exploration work on the claim.
  On
October 31, 2006, we entered into and closed a share purchase agreement with
Nanchang Best and each of Nanchang Best’s shareholders. Pursuant to this
agreement, we acquired all of the issued and outstanding capital stock of
Nanchang Best from the Nanchang Best shareholders in exchange for 5,376,000
shares of common stock.
  Contemporaneously,
on October 31, 2006, we entered into and closed a share purchase agreement with
Shanghai Best, and each of Shanghai Best’s shareholders. Pursuant to this
agreement, we acquire all of the issued and outstanding capital stock of
Shanghai Best from the Shanghai Best shareholders in exchange for 1,024,000
shares of common stock.
  Concurrently
with the closing of these transactions and as a condition thereof, we entered
into an agreement with Robert Gelfand, our former President and Chief Financial
Officer, pursuant to which Mr. Gelfand returned 2,600,000 shares of our common
stock to the treasury for cancellation. Mr. Gelfand was not compensated in any
way for the cancellation of his shares of our common stock. Upon completion of
the foregoing transactions, we had an aggregate of 8,000,000 shares of common
stock issued and outstanding. The shares of common stock issued to the
shareholders of Nanchang Best and Shanghai Best were issued in reliance upon the
exemption from registration provided by Regulation S under the Securities Act of
1933, as amended.
  Subsequent
to the acquisition of Nanchang Best and Shanghai Best, on October 31, 2006,
Robert Gelfand resigned as our sole officer and Dr. Songyan Li was appointed as
a director. On November 17, 2006, we declared a stock dividend of two additional
shares of common stock for each share of common stock outstanding, and changed
our name to AgFeed Industries, Inc.
  14
  On
December 20, 2006, we acquired all the outstanding shares of Guangxi Huijie for
a total purchase price of 8,600,000 Chinese yuan renminbi ("RMB") (approximately
US$1.1 million). We obtained the funds needed to complete this acquisition by
borrowing RMB8,600,000 from Sunrise Capital International, Inc. This loan
accrued interest at the rate of seven percent per annum and all accrued interest
and the principal amount of this loan was due and payable on June 20, 2007. We
were permitted to prepay this note without penalty and did so in March 2007. Mr.
Sheng Zhou, the brother of our corporate secretary and treasurer, Feng Zhou, is
a director of Sunrise Capital, which is owned by his sister-in-law, Ms. Chun Mei
Chang.
  On June
24, 2008, we completed the acquisition of premix feed company HopeJia for a
negotiated purchase price of RMB28,600,000 (approximately US$4.2
million).
  On
November 9, 2007, we acquired 90% of the issued and outstanding capital stock of
Lushan, a hog breeding operation. The aggregate purchase price was
RMB20,112,020, equivalent to approximately US$2.7 million on the date of the
transaction. In connection with this transaction, we also assumed and satisfied
at closing RMB4,919,980 (approximately US$660,400) of indebtedness owed by
Lushan.  The acquisition of Lushan marked our entrance into the hog
production business.  Since November 2007, we have acquired 30
operating meat hog producing farms.
  In
January 2008, we acquired at least a majority interest in five additional hog
farms.  Specifically:
  ·
              we
      acquired 70% of the issued and outstanding capital stock of Wannian on
      January 3rd for RMB12,250,000 (approximately US$1.7 million); we acquired
      the remaining 30% equity interest in Wannian on September 8th for
      RMB6,012,500 (approximately US$0.9
million);
  ·
              we
      acquired 70% of the issued and outstanding capital stock of Huyun on
      January 3rd for RMB6,482,000 (approximately US$0.9
    million);
  ·
              we
      acquired 60% of the issued and outstanding capital stock of Ganzhou on
      January 4th for RMB6,480,000 (approximately US$0.9
    million);
  ·
              we
      acquired all of the hogs and stock of Gang Feng on January 7th for
      RMB4,820,000 (approximately US$0.7 million);
and
  ·
              we
      acquired 55% of the issued and outstanding capital stock of Yichun on
      January 9th for RMB8,855,000 (approximately US$1.2
    million).
  On March
19, 2008, Best Swine was formed as a wholly-owned subsidiary of
AgFeed.  Best Swine was incorporated under the laws of the PRC on
March 19, 2008 and is being situated in Futian Township, Wuning County, Jiangxi
Province, PRC.  Best Swine is being built for the business of raising,
breeding and selling hogs for use in PRC’s pork production and hog breeding
markets.
  15
  On April
30, 2008, we acquired all of the equity interest in an additional 16 hog
farms.  Specifically, we acquired:
  Name of Hog Farm
                          
                          Purchase Price in RMB
                          
                          Purchase Price in US$(1)Guangxi
      Wanghua
                          
                          
                          26,030,000
                          
                          $3.7
      millionGuangxi
      Gangda
                          
                          
                          14,520,000
                          
                          $2.1
      millionGuangxi
      Guihong
                          
                          
                          42,500,000
                          
                          $6.1
      millionHainan
      Meilan
                          
                          
                          14,700,000
                          
                          $2.1
      millionHainan
      Wohao
                          
                          
                          15,200,000
                          
                          $2.2
      millionGuangxi
      Fuzhi
                          
                          
                          12,000,000
                          
                          $1.7
      millionGuangdong
      Xinfa
                          
                          
                          11,000,000
                          
                          $1.6
      millionZhejiang
      Yongxin
                          
                          
                          10,480,000
                          
                          $1.5
      millionShanghai
      Fengxian
                          
                          
                          35,000,000
                          
                          $5.0
      millionShanghai
      Tuanxi
                          
                          
                          7,000,000
                          
                          $1.0
      millionShanghai
      Senrong
                          
                          
                          30,000,000
                          
                          $4.3
      millionFujian
      Muxin
                          
                          
                          29,320,000
                          
                          $4.2
      millionFujian
      Yuanshengtai
                          
                          
                          26,200,000
                          
                          $3.7
      millionFujian
      Jianhua
                          
                          
                          32,000,000
                          
                          $4.6
      millionFujian
      Fengxiang
                          
                          
                          8,100,000
                          
                          $1.2
      millionJiangxi
      Zhiliang
                          
                          
                          8,000,000
                          
                          $1.1
      million
 
 (1)  based
on then-current conversion rate
  On May
28, 2008, we acquired all of the equity interest in Nanping Kangda for
RMB5,821,000 (approximately US$0.9 million) and all of the equity interest in
Fujian Jianxi for RMB16,338,166 (approximately US$2.4 million).
  On June
25, 2008, we acquired all of the equity interest in Shanghai Weisheng for
RMB12,820,000 (approximately US$1.9 million).
  In
September 2008, we acquired all of the equity interest in three additional hog
farms.  Specifically:
  ·
              we
      purchased Nanping Minkang for RMB9,865,000 (approximately US$1.4 million)
      on September 8th; and
  ·
              we
      purchased Nanning Shunan for RMB9,256,000 (approximately US$1.4 million)
      and Guangxi Gangxuan for RMB8,569,000 (approximately US$1.3 million) on
      September 10th.
  In
October 2008, we acquired all of the equity interest in two more hog
farms.  Specifically:
  ·
              on
      October 28th, we purchased Guangxi Linxing for RMB7,850,000 (approximately
      US$1.2 million); and
  ·
              on
      October 29th, we purchased Nanning Shunhua for RMB8,260,000 (approximately
      US$1.2 million).
  As of
December 31, 2008, we held at least a majority interest in 30 Hog Farms and five
pre-mix feed operations.
  16
  Item
1A.  Risk Factors
  RISK
FACTORS
  Investment
in our securities is subject to various risks, including risks and uncertainties
inherent in our business.  The following sets forth factors related to
our business, operations, financial position or future financial performance or
cash flows which could cause an investment in our securities to decline and
result in a loss.
  General Risks Related to Our
Business
  Our
success depends on our management team and other key personnel, the loss of any
of whom could disrupt our business operations.
  Our
future success will depend in substantial part on the continued service of our
senior management and founders. The loss of the services of one or more of our
key personnel could impede implementation and execution of our business strategy
and result in the failure to reach our goals. We do not carry key person life
insurance for any of our officers or employees. Our future success will also
depend on the continued ability to attract, retain and motivate highly qualified
personnel in the diverse areas required for continuing our operations. The rapid
growth of the economy in the PRC has caused intense competition for qualified
personnel. We cannot assure you that we will be able to retain our key personnel
or that we will be able to attract, train or retain qualified personnel in the
future.
  We
need to successfully integrate our acquired businesses.
  We have
made 30 acquisitions since entering the hog farm business in November 2007.
Prior to that time, we had limited experience in growth through acquisition. Our
future financial results depend upon our ability to successfully integrate the
acquired businesses.  We also face pressure to adequately conduct our
ongoing operations while working toward the integration of these businesses.
While we are pleased with the progress of our integration efforts to date, there
is no assurance that we will be able to complete the integration of the acquired
businesses as projected or without disrupting other areas of our business that
could have a negative effect on our future financial results.
  Our
acquisition strategy involves a number of risks. Even when an acquisition is
completed, we may have integration issues that may not produce results as
positive as management may have projected.
  While we
are taking a break from our acquisition program as we focus on integrating the
companies we have acquired and increasing the efficiencies of our existing
businesses,  we intend to grow through additional acquisitions in the
future. Acquisitions involve a number of special risks, including:
  ·
              failure
      of the acquired business to achieve expected
  results;
  ·
              diversion
      of management’s attention;
  ·
              failure
      to retain key personnel of the acquired
  business;
  ·
              additional
      financing, if necessary and available, could increase leverage, dilute
      equity, or both;
  ·
              the
      potential negative effect on our financial statements from the increase in
      goodwill and other intangibles; and
  ·
              the
      high cost and expenses of completing acquisitions and risks associated
      with unanticipated events or
liabilities.
  17
  These
risks could have a material adverse effect on our business, results of
operations and financial condition.  In addition, our ability to
further expand our operations through acquisitions may be dependent on our
ability to obtain sufficient working capital, either through cash flows
generated through operations or financing activities or both.  There
can be no assurance that we will be able to obtain any additional financing on
terms that are acceptable to us, or at all.
  Even
though we have curtailed our aggressive acquisition of established farms, we
expect to face increased competition for acquisition candidates. We cannot
guarantee that we will be able to identify, acquire, or manage profitably
additional businesses in the event that we resume our acquisition program. In
future acquisitions, we also could incur additional indebtedness or pay
consideration in excess of fair value, which could have a material adverse
effect on our business, results of operations and financial condition. In
addition, we may inadvertently assume unknown liabilities in acquisitions that
we complete. Assumption of unknown liabilities in acquisitions may harm our
financial condition and operating results. Acquisitions may be structured in
such a manner that would result in the assumption of unknown liabilities not
disclosed by the seller or uncovered during pre-acquisition due diligence. These
obligations and liabilities could harm our financial condition and operating
results.
  Volatile
energy prices could adversely affect our operating results.
  In the
last few years, energy prices have risen dramatically and are now volatile,
which has resulted in increased and unpredictable costs for our businesses and
raw materials costs for our branded feed products. Rising energy prices could
adversely affect demand for our feed products and increase our operating costs,
both of which would reduce our sales and operating income.
  We
face risks associated with currency exchange rate fluctuations; any adverse
fluctuation may adversely affect our operating margins
  Almost
allof our
revenues are denominated in Renminbi. Conducting business in currencies other
than US dollars subjects us to fluctuations in currency exchange rates that
could have a negative impact on our reported operating results. Fluctuations in
the value of the US dollar relative to other currencies impact our revenues,
cost of revenues and operating margins and result in foreign currency
translation gains and losses. If the exchange rate of the Renminbi is affected
by lowering its value as against the US dollar, our reported profitability when
stated in US dollars will decrease. Historically, we have not engaged in
exchange rate hedging activities and have no current intention of doing
so.
  Risks Related to Our Feed
Business
  We
cannot be certain that our feed product innovations and marketing successes will
continue.
  We
believe that our past performance has been based on, and our future success will
depend upon, in part, our ability to continue to improve our existing feed
products through product innovation and to develop, market and produce new feed
products. We cannot assure you that we will be successful in introducing,
marketing and producing any new feed products or feed product innovations, or
that we will develop and introduce in a timely manner innovations to our
existing feed products which satisfy customer needs or achieve market
acceptance. Our failure to develop new feed products and introduce them
successfully and in a timely manner could harm our ability to grow our business
and could have a material adverse effect on our business, results of operations
and financial condition.
  We
rely on independently owned wholesale distributors who do not exclusively offer
our feed products to their customers.
  The loss
of, or significant adverse change in, our relationship with any of our key
wholesale distributors of our feed products could cause our net sales, income
from operations and cash flow to decline. The loss of, or reduction in, orders
from any significant customer, losses arising from customer disputes regarding
shipments, fees, merchandise condition or related matters, or our inability to
collect accounts receivable from any major customer could reduce our income from
operations and cash flow.
  18
  We
may not be able to reach our revenue and net income targets due to unpredictable
market conditions.
  The
primary end-user customers for our feed products are commercial hog farms,
individual farmers and slaughterhouses. Although hog prices in the PRC reached
multi-year highs last year, hog prices declined during the last six months of
2008 as China substantially increased its imports of pork products. In addition,
the price for corn, an important element in feed, has been volatile. A
combination of lower hog sale prices and higher feed costs could constrain
demand for our feed products.
  We
are a major purchaser of many commodities that we use for raw materials and
packaging, and price changes for the commodities we depend on may adversely
affect our profitability.
  We enter
into contracts for the purchase of raw materials at fixed prices, which are
designed to protect us against raw material price increases during their term.
However, when necessary, we attempt to recover our commodity cost increases by
increasing prices, promoting a higher-margin product mix and creating additional
operating efficiencies. Nevertheless, the raw materials used in our feed
business are largely commodities that experience price fluctuations caused by
external conditions and changes in governmental agricultural
programs.  We also use paper products, such as corrugated cardboard,
aluminum products, films and plastics to package our feed products. Substantial
increases in the prices of packaging materials or higher prices of our raw
materials could adversely affect our operating performance and financial
results. Commodity price changes may result in unexpected increases in raw
material and packaging costs, and we may be unable to increase our prices to
offset these increased costs without suffering reduced volume, revenue and
income. Any substantial fluctuation in the prices of raw materials, if not
offset by increases in our sales prices, could adversely affect our
profitability.
  Outbreaks
of livestock disease can adversely affect sales of our products.
  Outbreaks
of livestock diseases can significantly affect demand for our feed products. An
outbreak of disease could result in governmental restrictions on the sale of
livestock products to or from customers, or require our customers to destroy
their flocks. This could result in the cancellation of orders of feed products
by our customers and create adverse publicity that may have a material adverse
effect on the agricultural products industry and our ability to market our
products successfully.
  Our
products and processes can expose us to product liability claims.
  Product
liability claims or product recalls can adversely affect our business reputation
and expose us to increased scrutiny by local, provincial, and central
governmental regulators. The packaging, marketing and distribution of
agricultural feed products entail an inherent risk of product liability and
product recall and the resultant adverse publicity. We may be subject to
significant liability if the consumption of any of our products causes injury,
illness or death of livestock, other animals or humans. We could be required to
recall certain of our feed products in the event of contamination or damage to
the products. In addition to the risks of product liability or product recall
due to deficiencies caused by our production or processing operations, we may
encounter the same risks if any third party tampers with our feed products. We
cannot assure you that we will not be required to perform product recalls, or
that product liability claims will not be asserted against us in the future. Any
claims that may be made may create adverse publicity that would have a material
adverse effect on our ability to market our feed products successfully or on our
business, reputation, prospects, financial condition and results of operations.
A successful product liability claim in excess of our insurance coverage could
have a material adverse effect on us and could prevent us from obtaining
adequate product liability insurance in the future on commercially reasonable
terms.
  19
  We
may not be able to obtain regulatory approvals for our feed
products.
  The
manufacture and sale of agricultural products in the PRC is regulated by the
central government and the local provincial governments. Although our licenses
and regulatory filings are current, the uncertain legal environment in the PRC
and within our industry may make us vulnerable to local government agencies or
other parties who wish to renegotiate the terms and conditions of, or terminate
their agreements or other understandings with us.
  We
require various licenses and permits to operate our business, and the loss of or
failure to renew any or all of those licenses and permits could require us to
suspend some or all of our production or distribution operations.
  In
accordance with the laws and regulations of the PRC, we are required to maintain
various licenses and permits in order to operate our feed
business.  We are required to comply with applicable hygiene and food
safety standards in relation to our feed production processes.  Our
premises and transportation vehicles are subject to regular inspections by the
regulatory authorities for compliance with applicable
regulations.  Failure to pass these inspections, or the loss of or
failure to renew our licenses and permits, could require us to temporarily or
permanently suspend some or all of our feed production or distribution
operations, which could disrupt our operations and adversely affect our revenues
and profitability.
  We
face significant competition in the sales of our agricultural feed
products.
  Competition
in the agricultural feed industry, especially with companies with greater
resources, may make us unable to compete successfully in these industries, which
could adversely affect our business.
  In
general, the competitive factors in the agricultural feed industry in the PRC
include:
  ·
              price;
 ·
              product
      quality;
 ·
              brand
      identification;
 ·
              breadth
      of product line; and
 ·
              customer
      service.
  To the
extent that our products and services do not exhibit these qualities, our
ability to compete will be hindered.
  Concerns
with the safety and quality of agricultural feed products could cause customers
to avoid our products.
  We could
be adversely affected if our customers and the ultimate consumers of our feed
products lose confidence in the safety and quality of various feed products.
Adverse publicity about these types of concerns, such as the recent publicity
concerning the use of the substance melamine in milk and infant formula, may
discourage our customers from buying our products or cause production and
delivery disruptions. Any negative change in customer perceptions about the
safety and quality of our feed products could adversely affect our business and
financial condition.
  20
  If
our feed products become adulterated or misbranded, we would need to recall
those items and may experience product liability claims if consumers are injured
as a result.
  Animal
feed products occasionally contain contaminants due to inherent defects in those
products or improper storage or handling. Under adverse circumstances, animal
feed manufacturers may need to recall some of their products if they become
adulterated or misbranded, and may also be liable if the consumption of any of
their products causes injury.  While we have never been required to
recall any of our feed products and we maintain insurance that we believe is
adequate to cover this type of loss, a widespread product recall could result in
changes to one or more of our business processes, product shortages, loss
of customer confidence in our food or other adverse effects on our
business.  If we are required to defend against a product liability
claim, whether or not we are found liable under the claim, we could incur
substantial costs, our reputation could suffer and our customers might
substantially reduce their existing or future orders from us.
  We
may not be able to adequately protect and maintain our intellectual property,
trademark, and brand names.
  Our
success will depend on our ability to continue to develop and market fodder and
blended feed products. We currently have not applied for patents for our
products or formulas, as our management believes an application for such patents
would result in public knowledge of our proprietary technology and
formulas. Since we do not have patent protection for our technology or
formulas, we may not be able to protect our rights to this intellectual property
if our competitors discover or illegally obtain this technology or formulas. Our
inability to protect our rights to this intellectual property may adversely
affect our ability to prevent competitors from using our products and
developments.
  Some
of our significant customer and supplier contracts are short-term.
  Some of
our feed customers and suppliers operate through purchase orders or short-term
contracts. Although we have long-term business relationships with many of our
feed customers and suppliers and alternative sources of supply for key items, we
cannot be sure that any of these customers or suppliers will continue to do
business with us on the same basis. Additionally, although we will try to renew
these contracts as they expire, there can be no assurance that these customers
or suppliers will renew these contracts on terms that are favorable to us, if at
all. The termination of or modification to any number of these contracts may
adversely affect our business and prospects, including our financial performance
and results of operations.
  Risks Related to Our Hog
Farming Business
  Our
limited operating history in hog farming makes it difficult to evaluate our
future prospects and results of operations.
  We have a
limited operating history in the hog farming business.  While we are a
leader in the feed product industry, the current management team does not have
the same depth of experience in the hog farming
business.  Accordingly, you should consider our future prospects in
light of the risks and uncertainties experienced by early stage companies in
evolving markets such as the market for breeding and selling hogs in the
PRC.  Some of these risks and uncertainties relate to our ability
to:
  ·
              attract
      additional customers and increase spending per
  customer;
 ·
              increase
      awareness of our brand and continue to develop customer loyalty in the hog
      farming line of business;
 ·
              respond
      to competitive market conditions;
 ·
              respond
      to changes in our regulatory
environment;
 ·
              maintain
      effective control of our costs and
expenses;
 ·
              raise
      sufficient capital to sustain and expand our business;
  and
 ·
              attract,
      retain and motivate qualified
personnel.
  If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
  21
  Health
risks to hogs and quality concerns could adversely affect production and our
business.
  We take
precautions to ensure that our hogs are healthy. Nevertheless, we are subject to
risks relating to our ability to maintain animal health and control
diseases.  Disease can reduce the number of offspring produced, hamper
the growth of the hogs to finished size and require in some cases the
destruction of infected hogs, all of which could adversely affect our ability
sell our hogs.  Adverse publicity concerning any disease or heath
concern could also cause customers to lose confidence in the safety and quality
of our hogs.  For example, blue ear disease, or PRRS, could result in
significant loss in production of hogs.  The PRC lost over 10 million
pigs to PRRS in 2006 and 2007.  Additionally, since our hogs will be
fed almost exclusively with our feed products, safety and quality concerns over
our feed products will also adversely affect the sales of our hogs.
  We
may not be able to maintain the necessary hog farming licenses.
  Hog
breeding is subject to substantial licensing requirements and
regulation.  In order to sell breeder hogs in the PRC a breeder hog
farm must be awarded a breeder’s license by the local government
authorities.  Only those breeder hog farms that have qualified staff,
specialized equipment and are in segregated locations to avoid the spread of
disease are eligible for licensing.  Meat hog farms do not require a
license.  Currently, we have obtained a license to own and operate
Lushan, our only breeder hog farm.  We need to maintain the licenses
we have and, if we pursue acquisitions of other breeder hog farms, we will need
to obtain additional licenses to operate those farms. Our future success in the
hog farming industry depends on our ability to acquire such licenses and permits
to expand our business.
  Our
hog farming business could be adversely affected by fluctuations in pork and
commodity prices.
  The price
at which we sell our hogs is directly affected by the supply and demand for pork
products and other proteins in the PRC, all of which are determined by the
constantly changing market forces of supply and demand as well as other factors
over which we have little or no control.  A downward fluctuation in
the demand for pork may adversely impact our quarterly and annual results of
operations for the hog farming business. Although hog prices in the PRC reached
multi-year highs last year, hog prices declined during the last six months of
2008 as China substantially increased its imports of pork products. In addition,
the price for corn, an important element in feed, has been volatile. Lower hog
sale prices, higher feed costs, or both would have a negative effect on our
results of operations.
  Risks Related to Conducting
Our Business in China
  We
are subject to economic and political risks in China over which we have little
or no control, and may be unable to alter our business practice in time to avoid
the possibility of reduced revenues.
  All of
our business is conducted in China. Doing business outside the United States,
and particularly in China, subjects us to various risks and uncertainties,
including changing economic and political conditions, major work stoppages,
exchange rate controls, currency fluctuations, armed conflicts and unexpected
changes in United States and foreign laws relating to tariffs, trade
restrictions, transportation regulations, foreign investments and taxation. We
have no control over most of these risks and may be unable to anticipate changes
in international economic and political conditions. Therefore, we may be unable
to alter our business practice in time to avoid the possibility of reduced
revenues.
  22
  China’s
economic policies could affect our business.
  All of
our assets are located in China and all of our revenue is derived from our
operations in China. Accordingly, our results of operations and prospects are
subject, to a significant extent, to the economic, political and legal
developments in China.  While China’s economy has experienced
significant growth in the past twenty years, such growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy of
the PRC, but they may also have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by the
government control over capital investments or changes in tax regulations. The
economy of the PRC has been changing from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets, and the establishment of
corporate governance in business enterprises. However, a substantial portion of
productive assets in the PRC are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over the PRC’s economic growth through the
allocation of resources, the control of payment of foreign currency-denominated
obligations, the setting of monetary policy and the provision of preferential
treatment to particular industries or companies.
  If the Chinese
government finds that the structure for operating our Chinese businesses do not
comply with Chinese governmental restrictions on foreign investment, or if these
regulations or the interpretation of existing regulations change in the future,
we could be subject to severe penalties or be forced to relinquish our interests
in those operations.
  All of
our operations are conducted through our subsidiaries in China. If we, our
subsidiaries, or our corporate structure is found to be in violation of any
existing or future PRC laws or regulations (for example, if we are deemed to be
holding equity interests in an entity in which direct foreign ownership is
restricted) the relevant PRC regulatory authorities, including the
administration of industry and commerce, the administration of foreign exchange
and relevant agencies of the Ministry of Commerce, would have broad discretion
in dealing with such violations, including:
  ·
              revoking
      business and operating licenses
 ·
              confiscating
      income and imposing fines and other
penalties
 ·
              requiring
      us to restructure our corporate structure or
  operations
 ·
              restricting
      or prohibiting our use of proceeds from our financings to finance our
      business and operations in China
 ·
              imposing
      conditions with which we or our subsidiaries may not be able to
      comply
 ·
              forcing
      us to relinquish our interests in our
  subsidiaries
  The
imposition of any of these penalties could result in a material and adverse
effect on our ability to conduct our business.
  We
may have difficulty establishing adequate management, legal and financial
controls in China.
  China
historically has not adopted a Western style of management, financial
reporting concepts and practices, modern banking, computer or other control
systems. We may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in China. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
and instituting business practices that meet Western standards. We may also
experience difficulty in collecting financial data and preparing financial
statements, books of account and corporate records.
  Our
bank accounts are not insured or protected against loss.
  We
maintain our cash with various banks and trust companies located in China. Our
cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise
unable to withdraw funds, we would lose the cash on deposit with that particular
bank or trust company.
  23
  As
we have limited business insurance coverage in China, any loss which we suffer
may not be insured or may be insured to only a limited extent.
  The
insurance industry in China is still in an early stage of development and
insurance companies located in China offer limited business insurance products.
In the event of damage or loss to our properties, our insurance may not provide
as much coverage as if we were insured by insurance companies in the United
States.
  Tax
laws and regulations in China are subject to substantial revision, some of which
may adversely affect our profitability
  The
Chinese tax system is in a state of flux, and it is anticipated that China's tax
regime will be altered in the coming years. Tax benefits that we presently enjoy
may not be available in the wake of these changes, and we could incur tax
obligations to our government that are significantly higher than anticipated.
These increased tax obligations could negatively impact our financial condition
and our revenues, gross margins, profitability and results of operations may be
adversely affected as a result.
  We
may face judicial corruption in China.
  Another
obstacle to foreign investment in China is corruption. There is no assurance
that we will be able to obtain recourse in any legal disputes with suppliers,
customers or other parties with whom we conduct business, if desired, through
China’s poorly developed and sometimes corrupt judicial systems.
  We
may face obstacles from the communist system in China.
  Foreign
companies conducting operations in China face significant political, economic
and legal risks. The Communist regime in China, including a cumbersome
bureaucracy, may hinder Western investment.
  If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
  At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
  The
government of China could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our and your investment.
  Our
business is subject to significant political and economic uncertainties and may
be affected by political, economic and social developments in China. Over the
past several years, the government of China has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The government of China may not continue to pursue these
policies or may significantly alter them to our detriment from time to time with
little, if any, prior notice.
  Changes
in policies, laws and regulations or in their interpretations or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to shareholders, or devaluations of currency
could cause a decline in the price of our common stock, should a market for our
common stock ever develop. Nationalization or expropriation could even result in
the total loss of your investment.
  24
  The
nature and application of many laws of China create an uncertain environment for
business operations and they could have a negative effect on us.
  The legal
system in China is a civil law system. Unlike the common law system, the civil
law system is based on written statutes where decided legal cases have little
value as precedents. In 1979, China began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes of existing laws and the abrogation of local regulations by national
laws could cause a decline in the price of our common stock. In addition, as
these laws, regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty.
  Limitations
on the ability of our operating subsidiaries to make payments to us could have a
material adverse effect on our ability to conduct our business and fund our
operations
  We are a
holding company and conduct substantially all of our business through our
operating subsidiaries in China. We will of necessity rely on dividends paid by
our subsidiaries for our cash needs, including the funds necessary to pay
dividends and other cash distributions to our shareholders, to service any debt
we may incur and to pay our operating expenses. The payment of dividends by
entities organized in China is subject to limitations. In particular,
regulations in China currently permit payment of dividends only out of
accumulated profits as determined in accordance with Chinese accounting
standards and regulations. Our Chinese subsidiaries are also required to set
aside at least 10% of their after-tax profit based on Chinese accounting
standards each year to its general reserves until the accumulative amount of
such reserves reaches 50% of their registered capital. These reserves are not
distributable as cash dividends. In addition, they are required to allocate a
portion of its after-tax profit to its staff welfare and bonus fund at the
discretion of its board of directors. Moreover, if our subsidiaries incur debt
on their own behalf in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other distributions to us. Any
limitation on the ability of our subsidiaries to distribute dividends and other
distributions to us could materially and adversely limit our ability to make
investments or acquisitions that could be beneficial to our businesses, pay
dividends or otherwise fund and conduct our business.
  Recent
Chinese regulations relating to the establishment of offshore special purpose
companies by Chinese residents and registration requirements for employee stock
ownership plans or share option plans may subject our China resident
shareholders to personal liability and limit our ability to acquire Chinese
companies or to inject capital into our operating subsidiaries in China, limit
our subsidiaries’ ability to distribute profits to us, or otherwise materially
and adversely affect us.
  The State
Administration of Foreign Exchange (SAFE) issued a public notice in October
2005, requiring PRC residents, including both legal persons and natural persons,
to register with the competent local SAFE branch before establishing or
controlling any company outside of China, referred to as an “offshore special
purpose company,” for the purpose of acquiring any assets of or equity interest
in PRC companies and raising funds from overseas. In addition, any PRC resident
that is the shareholder of an offshore special purpose company is required to
amend his or her SAFE registration with the local SAFE branch, with respect to
that offshore special purpose company in connection with any increase or
decrease of capital, transfer of shares, merger, division, equity investment or
creation of any security interest over any assets located in China. To further
clarify the implementation of Circular 75, the SAFE issued Circular 124 and
Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular
106, PRC subsidiaries of an offshore special purpose company are required to
coordinate and supervise the filing of SAFE registrations by the offshore
holding company’s shareholders who are PRC residents in a timely manner. If
these shareholders fail to comply, the PRC subsidiaries are required to report
to the local SAFE authorities. If the PRC subsidiaries of the offshore parent
company do not report to the local SAFE authorities, they may be prohibited from
distributing their profits and proceeds from any reduction in capital, share
transfer or liquidation to their offshore parent company and the offshore parent
company may be restricted in its ability to contribute additional capital into
its PRC subsidiaries. Moreover, failure to comply with the above SAFE
registration requirements could result in liabilities under PRC laws for evasion
of foreign exchange restrictions. Some of our PRC resident beneficial owners
have not registered with the local SAFE branch as required under SAFE
regulations. The failure or inability of these PRC resident beneficial owners to
comply with the applicable SAFE registration requirements may subject these
beneficial owners or us to fines, legal sanctions and restrictions described
above.
  25
  On
March 28, 2007, SAFE released detailed registration procedures for employee
stock ownership plans or share option plans to be established by overseas listed
companies and for individual plan participants. Any failure to comply with the
relevant registration procedures may affect the effectiveness of our employee
stock ownership plans or share option plans and subject the plan participants,
the companies offering the plans or the relevant intermediaries, as the case may
be, to penalties under PRC foreign exchange regime. These penalties may subject
us to fines and legal sanctions, prevent us from being able to make
distributions or pay dividends, as a result of which our business operations and
our ability to distribute profits to you could be materially and adversely
affected.
  In
addition, the National Development and Reform Commission ("NDRC") promulgated a
rule in October 2004, or the NDRC Rule, which requires NDRC approvals for
overseas investment projects made by PRC entities. The NDRC Rule also provides
that approval procedures for overseas investment projects of PRC individuals
must be implemented with reference to this rule. However, there exist extensive
uncertainties in terms of interpretation of the NDRC Rule with respect to its
application to a PRC individual’s overseas investment, and in practice, we are
not aware of any precedents that a PRC individual’s overseas investment has been
approved by the NDRC or challenged by the NDRC based on the absence of NDRC
approval. Our current beneficial owners who are PRC individuals did not apply
for NDRC approval for investment in us. We cannot predict how and to what extent
this will affect our business operations or future strategy. For example, the
failure of our shareholders who are PRC individuals to comply with the NDRC Rule
may subject these persons or our PRC subsidiary to certain liabilities under PRC
laws, which could adversely affect our business.
  Restrictions on
currency exchange may limit our ability to utilize our revenues
effectively.
  The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive all of our revenues in RMB. Under our current structure, our income is
primarily derived from dividend payments from our subsidiaries. Shortages in the
availability of foreign currency may restrict the ability of our subsidiaries to
remit sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. However, approval from
appropriate government authorities is required where RMB are to be converted
into foreign currency and remitted out of China to pay capital expenses such as
the repayment of bank loans denominated in foreign currencies. The Chinese
government may also, at its discretion, restrict access in the future to foreign
currencies for current account transactions. Since our revenues are denominated
in RMBs, any existing and future restrictions on currency exchange may limit our
ability to utilize revenues to fund business activities outside of China that
require foreign currencies.
  Recent
changes in China’s currency policies may cause a target business’s ability to
succeed in the international markets to be diminished.
  Historically,
China “pegged” its currency to the U.S. dollar. This meant that each unit of PRC
currency had a set ratio for which it could be exchanged for United States
currency, as opposed to having a floating value like other countries’
currencies. Many countries argued that this system of keeping China currency low
when compared to other countries gave PRC companies an unfair price advantage
over foreign companies. Due to mounting pressure from outside countries, China
recently reformed its economic policies to establish a floating value. As a
result of this policy reform, we may be adversely affected since the competitive
advantages that existed as a result of the former policies will cease. We cannot
assure you that we will be able to compete effectively with the new policies in
place.
  26
  If
any dividend is declared in the future and paid in a foreign currency, you may
be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you
will actually ultimately receive.
  If you
are a United States holder, you will be taxed on the U.S. dollar value of your
dividends, if any, at the time you receive them, even if you actually receive a
smaller amount of U.S. dollars when the payment is in fact converted into U.S.
dollars. Specifically, if a dividend is declared and paid in a foreign currency,
the amount of the dividend distribution that you must include in your income as
a U.S. holder will be the U.S. dollar value of the payments made in the foreign
currency, determined at the spot rate of the foreign currency to the U.S. dollar
on the date the dividend distribution is includible in your income, regardless
of whether the payment is in fact converted into U.S. dollars. Thus, if the
value of the foreign currency decreases before you actually convert the currency
into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the
U.S. dollar amount that you will actually ultimately receive.
  The
admission of China into the World Trade Organization could lead to increased
foreign competition for us.
  Domestic
competition in the animal feed industry is largely fragmented and foreign
competition is minimal. However, as a result of China becoming a member of the
World Trade Organization (“WTO”), import restrictions on agricultural products
are expected to be reduced. The lowering of import restrictions and the WTO’s
requirement for a reduction of import tariffs as a condition of membership may
result in an increase of foreign products, and could in turn lead to increased
competition in the domestic agricultural market.
  Risks Related to our
Securities
  It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
  As our
executive officers and several of our directors, including the chairman of our
Board of Directors, are Chinese citizens, it may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit is
initiated against us and/or our officers and directors by a shareholder or group
of shareholders in the United States. Also, because our operating subsidiaries
and assets are located in China, it may be extremely difficult or impossible for
investors to access those assets to enforce judgments rendered against us or our
directors or executive officers by United States courts. In addition, the courts
in China may not permit the enforcement of judgments arising out of United
States federal and state corporate, securities or similar laws. Accordingly,
United States investors may not be able to enforce judgments against us for
violation of United States securities laws.
  Our
common stock price is subject to significant volatility, which could result in
substantial losses for investors.
  During
the eight month period ended August 28, 2007, the high and low bid prices of our
common stock on the Over-The-Counter Bulletin Board (“OTCBB”) were $8.25 per
share and $1.85 per share, respectively.  Since our commencement of trading
on the Nasdaq Stock Market on August 29, 2007 through March 10, 2009, the high
and low sales prices of our common stock were $21.3099 and $0.90.  Prices
for our shares are determined in the marketplace and may accordingly be
influenced by many factors, including, but not limited to:
  ·
              the
      depth and liquidity of the market for the
  shares;
 ·
              quarter-to-quarter
      variations in our operating
results;
 ·
              announcements
      about our performance as well as the announcements of our competitors
      about the performance of their
businesses;
  27
  ·
              investors’
      evaluations of our future prospects and the food industry
      generally;
 ·
              changes
      in earnings estimates by, or failure to meet the expectations of,
      securities analysts;
 ·
              our
      dividend policy; and
 ·
              general
      economic and market conditions.
  In
addition, the stock market often experiences significant price fluctuations that
are unrelated to the operating performance of the specific companies whose stock
is traded. These market fluctuations could adversely affect the trading price of
our shares.
  The price
at which investors purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. Investors may be unable to
sell their shares of common stock at or above their purchase price, which may
result in substantial losses.
  Future
sales of shares of our common stock by our shareholders could cause our stock
price to decline.
  We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time.  As of March 10, 2009, we had
outstanding 38,300,436 shares of common stock.  An aggregate of
3,880,004 shares of our common stock are issuable upon conversion of our
outstanding convertible notes or upon exercise of our outstanding warrants and
an aggregate of 180,000 shares of our common stock are issuable upon exercise of
our outstanding options.  Sales of shares of our common stock in the
public market covered under an effective registration statement, or pursuant to
Rule 144, or the perception that those sales may occur, could cause the trading
price of our common stock to decrease or to be lower than it might be in the
absence of those sales or perceptions.
  We
may issue additional shares of our capital stock or debt securities to raise
capital or complete acquisitions, which would reduce the percentage equity
interest of our shareholders.
  Our
certificate of incorporation authorizes the issuance of up to 75,000,000 shares
of common stock, par value $0.001 per share.  As of March 10, 2009,
there were approximately 32,639,560 authorized and unissued shares of our common
stock which have not been reserved and accordingly, are available for future
issuance. Although we have not entered into any agreements as of this date to
issue our unreserved shares of common stock, we may issue a substantial number
of additional shares of our common stock to complete a business combination or
to raise capital in the private or public markets. The issuance of additional
shares of our common stock:
  ·
              may
      significantly reduce the equity interest of investors in this offering;
      and
  ·
              may
      adversely affect prevailing market prices for our common
      stock.
  The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may cause us to incur substantial expenditures and may
discourage lawsuits against our directors, officers and employees.
  Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
to the extent provided by Nevada law. We may also have or may create contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.
  28
  Our
management owns a significant amount of our common stock, giving them influence
or control in corporate transactions and other matters, and their interests
could differ from those of other shareholders.
  Our
principal executive officers and directors beneficially own approximately 37.61%
of our outstanding common stock. As a result, they are in a position to
significantly influence the outcome of matters requiring a shareholder vote,
including the election of directors, the adoption of any amendment to our
articles of incorporation or bylaws, and the approval of significant corporate
transactions. Their control may delay or prevent a change of control on, terms
favorable to our other shareholders and may adversely affect your voting and
other shareholders rights.
  Our
articles of incorporation, our bylaws and provisions of Nevada law could make it
more difficult for a third party to acquire us, even if doing so could be in our
shareholders’ best interest.
  Provisions
of our articles of incorporation and bylaws could make it more difficult for a
third party to acquire us, even if doing so might be in the best interest of our
shareholders. It could be difficult for a potential bidder to acquire us because
our articles of incorporation and bylaws contain provisions that may discourage
takeover attempts. These provisions may limit shareholders’ ability to approve a
transaction that shareholders may think is in their best interests. These
provisions include a requirement that certain procedures must be followed before
matters can be proposed for consideration at meetings of our
shareholders.
  Provisions
of Nevada’s business combinations statute also restrict certain business
combinations with interested shareholders. We have elected not to be governed by
these provisions in our amended and restated articles of incorporation. However,
this election may not be effective unless we meet certain conditions under the
Nevada statute.
  Capital
outflow policies in China may hamper our ability to declare and pay dividends to
our shareholders.
  The PRC
has adopted currency and capital transfer regulations. These regulations may
require us to comply with complex regulations for the movement of capital.
Although our management believes that we will be in compliance with these
regulations, should these regulations or the interpretation of them by courts or
regulatory agencies change, we may not be able to pay dividends to our
shareholders outside of China. In addition, under current Chinese law, we must
retain a reserve equal to 10 percent of net income after taxes, not to exceed 50
percent of registered capital. Accordingly, this reserve will not be available
to be distributed as dividends to our shareholders. We presently do not intend
to pay dividends in the foreseeable future. Our management intends to follow a
policy of retaining all of our earnings to finance the development and execution
of our strategy and the expansion of our business.
  We
have agreed with the staff of Nasdaq to seek shareholder ratification of the
issuance of our securities in our December 2008 financing.
  By letter
dated February 27, 2009 to the staff of The NASDAQ Stock Market, we agreed to
seek shareholder ratification at its upcoming annual meeting of shareholders for
the issuance of common stock and warrants in the Company's registered direct
offering on December 31, 2008. In the letter and subsequent conversations with
the staff of NASDAQ, we also agreed to not effect exercises of the warrants
prior to obtaining shareholder ratification of the issuance. We plan to seek
shareholder ratification at our upcoming annual meeting of shareholders, which
we plan to hold on June 11, 2009, well before the date the warrants become
exercisable.
  29
  On
December 31, 2008, we issued 5,000,006 shares of our common stock and warrants
to purchase 3,500,000 shares of our common stock for aggregate gross proceeds of
approximately $8,750,000. The sales were made under our shelf registration
statement to four institutional investors. Nasdaq Marketplace Rule
4350(i)(1)(D)(ii) requires shareholder approval for the issuance of common stock
or securities exercisable for common stock equal to 20% or more of the common
stock outstanding before the issuance for less than the greater of book or
market value of the stock. The shares of common stock were sold at a
discount to market price, but only represented approximately 15.2% of our
outstanding common stock prior to the sale, well below the 20% limit of
Marketplace Rule 4350(i)(1)(D)(ii). However, the shares of our common stock
issuable upon exercise of the warrants represented approximately 10.6% of our
common stock prior to the sale. While the $2.50 exercise price of the warrants
was greater than the market price of our common stock at the time of the sale,
it was less the book value of our shares as of September 30, 2008.
  Members
of the Company's management having the right to vote 11,460,024 shares of the
Company's common stock (representing approximately 35% of the outstanding common
stock prior to the completion of the offering) have agreed to vote in favor of
the ratification. The ratification will be approved if a majority of the votes
cast on the ratification proposal at the annual meeting vote to approve it, not
counting any votes represented by the shares of common stock issued in the
offering.
  If our
stockholders do not ratify the issuance, the securities will remain duly issued
and outstanding and the warrants will remain obligations of the
Company
  However,
in the event that our stockholders do not ratify the issuance of these
securities, Nasdaq may take formal action with respect to our issuance of the
common stock and warrants, which could include a public reprimand of the Company
and/or delisting our shares from the Nasdaq Global Market.
  Risk Associated with the
Global Economy
  Deterioration of economic conditions
could negatively impact our business.
  Our
business may be adversely affected by changes in global economic conditions,
including inflation, interest rates, availability of capital markets, consumer
spending rates, energy availability and costs (including fuel surcharges) and
the effects of governmental initiatives to manage economic conditions. Any such
changes could adversely affect the demand for our products or the cost and
availability of our needed raw materials, thereby negatively affecting our
financial results.
  The
recent disruptions in credit and other financial markets and deterioration of
global economic conditions, could, among other things:
  ·
              make
      it more difficult or costly for us to obtain financing for our operations
      or investments or to finance debt in the
future;
  ·
              impair
      the financial condition of some of our customers, suppliers or
      counterparties to our derivative instruments, thereby increasing bad debts
      or non-performance by suppliers;
and
  ·
              negatively
      impact demand for pre-mix feed or hog products, which could result in a
      reduction of sales, operating income and cash
  flows.
  Item
1B.  Unresolved Staff Comments.
  None
  Item
2.  Properties.
  We lease
our headquarters office, located at atRm. A1001-1002, Tower
16, Hengmao Int'l Center, 333 S. Guangchang Rd., Nanchang, Jiangxi Province, PRC
330003.  The annual rent on this space is approximately $28,000 and
the lease runs for two years through April 28, 2010.
  30
  Nanchang
Best is located in Chang Bei District Industrial Park, in Nanchang, Jiangxi
Province.  It owns three buildings consisting of an office building, a
factory and a dormitory.  Nanchang Best has been granted the right to
use the land in Nanchang by the Municipal Administration of state-owned land
through December 2049.  Nanchang Best also leases a feed manufacturing
facility at No. 4 Chuangye Street, East New Area, in the city of Taian, Shandong
Province.  The facility consists of four buildings, one each for
manufacturing, offices, warehouse and dormitory facilities. Nanchang Best has
been granted the right to use the land in Shandong by the Shandong Provisional
Government through July 2052.
  Shanghai
Best is located in Nanxiang, Jia Ding District, Shanghai.  It rents to
workshop buildings and office space in which it conducts all manufacturing and
business operations.  The annual rent on the Shanghai property is
approximately $33,000 and the lease runs through September 2009.
  Guangxi
Huijie is located in Coastal Industrial Park, Liangqin District, Nanning City,
Guangxi Province.  Guangxi Huijie owns three buildings, an office
building, a production plant and a worker dormitory.  The right to use
the land was granted by the Housing Bureau and Land Administrative Bureau of
Langqin District, Nanning City through October 2056.
  Shandong
Feed is located at No. 4 Chuangye Street, East New Area, in the city of Taian,
Shandong Province.  This facility consists of four buildings, one each
for manufacturing, offices, warehouse and dormitory facilities. Shandong Feed
has been granted the right to use this land by the Shandong Provisional
Government through July 2052.
  HopeJia
is located on South Wuting Road, Laocheng Development Zone, Chengmai County,
Hainan Province.  HopeJia owns three buildings, an office building,
production plant and a worker dormitory. The right to use the land was granted
by Housing Bureau and Land Administration Bureau of Hainan Province through
January 2056.
  Lushan’s
primary facility is a breeder hog farm located in the town of Hualin in Xingzi
County, Jiangxi Province.  The facility, which is situated on 258,000
square meters of developed land, is leased from the Chinese government for a
period of 29 years and is scheduled to expire on April 13, 2034. Lushan’s
breeder hog farm contains two separated areas, one for sows and the other for
boars and gilts, with a total of 15,800 square meters of
buildings.  Lushan pays a nominal annual rent under the terms of the
lease.
  Wannian
is located in Nanyan village in the town of Peimei in Wannian county, Jiangxi
Province.  Wannian subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.   The lease runs for 10 years
from January 3, 2008.
  Huyun is
located in the town of Huyun in Wannian county, Jiangxi Province. Huyun
subleases the property from the other shareholders of Huyun and includes
the land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from January 3,
2008.
  Ganzhou
is located in Yuliang village in the town of Hengshui in Chingyi County, Ganzhou
City, Jiangxi Province.  Ganzhou subleases the property from
the other shareholders of Ganzhou and includes the land, pig houses, office
buildings, heating system, power and water supply system.   The lease
runs for 10 years from January 4, 2008.
  Gang Feng
is located in the town of Fenglin in Dean county, Jiangxi Province. Gang Feng
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply
system.  The lease runs for 6 and 1/2 years from January 7,
2008.
  31
  Yichun is
located in Nanmiao Township, Yichun City, Jiangxi Province.  Yichun
subleases the property from the other shareholders of Yichun and includes
the land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from January 9,
2008.
  Zhejiang
Yongxin is located in Pinghu City, Zhejiang Province.  Zhejiang
Yongxin subleases the property from the former shareholders and includes the
land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 12 years from April 18, 2008.
  Shanghai
Fengxian is located in Yuantong Village, Qianqiao Town, Fengxian District,
Shanghai City.  Shanghai Fengxian subleases the property from the
former shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.   The lease runs for 14 years
from May 1, 2008.
  Shanghai
Tuanxi is located in Tuanxi Village, Datuan Town, Nanjiang District,
Shanghai.  Shanghai Tuanxi subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system. The lease runs for 10 years from May 1,
2008.
  Shanghai
Senrong is located in Wanglong Village, Xinnong Town, Jinshan District,
Shanghai.  Shanghai Senrong subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years
from May 1, 2008.
  Fujian
Muxin is located in Tongan District, Xiamen City, Fujian
Province.  Fujian Muxin subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.   The lease runs for 10 years
from April 30, 2008.
  Xiamen
Yuanshengtai is located in Xiamen, Fujian Province.  Fujian
Yuanshengtai subleases the property from the former shareholders and includes
the land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 10 years from April 30, 2008.
  Jiangxi
Zhiliang is located in Gancaoqian Village, Dayangzhou, Xingan County, Jiangxi
Province. Jiangxi Zhiliang subleases the property from the former shareholders
and includes the land, pig houses, office buildings, heating system, power and
water supply system.   The lease runs for 22 years from April 30,
2008.
  Shanghai
WeiSheng is located in the Jinshan District, Shanghai City.  Shanghai
Weisheng subleases the property from the former shareholders and includes the
land, pig houses, office buildings, heating system, power and water supply
system.  The lease runs for 30 years from June 1, 2008.
  Nanping
Minkang is located in the Fujian Province.  Nanping Minkang subleases
the property from the former shareholders and includes the land, pig houses,
office buildings, heating system, power and water supply system.  The lease
runs for 15 years from September 17, 2008.
  Guangdong
Xinfa is located in Lianjiang City, Guangdong Province.  Guangdong
Xinfa subleases the property from the other shareholders and includes the land,
pig houses, office buildings, heating system, power and water supply
system.   The lease runs for 10 years from May 30, 2008.
  Guangxi
Wanghua is located in Nanning City, Guangxi Province.  Guangxi Wanghua
subleases the property from the former shareholders and includes the land, pig
houses, office buildings, heating system, power and water supply
system.   The lease runs for 10 years from May 30, 2008.
  Guangxi
Linxing is located in Guangxi Province.  Guangxi Linxing subleases the
property from the former shareholders and includes the land, pig houses, office
buildings, heating system, power and water supply system.  The lease
runs for 10 years from September 20, 2008.
  32
  Nanning
Shunhua is located in Guangxi Province.  Nanning Shunhua subleases the
property from the former shareholders and includes the land, pig houses, office
buildings, heating system, power and water supply system.  The lease
runs for 10 years from October 28, 2008.
  Nanning
Shunan is located in Guangxi Province.  Nanning Shunan subleases the
property from the former shareholders and includes the land, pig houses, office
buildings, heating system, power and water supply system.  The lease
runs for 10 years from October 29, 2008.
  Guangxi
Gangda is located in Guigang City, Guangxi Province.  Guangxi Huijie
acquired all of the rights to the land, pig houses, office buildings, heating
system, power and water supply system in our acquisition of Guangxi Gangda. The
right to use the land was granted by Housing Bureau and Land Administration
Bureau of Guangxi Province through May 30, 2025.
  Guangxi
Gangxuan is located in Guangxi Province.  Guangxi Gangxuan subleases
the property from the former shareholders and includes the land, pig houses,
office buildings, heating system, power and water supply system. The lease runs
for 11 years from September 20, 2008.
  Guangxi
Guihong is located in Kuiyang Town, Xingye County, Yulin City, Guangxi
Province.  Guangxi Huijie acquired all of the rights to the land, pig
houses, office buildings, heating system, power and water supply system in our
acquisition of Guangxi Guihong. The right to use the land was granted by Housing
Bureau and Land Administration Bureau of Guangxi Province through March 31,
2025.
  Hainan
Meilan is located in Xianlai Village, Dazhipo Town, Haikou City, Hainan
Province.  Guangxi Huijie acquired all of the rights to the land, pig
houses, office buildings, heating system, power and water supply system in our
acquisition of Hainan Meilan.  The right to use the land was granted
by Housing Bureau and Land Administration Bureau of Guangxi Province through
April 12, 2033.
  Hainan
Haikou Wohao Hog Farm (“Hainan Wohao”), a wholly owned subsidiary of Guangxi
Huijie, is located in Fuan Village, Shishan Town, Xiuying District, Haikou City,
Hainan Province.  Guangxi Huijie acquired all of the rights to the
land, pig houses, office buildings, heating system, power and water supply
system in our acquisition of Hainan Wohao. The right to use the land was granted
by Housing Bureau and Land Administration Bureau of Guangxi Province through
April 18, 2038.
  Guangxi
Fuzhi is located in Sujia Village, Zhalin Town, Yanshan District, Guilin City,
Guangxi Province.  Guanxi Fuzhi subleases the property from the other
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 20 years
from May 30, 2008.
  Fujian
Jianhua is located in Xudun Town, Jian’ou City, Fujian
Province.  Fujian Jianhua subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years
from April 22, 2008.
  Fujian
Fengxiang is located in Mawei District, Fuzhou City, Fujian
Province.  Fujian Fengxiang subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years from
April 30, 2008.
  Nanping
Kangda is located in Yanping District, Nanping City, Fujian
Province.  Nanping Kangda subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years from
May 27, 2008.
  Fujian
Jianxi is located in Zhishan District, Jianou City, Fujian
Province.  Fujian Jianxi subleases the property from the former
shareholders and includes the land, pig houses, office buildings, heating
system, power and water supply system.  The lease runs for 15 years
from May 25, 2008.
  33
  Item
3.  Legal Proceedings.
  From time
to time, we may become involved in various lawsuits and legal proceedings that
arise in the ordinary course of business.  However, litigation is
subject to inherent uncertainties and an adverse result in these or other
matters may arise from time to time that may harm our business.  We
are currently not aware of any such legal proceedings or claims that we believe
will have, individually or in the aggregate, a material adverse affect on our
business, financial condition or operating results.
  Item
4.  Submission of Matters to a Vote of Security Holders.
  No
matters were submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended December 31, 2008.
  34
  PART
II
  Item
5.   Market for Registrant’s Common Equity, Related Shareholder
Matters and Issuer
 Purchases
of Equity Securities.
  Market
Information
  Through
August 28, 2007 our common stock was quoted on the Over-the-Counter Bulletin
Board under the symbol “AGFI.OB.”  Our common stock is currently
traded on the Nasdaq Global Market under the symbol FEED.  The
following table sets forth, for the periods indicated, the quarterly high and
low selling prices for our common stock as reported by Nasdaq.
  For
      the Year Ended December 31,2008
                  
                  
                  2007High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  LowFirst
      Quarter
                  
                  $
                  13.75
                  
                  
                  $
                  8.40
                  
                  
                  $
                  5.00
                  
                  
                  $
                  1.85Second
      Quarter
                  
                  
                  21.3099
                  
                  
                  
                  11.61
                  
                  
                  
                  6.00
                  
                  
                  
                  4.55Third
      Quarter
                  
                  
                  14.95
                  
                  
                  
                  7.55
                  
                  
                  
                  9.00
                  
                  
                  
                  5.55Fourth
      Quarter
                  
                  
                  8.09
                  
                  
                  
                  1.10
                  
                  
                  
                  16.36
                  
                  
                  
                  7.16
  The
closing price for our common stock on March 10, 2009 was $1.05.
  Holders
  The
number of record holders of our common stock as of March 10, 2009 was
58.
  Dividend
Policy
  We have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we will
declare and pay dividends in the future will be determined by our board of
directors at their discretion, subject to certain limitations imposed under
Nevada corporate law. In addition, our ability to pay dividends may be affected
by the foreign exchange controls in the PRC. The timing, amount and form of
dividends, if any, will depend on, among other things, our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our board of directors.
  Securities
Authorized for Issuance Under Equity Compensation Plans
  We
adopted the AgFeed Industries, Inc. 2008 Long-Term Incentive Plan at our 2008
Annual Meeting of Shareholders.  Prior to that time, we did not have a
formal equity compensation plan in effect for employees or
directors.
  35
  The
following table provides information as of December 31, 2008 about our
common stock that may be issued upon the exercise of options and rights granted
to employees or members of our Board of Directors:
  Plan
      Category
                          
                          (a)
                            Number
      of
                            Securities
      to
                            be
                            Issued
      Upon
                            Exercise
      of
                            Outstanding
                            Options
                          
                          
                          (b)
                            Weighted-
                            Average
                            Exercise
                            Price
                            of
                            Outstanding
                            Options
                          
                          
                          (c)
                            Number
      of
                            Securities
                            Remaining
                            Available
                            for
      Future
                            Issuance
      Under
                            Equity
                            Compensation
                            Plans
                            (excluding
                            securities
                            reflected
                            in
      column (a))Equity
      compensation plans approved by security holders
                          
                          
                          160,000
                          
                          
                          $
                          9.32
                          
                          
                          
                          840,000Equity
      compensation plans not approved by security holders
                          
                          
                          20,000
                          
                          
                          $
                          8.85
                          
                          
                          
                          -0-Total
                          
                          
                          180,000
                          
                          
                          $
                          9.27
                          
                          
                          
                          840,000
 (1)
                  Includes
      options to purchase 20,000 shares of our common stock, at an exercise
      price of $8.85 per share, granted to our independent directors in
      2007 outside any
plan.
 
 Stock
Price Performance Graph
 
 The stock
price performance graph below represents a comparison of the five year total
return of our common stock, the Nasdaq Composite Index and the CBOE China Index.
The graph assumes $100 was invested on November 17, 2006 and dividends are
reinvested for all years ending December 31.
  
 
 11/17/2006
                    
                    
                    12/31/2006
                    
                    
                    12/31/2007
                    
                    
                    12/31/2008Agfeed
      Industries, Inc
                    
                    $
                    100
                    
                    
                    $
                    67
                    
                    
                    $
                    282
                    
                    
                    $
                    54Nasdaq
      Composite Index
                    
                    $
                    100
                    
                    
                    $
                    99
                    
                    
                    $
                    108
                    
                    
                    $
                    63CBOE
      China Index
                    
                    $
                    100
                    
                    
                    $
                    114
                    
                    
                    $
                    152
                    
                    
                    $
                    88
  36
  Purchases
of Equity Securities
  This
table provides certain information with respect to our purchases of shares of
our common stock during the fourth quarter of 2008:
  Issuer
Purchases of Equity Securities
  Period
                      
                      Total Number of
                        Shares Purchased
                      
                      
                      Average
                        Price
                        Paid per
                        Share
                      
                      
                      Total Number of
                        Shares Purchased as
                        Part
      of Publicly
                        Announced Plan
                      
                      
                      Approximate
                        Dollar
      Value of
                        Shares
      that May
                        Yet
      Be Purchased
                        Under the PlanOctober
      6, 2008 through October 31, 2008
                      
                      
                      367,295
                      
                      
                      $
                      4.93
                      
                      
                      
                      367,295
                      
                      
                      $
                      8,188,254
                      (1)Total
                      
                      
                      367,295
                      
                      
                      $
                      4.93
                      
                      
                      
                      367,295
                      
                      
                      $
                      8,188,254
                      (1)
 (1)
                  On
      October 6, 2008, AgFeed announced that the Board of Directors authorized a
      $10 million share buyback program.  From October 6, 2008
      through October 31, 2008, we repurchased 367,295 shares for gross proceeds
      of $1,811,746.  We suspended the stock buyback program in
      December 2008.
  37
  Item
6.  Selected Financial Data.
  For
      the Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Net
      Revenue
                      
                      $
                      143,661,485
                      
                      
                      $
                      36,163,339
                      
                      
                      $
                      8,594,876Cost
      of Revenue
                      
                      
                      109,224,565
                      
                      
                      
                      25,763,479
                      
                      
                      
                      5,446,332Gross
      profit
                      
                      
                      34,436,920
                      
                      
                      
                      10,399,860
                      
                      
                      
                      3,148,544Operating
      expenses
                      
                      
                      9,695,989
                      
                      
                      
                      4,079,089
                      
                      
                      
                      2,114,650Income
      from operations
                      
                      
                      24,740,931
                      
                      
                      
                      6,320,771
                      
                      
                      
                      1,033,894Non-operating
      income (expense)
                      
                      
                      (6,783,375
                      )
                      
                      
                      148,921
                      
                      
                      
                      41,000Income
      before minority interest and provision for income taxes
                      
                      
                      17,957,556
                      
                      
                      
                      6,469,692
                      
                      
                      
                      1,074,894Minority
      Interest in Subsidiaries
                      
                      
                      (421,519
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      before provision for income taxes
                      
                      
                      17,536,037
                      
                      
                      
                      6,469,692
                      
                      
                      
                      1,074,894Provision
      (benefit) for income taxes
                      
                      
                      587,222
                      
                      
                      
                      (193,203
                      )
                      
                      
                      (100,386
                      )Net
      income
                      
                      $
                      16,948,815
                      
                      
                      $
                      6,662,895
                      
                      
                      $
                      1,175,280Weighted
      average shares outstanding :Basic
                      
                      
                      31,557,742
                      
                      
                      
                      26,093,376
                      
                      
                      
                      17,911,296Diluted
                      
                      
                      31,713,977
                      
                      
                      
                      26,174,973
                      
                      
                      
                      17,911,296Earnings
      per share:Basic
                      
                      $
                      0.54
                      
                      
                      $
                      0.26
                      
                      
                      $
                      0.07Diluted
                      
                      $
                      0.53
                      
                      
                      $
                      0.25
                      
                      
                      $
                      0.07
  We
believe that "adjusted net income" and "adjusted earnings per share"
information, when taken in conjunction with reported results, provide a useful
measure of financial performance since they eliminate the impact of certain
non-recurring, non-cash charges. These non-GAAP measures should not be
considered in isolation or as a substitute for the most comparable GAAP
measures. Additionally, the non-GAAP financial measures used by AgFeed may not
be comparable to non-GAAP financial measures used by other
companies.
  Adjusted
      Net Income and Earnings Per Share
                  
                  For
      the Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Net
      Income
                  
                  $
                  16,948,815
                  
                  
                  $
                  6,662,895
                  
                  
                  $
                  1,175,280AdjustmentsInterest
      and financing costs related to conversion of convertible
      debentures
                  
                  $
                  5,704,358
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
      currency loss
                  
                  $
                  559,299
                  
                  
                  
                  -
                  
                  
                  
                  -Adjusted
      Net Income
                  
                  $
                  23,212,472
                  
                  
                  $
                  6,662,895
                  
                  
                  $
                  1,175,280Basic
      Weighted Shares Outstanding
                  
                  
                  31,557,742
                  
                  
                  
                  26,093,376
                  
                  
                  
                  17,911,296Adjusted
      Earnings per Share
                  
                  $
                  0.74
                  
                  
                  $
                  0.26
                  
                  
                  $
                  0.07
  38
  Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
  The
information contained in this section has been derived from the consolidated
financial statements of AgFeed. Information contained herein should be read
together with AgFeed’s financial statements and related notes included elsewhere
in this annual report.
  Dollar
amounts set forth in this Item 7 "Management’s Discussion and Analysis of
Financial Condition and Results of Operations" are in thousands (000s) unless
otherwise indicated.
  Overview
  We are a
leading producer of premix animal feed and commercial hog production in the PRC.
Our premix feed business consists of the research and development, manufacture,
marketing and sale of premix feed for use in the domestic animal husbandry
markets, primarily the hog raising markets in the PRC.   Premix is an
animal feed additive that is broadly used in commercial animal production
worldwide. The use of premix feed reduces the time it takes to grow an animal to
reach market weight. We have been in the premix feed business since 1995 and
currently operate five premix feed manufacturing facilities. Nanchang Best,
Shanghai Best, Guangxi Huijie, Shandong Feed and HopeJia operate facilities
Jiangxi, Shanghai, Guangxi, Shandong, and Hainan provinces,
respectively.
  In
November 2007, we acquired Lushan and entered the hog breeding and production
business. In addition to our premix feed business, we are also engaged in the
business of raising, breeding and selling hogs in China.  As of
December 31, 2008, the Company owned 30 operating hog farms located in Jiangxi,
Shanghai, Hainan, Guangxi and Fujian provinces, which are in or near the largest
pork consumption areas in the PRC. The 30 hog farms are well-structured and
well-managed through five hog production management branches featuring
centralized resources including sales, human resources, purchasing and finance
departments in Jiangxi, Shanghai, Guangxi, Fujian and Hainan
provinces.
  We have
developed a system of centralized raw material purchases, accounting and
internal control management, corporate marketing strategies and brand
building.  AgFeed has created, and centrally manages, an animal
disease control response team.  This team consists of experienced hog
industry professionals that are used by each of our subsidiaries across both of
our lines of business. Our increased size and economies of scale throughout 2008
have benefited us greatly in both raw materials cost savings and administrative
efforts.
  AgFeed
had revenues of $143.66 million for the year ended December 31, 2008 compared to
revenues of $36.16 million for the year ended December 31, 2007.  The
increase (297%) we experienced in this period was the result of our organic
growth in our feed business and the hog farm acquisitions we made during the
year.
  Feed
Business
  In our
feed business, we operate each subsidiary independently with regard to
manufacturing and local marketing and sales efforts.  We share sales
referrals and leads among the subsidiaries, but our subsidiaries do not compete
against each other for new sales. Most of our research and development occurs at
Nanchang Best and Guangxi Huijie.  The results of our R&D efforts
are for the benefit of, and shared with, each of our feed operating
companies.
  As of
December 31, 2008, we had established relationships with over 1,000
independently owned feed distribution chain stores that sell our products
exclusively, targeting backyard and small hog farms. These complement our direct
sales to more than 660 large size commercial hog farms. We rely on the
distributors to market and sell our products to the smaller hog
farms.  Approximately 75% of China’s total annual hog production is
supplied by backyard and small farms that raise less than 100 hogs per year per
family. Through our network of distributors and direct sales, we are able to
market our premix feed to the producers of more than 90% of the annual hog
production in China.
  39
  AgFeed is
one of a handful of companies that have received “Green Certification” from the
Minister of Agriculture of PRC for its premix products under the brand label
“BEST.”  This means that these products are safe,
environmentally-friendly, and can effectively promote the healthy growth of
pigs. According to current government regulations, pork cannot be accredited by
the government as “green” unless it is produced using government certified green
feed. Having our feed certified as green requires us to adhere to strict
operational controls and procedures. This green certification laid the ground
for our Hog Farms to produce hogs providing green pork. It is also an incentive
for other commercial hog farms to enter into sales contracts with our feed
operations.
  AgFeed
invests capital in research and development to maintain and improve on a
superior quality product while experimenting with environmentally sensitive
premix formulas. We will continue to invest up to 1% of our revenues to
increasing our long term profitability and competitiveness.
  In the
last year AgFeed managed to negotiate a number of agreements with dealers and
suppliers to ensure that we receive supplies of key raw materials at a discount
to market.  This is an important aspect of our ongoing strategy to
mitigate corn and soybean meal price disruptions. Additionally, to maintain
reasonable profit, we increased our selling price in the spring of 2008 in the
midst of the rising and uncertain raw material market.
  The
increase in our revenues during the year ended December 31, 2008 was due to
increases in the volume of products sold as a direct result of new products
launched and our expansion into new markets. Due to a stronger AgFeed brand
name, we were able to raise our premix feed prices several times in our second
quarter and successfully mitigate the effects of increased costs of raw
materials during the year .
  We also
experienced increases in our cost of goods sold during the year ended December
31, 2008.  The costs of corn and soybean meal, which are two of our
main raw materials, increased approximately 5 to 12% and 15 to 50%,
respectively. The cost of corn stabilized during the last half of
2008.
  Hog
Production Business
  In our
hog production business, we have grown our business through strategic
acquisitions of current producing commercial hog farms.  Since
November 2007, we have acquired at least a majority interest in one breeder hog
farm and an additional 29 operating hog farms.  These farms are
located in Jiangxi, Fujian, Shanghai and Guangxi provinces. All of our hog farms
are immediately accretive to earnings. We sell live hogs in two of China’s
wealthiest regions – Shanghai and Guangdong, both of which have China’s highest
hog prices as well as deep pork consuming cultures.
  We have
effectively marketed our products through a team-based approach, sharing sales
leads and referrals. Due to centralized procurement processes, we have been able
to offset production costs related to corn, soybean meal, veterinary drugs and
animal health products.
  For 2009,
AgFeed plans to achieve a production capacity of up to 650,000
hogs.  This capacity is based on a projected average sow population of
31,500 head at an average production per sow of 17.6 hogs (554,400 hogs),
coupled with the potential purchase and finishing of baby pigs as market
conditions warrant.  We believe this could add an additional 100,000
to 150,000 hogs to our sale total.
  AgFeed is
studying the entrance into a genetics program that can potentially significantly
improve hog productivity and profitability through a higher number of piglets
born per sow and lower feed costs due to improved feed to meat conversion ratios
as better hog types grow faster while consume less feed.
  AgFeed's
future investment plans include modernization of our pork production facilities,
investment in reporting and cash management systems and the training of our
employees, environmental and health safety programs including an emphasis on
upgrading bio security. These actions are part of our effort to improve on the
standards of the new proposed China Safety Law to be implemented on June 1,2009
and to assure consistent high quality and safe pork.
  40
  According
to the China Feed Industry Association, the PRC has the world's largest and most
profitable markets for hog production with approximately 600 million hogs
produced annually, compared to approximately 100 million in the US. More than
1.2 billion Chinese consume pork as their primary source of meat. 65% of all
meat consumed in the PRC is pork. Chinese consumers consume more pork each year
than the rest of the world combined. Pork production in China is a key
political, social and security issue for consumers. The PRC Government supports
hog producers with favorable tax status and subsidies, insurance, vaccines, caps
on feed costs and land use grants. Hog production is exempt from all taxes and
sow owners receive government grants and subsidies.
  Examples
of the importance that the PRC puts on hog production are exemplified by the
adoption of new policies and enactment of new laws benefiting hog producers. In
January 2008, the Chinese central government instituted a set of measures that
could prevent large declines in hog prices with the view of stabilizing hog
production and hog prices in order to protect the interest of hog farms. In July
2008, the NDRC announced that they were channeling $5.6 billion RMB for
livestock farm construction and another $2.8 billion RMB to support live pig
production. The Food Safety Law, which goes into effect on June 1, 2009,
provides a legal basis for the government to strengthen food safety control
“from the production line to the dining table.”
  Critical
Accounting Policies
  In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States, we are required to make certain
estimates and assumptions that affect the amounts reported
therein.  Several of the estimates and assumptions we are required to
make relate to matters that are inherently uncertain as they pertain to future
events.  However, events that are outside of our control cannot be
predicted and, as such, they cannot be contemplated in evaluating such estimates
and assumptions.  If there is a significant unfavorable change to
current conditions, it will likely result in a material adverse impact to our
consolidated results of operations, financial position and liquidity. We believe
that the estimates and assumptions we used when preparing our financial
statements were the most appropriate at that time.  Presented below
are those accounting policies that we believe require subjective and complex
judgments that could potentially affect reported results.
  Use of
Estimates.  Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America.  The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities.  On an ongoing basis, we evaluate our estimates,
including those related to impairment of long-lived assets and allowance for
doubtful accounts.  We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions; however, we believe that our estimates,
including those for the above-described items, are reasonable.
  Areas
that require estimates and assumptions include valuation of accounts receivable
and inventory, determination of useful lives of property and equipment,
estimation of certain liabilities and sales returns.
  Allowance
For Doubtful Accounts.  We continually monitor customer
payments and maintain a reserve for estimated losses resulting from our
customers’ inability to make required payments. In determining the reserve, we
evaluate the collectability of our accounts receivable based upon a variety of
factors. In cases where we become aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations, we record a
specific allowance against amounts due. For all other customers, we recognize
allowances for doubtful accounts based on our historical write-off experience in
conjunction with the length of time the receivables are past due, customer
credit worthiness, geographic risk and the current business environment. Actual
future losses from uncollectible accounts may differ from our
estimates.
  41
  Inventories.  Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. We evaluate our ending inventories for estimated
excess quantities and obsolescence. Our evaluation includes the analysis of
future sales demand by product, within specific time horizons. Inventories in
excess of projected future demand are written down to net realizable value. In
addition, we assess the impact of changing technology on inventory balances and
writes-down inventories that are considered obsolete. Inventory obsolescence and
excess quantities have historically been minimal.
  Long-Lived
Assets.  We periodically assess potential impairments to our
long-lived assets in accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS
No. 144 requires, among other things, that an entity perform an impairment
review whenever events or changes in circumstances indicate that the carrying
value may not be fully recoverable.  Factors we considered include,
but are not limited to: significant underperformance relative to expected
historical or projected future operating results; significant changes in the
manner of use of the acquired assets or the strategy for our overall business;
and significant negative industry or economic trends. When we determine that the
carrying value of a long-lived asset may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we estimate the
future undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future undiscounted cash
flows and eventual disposition is less than the carrying amount of the asset, we
recognize an impairment loss. An impairment loss is reflected as the amount by
which the carrying amount of the asset exceeds the fair market value of the
asset, based on the fair market value if available, or discounted cash flows. To
date, there has been no impairment of long-lived assets.
  Property
and Equipment.  Useful lives of property and equipment is based
on historical experience and industry norms. Changes in useful lives due to
changes in technology or other factors can affect future depreciation
estimates.
  Revenue
Recognition. Our revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) 104. Revenue is recognized when services are
rendered to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of
AgFeed exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. We are not subject to VAT withholdings.  We give
volume rebates to certain customers based on volume achieved. AgFeed accrues
sales rebates based on actual sales volume. Sales returns and rebates included
in our revenues were $1,192,157, $385,375 and $324,218 for the years ended
December 31, 2008, 2007 and 2006, respectively.
  We make
estimates and judgments when determining whether the collectability of revenue
from customers is reasonably assured.  Management estimates regarding
collectability impact the actual revenues recognized each period and the timing
of the recognition of revenues.  Our assumptions and judgments
regarding future collectability could differ from actual events, thus materially
impacting our financial position and results of operations.
  Sales
returns and allowances have historically been
insignificant.  Accordingly, estimating returns is not
critical.  However, if circumstances change, returns and allowance may
impact the company’s earnings.
  There are
no differences in our arrangements with our different types of
customers.  Accordingly, we do not have different revenue recognition
policies for different types of customers.   We offer credit
terms ranging from 30 to 90 days for most customers.  From some large
customers, we may extend these terms beyond 90 days.
  42
  Recent
Accounting Pronouncements
  In June
2007, FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities”, which addresses whether nonrefundable
advance payments for goods or services used or rendered for research and
development activities should be expensed when the advance payment is made or
when the research and development activity has been
performed.  Management is currently evaluating the effect of this
pronouncement on our financial statements.
  In
December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS 141R changes how a reporting enterprise accounts for the
acquisition of a business. SFAS 141R requires an acquiring entity to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value, with limited exceptions, and applies to a wider
range of transactions or events. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008. Early adoption and retrospective
application is prohibited.
  In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which is an amendment of ARB No.
51.  SFAS 160 clarifies that a noncontrolling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements.  SFAS 160 changes the
way the consolidated income statement is presented, thus requiring consolidated
net income to be reported at amounts that include the amounts attributable to
both parent and the noncontrolling interest.  SFAS 160 is effective
for the fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008.  Based on current conditions, we do not
expect the adoption of SFAS 160 to have a significant impact on our results of
operations or financial position.
  In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133.”  SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  Based on current conditions, we do not expect the adoption of
SFAS 161 to have a significant impact on our results of operations or financial
position.
  In May
2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.”  SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP in the United States.  SFAS 162 will not have an
impact on our financial statements.
  In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.”  The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on our
financial statements.
  43
  Results
of Operations
  Comparison
of Fiscal Years Ended December 31, 2008 and December 31, 2007
  As of December31,2008
                  
                  
                  2007
                  
                  
                  $ Change
                  
                  
                  % ChangeRevenues
                  
                  $
                  143,661,485
                  
                  
                  $
                  36,163,339
                  
                  
                  $
                  107,498,146
                  
                  
                  
                  297.3
                  %Cost
      of Sales
                  
                  
                  109,224,565
                  
                  
                  
                  25,763,479
                  
                  
                  
                  83,461,086
                  
                  
                  
                  324.0Gross
      Profits
                  
                  
                  34,436,920
                  
                  
                  
                  10,399,860
                  
                  
                  
                  24,037,060
                  
                  
                  
                  231.1Operating
      Expenses
                  
                  
                  9,695,989
                  
                  
                  
                  4,079,089
                  
                  
                  
                  5,616,900
                  
                  
                  
                  137.7Interest
      and financing costs
                  
                  
                  (5,704,358
                  )
                  
                  
                  (153,723
                  )
                  
                  
                  (5,550,635
                  )
                  
                  
                  3,610.8Net
      Income
                  
                  
                  16,948,815
                  
                  
                  
                  6,662,895
                  
                  
                  
                  10,285,920
                  
                  
                  
                  154.4
  Revenues.Compared
to the same period in 2007, the increase in revenues was due to an increase in
the volume of feed products that we sold and the acquisition of our hog
farms.  The increase in feed product sales was a result of expanding
our distribution channels by the opening of additional exclusive distribution
stores for our products.   We experienced favorable market conditions
that increased the demand for our feed products.  A stronger “AgFeed”
brand name allowed us to successfully increase
our price twicein the second quarter of 2008. Due to softening in the
market for hog prices, we experienced a decrease in the selling price for our
hogs during the second half of 2008. However, as a result of economies of scale,
we were able to cut hog production cost through centralized raw materials
purchases, sales and marketing channels, and finance and internal control
management.
  Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the twelve month period ended December 31, 2008 compared to the same
period in 2007. The cost of goods sold included costs in both premix feed
and hog production. These raw materials constitute approximately 60 - 75% of our
raw material costs.
  Gross
Profit. Gross margins decreased to 23.97% from 28.76% during
the twelve month period ended December 31, 2008 as compared to the same period
last year.  The decrease in gross margin can be attributed to the increase
in the cost of hog feed during the 2008 last two quarters, and a substantial
general sell-off of swine inventory resulting in falling prices after the 2008
Olympics ended. This was modified somewhat by actions taken in the first half of
2008, including expansion of our product distribution channels, and our entry
into long-term contracts for key product ingredients which locked in favorable
cost savings.
  Selling, General and Administrative
Expenses.   General and administrative expense includes
overhead expenses such as rent, management and staff salaries, general
insurance, marketing, accounting, legal and offices expenses. The increase
in our selling, general and administrative expense also reflects the addition of
our new subsidiaries, which had a total of approximately $9.7 million in
selling, general and administrative expenses during 2008. Selling expenses for
the period increased by 46.32% due to costs associated with the aggressive
expansion into markets in neighboring provinces, and the costs associated with
the absorption of our new subsidiaries.
  Interest and Financing Costs.We incurred interest and financing costs of approximately $5.7 million
during 2008, principally as a result of the issuance of $19 million principal
amount of convertible notes issued during February 2008.  $15.2
million of the convertible notes were converted into shares of common stock,
resulting in the non-recurring accelerated amortization of the debt issuance
costs and debts discounts amounting to approximately $5.8 million.
  Due to
foreign exchange appreciation in RMB against the USD, we incurred a one-time,
non-recurring loss on foreign translation of $559,299 during 2008, as it is
hard to timely convert USD deposits into RMB to implement these procedures
due to SAFE regulations.
  44
  Hog
production is an income tax exempt sector in China and sow owners receive
government grants and subsidies.  Our feed manufacturing companies
benefit from exemption from value-added tax.
  Net Income.   The
increase in our net income was due to higher sales and the benefits from
economies of scale in our business resulting in a modest increase in operating
efficiency. This was offset by one time, non-operational related charges and
interest expenses associated with the conversion of a portion of the $19 million
of convertible notes by investors during 2008. We continued to benefit from the
tax exempt status for our hog production business.
  Comparison
of Fiscal Years Ended December 31, 2007 and December 31, 2006
  As of December 31,2007
                          
                          
                          2006
                          
                          
                          $ Change
                          
                          
                          % ChangeRevenues
                          
                          $
                          36,163,339
                          
                          
                          $
                          8,594,876
                          
                          
                          $
                          27,568,463
                          
                          
                          
                          321
                          %Cost
      of Sales
                          
                          
                          25,763,479
                          
                          
                          
                          5,446,332
                          
                          
                          
                          20,317,147
                          
                          
                          
                          373Gross
      Profits
                          
                          
                          10,399,860
                          
                          
                          
                          3,148,544
                          
                          
                          
                          7,251,316
                          
                          
                          
                          230Selling,
      General and Administrative Expenses
                          
                          
                          4,079,089
                          
                          
                          
                          2,114,650
                          
                          
                          
                          1,964,436
                          
                          
                          
                          93Net
      Income
                          
                          
                          6,662,895
                          
                          
                          
                          1,175,280
                          
                          
                          
                          5,487,615
                          
                          
                          
                          467
  Revenues.  The
increase in revenues was due to an increase in the volume of feed products that
we sold, the acquisition of Guangxi Huijie and the introduction in early 2007 of
the Airubao Series, a new special blended feed product formulated especially for
baby pigs.  Guangxi Huijie contributed approximately 858 metric tons
of premix volume during the fiscal year ended December 31, 2007, Nanchang Best
experienced a decrease of approximately 838 metric tons and Shanghai Best
experienced an increase of approximately 1,335 metric tons of premix during the
year ended December 31, 2007 as compared to the year ended December 31, 2006 to
account for the increase in premix volume. We focused on increasing sales of the
Airubao Series, which is a special blended feed product.  For
comparative purposes, we will analyze the blended feed and Airubao Series
together. This increase was due primarily to the new Airubao sales and
approximately 394 metric tons of blended feed sold by Guangxi
Huijie.  Nanchang Best sold 12,165 metric tons during the year ended
December 31, 2007 compared to 1,097 metric tons during the same period in
2006.  Guangxi Huijie also accounted for 1,581 metric tons of other
feed products, Nanchang Best sold 226 metric tons and Shanghai Best sold 231
metric tons of other feed products during the year ended December 31,
2007.  Overall, the Guangxi Huijie acquisition provided approximately
31% of our revenues while Nanchang Best provided 42% and Shanghai Best provided
27% of our total revenues during the fiscal year ended December 31,
2007.  Guangxi Huijie contributed approximately 29.3%, Nanchang Best
approximately 48.1% and Shanghai Best approximately 22.6% of the total volume of
feed sold during the year ended December 31, 2007.  Nanchang Best’s
revenues increased approximately 226% during the year ended December 31, 2007
compared to the same period in 2006.  Shanghai Best’s revenues
increased approximately 187% during the year ended December 31, 2007 compared to
the same period in 2006. Lushan, acquired in November 2007, did not
materially contribute to our overall revenues.
  Cost of Goods
Sold.  We experienced an approximate 46% and 35% increase in
the unit cost of goods sold for blended feed and premix products, respectively,
during the twelve month period ended December 31, 2007 compared to the same
period in 2006.  In order to provide excellent customer service and
differentiate ourselves from our competition, at our customers’ request, we
supply them with customized formulations of our products.  In any
given month, the cost of the various additives used fluctuates, which can result
in temporary increases in unit cost of goods sold. We experienced an increase in
the costs of corn and soybean meal of approximately 12 and
20%, respectively over their levels during the year ended December 31,
2007.  These additives constitute approximately 70% of our raw
material costs.  These increased costs offset our increases in
revenues.  Even though this may have an adverse effect on our short
term profits, we take the long-term view that this practice results in increased
customer loyalty, builds the AgFeed brand and will ultimately lead to increased
sales and gross profits.  In addition, we are presently experiencing
more stable pricing in these additives, which we anticipate will stabilize our
cost of goods sold.
  45
  Nanchang
Best experienced a 269% increase in cost of goods sold during the year ended
December 31, 2007 compared to the same period in 2006.  Shanghai Best
experienced a 233% increase in cost of goods sold during the year ended December
31, 2007 compared to the same period in 2006.
  Gross Profit. Gross margins
decreased to 29% for the year ended December 31, 2007 from 37% for the same
period in 2006.  The decrease in gross margin can be attributed to
several factors: (i) the cost of introducing the Airubao Series; (ii) we
experienced an approximate 46% increase in the unit cost of goods sold of
blended feed during the twelve months ended December 31, 2007 compared to the
same period in 2006; (iii) the unit cost of goods sold for premix products
increased approximately 35% during the year ended December 31, 2007 compared to
the same period in 2006.
  Gross
margins at Nanchang Best for the year ended December 31, 2007 were approximately
26% compared to 34% for the same period in 2006.  Gross margins at
Shanghai Best for the year ended December 31, 2007 were 28% compared to 38% for
the same period in 2006.  Gross margins at Guangxi Huijie for the year
ended December 31, 2007 were approximately 28%.  Gross margin
calculations for each subsidiary are calculated prior to any adjustments for
intercompany sales, which are reflected in the consolidated financial
statements.
  Selling, General and Administrative
Expenses.  We incurred legal and audit expense in the year
ended December 31, 2007 of approximately $450,000 associated with being a U.S.
publicly traded reporting company that we did not incur during the same period
in 2006.  The increase in our general and administrative expense also
reflects the addition of Guangxi Huijie, which had approximately $878,000 of
general and administrative expenses during the year ended December 31,
2007.  General and administrative expense includes overhead expenses
such as rent, management and staff salaries, general insurance, marketing,
accounting and legal and office expenses. Selling expenses for the period
increased by 109% due to the 321% increase in revenues and the costs associated
with entering markets in neighboring provinces as well as the addition of
Guangxi Huijie, which had approximately $639,000 of selling expenses during the
year ended December 31, 2007. We attempted to control our selling expenses
through the use of strict cost controls and efficient use of our distribution
channels.
  Net Income. Our increase in
net income was due to an increase in income from operations offset by an
increase in non-operating income due to net interest expense offset by other
income of approximately $149,000.  The major reason for the increase
in non-operating income during 2007 was interest earned on the net proceeds of
our financings of approximately $142,000 and other income of approximately
$160,000 offset by interest paid in connection with short term loans of
approximately $154,000. In addition, our Nanchang Best subsidiary became a Sino
Foreign Joint Venture due to an investment by a foreign investor in July
2006.  Nanchang Best receives favorable tax status and is exempt from
all income tax through July 14, 2008 after which will pay tax at a reduced rate
of 15% for the next three years.
  Off-Balance
Sheet Arrangements
  There
were no off-balance sheet arrangements during the year ended December 31, 2008
that have, or are reasonably likely to have, a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
interests.
  Liquidity
and Capital Resources
  At
December 31, 2008, we had $24,839,378 in cash and cash equivalents on
hand.
  46
  During
first quarter of 2008, we completed a $41,000,000 financing.  We
received aggregate gross proceeds of $22,000,032 through the sale of 2,444,448
shares of common stock at $9 per share.  We received aggregate
proceeds of $19,000,000 through the issuance of three year convertible notes
bearing interest at 7% per annum and convertible into common stock at $10 per
share.  In connection with the convertible notes, we issued 380,000
warrants which are exercisable immediately and have a $10 strike
price.  We paid $3,432,670 related to the sale of shares and
$1,716,666 related to the issuance of the convertible notes.
  On April
16, 2008, we entered into a Securities Purchase Agreement with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of our common stock at price
of $16.00 per share for aggregate gross proceeds of $10,000,000.
  On April
22, 2008, we entered into Securities Purchase Agreements with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 1,322,836 shares of the Company’s Common
Stock at price of $19.05 per share for aggregate gross proceeds of
$25,200,026.
  On
December 29, 2008, we completed a financing and raised gross proceeds of $8.75
million through the sale to institutional investors of 5 million newly issued
common stock units at $1.75 per unit under an effective Form S-3 Registration
Statement. Each unit consists of one share of newly issued common stock and a
warrant to purchase 0.7 of a share of common stock for $2.50 a share, which is
exercisable over a five-year period.
  During
the period from October 6, 2008 through October 31, 2008, the Company
repurchased 367,295 shares of our common stock for gross proceeds of $1,811,746.
No additional shares have been repurchased.
  During
the year ended December 31, 2007, we completed two private placement offerings
of our securities.  Through the final closing of the first private
placement offering on April 29, 2007, we received aggregate gross proceeds of
$6,830,259 from the sale of an aggregate of 2,276,753 units to 37 accredited
investors. Each unit was priced at $3.00 and represented one share of our common
stock and a warrant to purchase eight percent of one share of common
stock.  Accordingly, we issued an aggregate of 2,276,753 shares of our
common stock and warrants to purchase an aggregate of 182,146 shares of our
common stock to the 37 accredited investors who participated in this
offering.  In connection with the private placement, fees of eight
percent of the securities placed were paid in cash and a number of common stock
purchase warrants equal to eight percent of the units placed were paid to
participating dealers and one finder.  Accordingly, we paid $546,421
and issued warrants to purchase 182,141 shares of our common stock to the
participating dealers and finder.  All of the common stock purchase
warrants issued have a three-year term and have an initial exercise price of
$5.00.  We received net proceeds from the private placement of
$6,247,503, after deduction of the costs associated with the financing of
$582,756
  On June
22, 2007, we completed a second private placement offering pursuant to which we
sold 750,000 units at an offering price of $4.00 per unit for gross proceeds of
$3,000,000.  Each unit sold consisted of one share of common stock and
one warrant to purchase 25 percent of one share of common
stock.  Accordingly, we issued 750,000 shares of our common stock and
warrants to purchase 187,500 shares of our common stock to the one accredited
investor that participated in this offering.  In connection with this
private placement offering, a fee of eight percent of the securities placed was
paid in cash and a number of common stock purchase warrants equal to eight
percent of the units placed were paid to a finder.  Accordingly, we
paid $240,000 in cash and issued warrants to purchase 60,000 shares of our
common stock to the finder.  All stock purchase warrants are
exercisable for a period of three years at an exercise price of $5.60 per
share.  We received net proceeds from the private placement of
$2,760,000, after deduction of costs associated with the financing.
  As of
December 31, 2008, we had no outstanding loans.  The loans that we
entered into in 2006 and 2007 were paid in full during the second quarter of
2008.
  47
  During
the year ended December 31, 2008, we generated $18,456,186 of cash from our
operating activities. The cash was generated primarily due to net income of
$16,948,815, non-cash  expenses of $7,558,935 offset by an increase in
operating assets, net of $6,051,564.
  We used
$78,327,198 in investing activities during the year ended December 31, 2008; of
which $10,696,569 was for the acquisition of property and equipment, and
$67,490,049 for the acquisition of the 29 Hog Farms and one feed
company.
  We
received $76,466,637 in cash from financing activities.  During the
year ended December 31, 2008, we received $65,950,069 from the sale of our
securities and paid $7,030,261 in offering costs. We also received $19,000,000
from the issuance of convertible notes and warrants, of which the Company paid
$1,716,666 for the cost of issuing the convertible notes and warrants. In
addition, warrants holders exercised 269,456 warrants resulting in gross
proceeds to us of $2,138,848 and minority interest holders contributed
$1,097,690.
  At
December 31, 2008, our accounts receivable balance was approximately $9.46
million, a reduction of $1.3 million in the last quarter alone. There is no
accounts receivable for hog sales because the farmers purchasing hogs from us
generally pay cash.
  Our
principal demands for liquidity are to increase capacity, raw materials
purchase, sales distribution, and the possible acquisition of producing hog
farms or joint ventures in our industry as opportunities present themselves, as
well as general corporate purposes.  We anticipate that the amount of
cash we have on hand as of the date of this report as well as the cash that we
will generate from operations will satisfy these requirements.   We
may seek additional funds from the capital markets as we identify additional
acquisition candidates.  We expect all of our hog farm acquisitions in
the future to be accretive to earnings.
  We intend
to meet our liquidity requirements, including capital expenditures related to
the purchase of equipment, purchase of raw materials, and the expansion of our
business, through cash flow provided by operations and funds raised through cash
investments.
  The
majority of the our revenues and expenses were denominated in RMB, the currency
of the PRC.  There is no assurance that exchange rates between the RMB
and the USD will remain stable.
  Contractual
Obligations
  No
contractual obligation occurred during the year ended December 31, 2008 and
therefore it is not expected to have any effect on our liquidity and cash flow
in future periods.
  Inflation
and Seasonality
  Demand
for our products remains fairly consistent throughout the year and we do not
believe our operations have been materially affected by inflation or
seasonality.
  Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.
  Disclosures
About Market Risk
  We may be
exposed to changes in financial market conditions in the normal course of
business.  Market risk generally represents the risk that losses may
occur as a result of movements in interest rates and equity
prices.  We currently do not use financial instruments in the normal
course of business that are subject to changes in financial market
conditions.
  48
  Currency
Fluctuations and Foreign Currency Risk
  Substantially
all of our operations are conducted in the PRC, with the exception of our
limited export business and overseas purchases of raw materials.  Most
of our sales and purchases are conducted within the PRC in RMB, which is the
official currency of the PRC.  The effect of the fluctuations of
exchange rates is considered minimal to our business operations.
  Substantially
all of our revenues and expenses are denominated in RMB.  However, we
use US dollars for financial reporting purposes.  Conversion of RMB
into foreign currencies is regulated by the People’s Bank of China through a
unified floating exchange rate system.  Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from its operations in the PRC.
  Interest
Rate Risk
  We do not
have significant interest rate risk, as loans we had entered into in 2006 and
2007 were paid in full during the second quarter of 2008.
  Credit
Risk
  We have
not experienced significant credit risk, as most of our customers are long-term
customers with superior payment records.  Our receivables are
monitored regularly by our credit managers.
  Item
8.  Financial Statements and Supplementary Data.
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm
                              
                              F-1Consolidated
      Balance Sheet at December 31, 2008 and 2007
                              
                              F-2Consolidated
      Statements of Income and Other Comprehensive Income for the
      Years Ended December 31, 2008, 2007 and
2006
                              
                              F-3Consolidated
      Statement of Shareholders' Equity for the Years Ended
      December 31, 2008, 2007 and 2006
                              
                              F-4Consolidated
      Statements of Cash Flows for the Years Ended
      December 31, 2008, 2007 and 2006
                              
                              F-5Notes
      to Consolidated Financial Statements
                              
                              F-6 to F-29
  Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
  None.
  Item
9A.  Controls and Procedures
  Disclosure Controls and
Procedures.
  Our
management, under the supervision and with the participation of our chief
executive officer and chief financial officer, has performed an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange "Act")) as of the end
of the period covered by this report, as required by Rule 13a-15(b) under
the Exchange Act.  Disclosure controls and procedures are those
controls and procedures designed to provide reasonable assurance that the
information required to be disclosed in our Exchange Act filings is
(1) recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (2) accumulated and
communicated to management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.  Based on that evaluation, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Annual Report on Form
10K.
  49
  Management’s
Report on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act).  Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles (“GAAP”).  Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and or the Board of Directors of AgFeed; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of AgFeed’s assets that could
have a material effect on the interim or annual consolidated financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
  Under the
supervision and with the participation of our chief executive officer and chief
financial officer, management conducted an evaluation of the effectiveness of
AgFeed’s internal control over financial reporting as of December 31, 2008,
using the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
  Based on
this evaluation, our management concluded that our internal control over
financial reporting was effective and that there was no material weakness or
significant deficiency discovered as of December 31, 2008.
  There are
newly acquired subsidiaries excluded from our Sarbanes-Oxley compliance scope
for 2008, whose aggregated financial statements constitute 71.1% of total
assets, 67.6% of revenue, and 97.0% of net income of the consolidated
financial statement amounts as of and for the year ended December 31,
2008.
  Management’s
evaluation of the effectiveness of AgFeed’s internal control over financial
reporting as of December 31, 2008 has been audited by Goldman Parks Kurland
Mohidin LLP, an independent registered public accounting firm, as stated in
their report included on page F-1.
  Remediation
of Fiscal Year 2007 Material Weaknesses
  We have
previously disclosed in our Annual Report on Form 10K for the year ended
December 31, 2007 that we have identified material weaknesses in internal
control over financial reporting.  The following summarizes the
material weaknesses reported as of December 31, 2007 and the remedial action
taken by AgFeed:
  1.
              AgFeed
      did not maintain effective controls to ensure there is adequate analysis,
      documentation, reconciliation, and review of accounting records and
      supporting data, especially as it relates to subsidiary accounting
      records. AgFeed did not maintain effective controls over its financial
      reporting process. Specifically, AgFeed lacked policies, procedures, and
      controls for the preparation and review of the interim and annual
      consolidated financial statements and supporting schedules. This control
      deficiency contributed to the individual material weaknesses described
      below:
  50
  a)
              AgFeed
      did not maintain effective controls over its preparation, review, and
      approval of significant account reconciliations and journal entries.
      Specifically, AgFeed did not maintain effective controls over the
      completeness and accuracy of underlying data for supporting schedules and
      journal entries for all of its significant balance sheet and income
      statement accounts.
  b)
              AgFeed
      did not maintain effective control over certain spreadsheets utilized in
      the period end financial reporting process. Specifically, AgFeed lacked
      effective controls related to the completeness, accuracy, validity, and
      restricted access to spreadsheets related to: fixed assets, including
      accumulated depreciation; payroll reconciliations and related journal
      entries; revenue and accounts receivable. This control deficiency did not
      result in audit adjustments to the 2007 interim or annual consolidated
      financial statements.
  In
summary with respect to the control deficiencies in a) through b) above could
result in a material misstatement of the aforementioned accounts or disclosures
that would result in a material misstatement to AgFeed’s interim or annual
consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that each of the control deficiencies
described in a) through b) above constitutes a material weakness.
  A number
of actions were taken by AgFeed to remediate this, including:
  ·
              Implemented
      Kingdee K3, a new information technology ERP
  system.
  ·
              Embedded
      IT application controls about journal entry preparation, review and
      approval, posting and closing, functional reconciliation and analysis in
      Kingdee K3.
  ·
              Established
      and standardized manual controls to review journal entries, non-routine
      transactions, chart of accounts, accounting policies and estimates
      financial statements both at subsidiary level and consolidated level etc.
      to ensure accuracy and
completeness.
  ·
              Established
      controls for the preparation and review of the financial reporting, which
      includes long-lived assets assessment, use of disclosure checklist,
      management discussion and analysis checklist, review and communication
      with senior management.
  ·
              Established
      end user controls over financial reporting, which include risk assessment
      of key spreadsheets, change controls, access controls, protect and logic
      verification controls, segregation of duty controls, backup controls
      etc.
  ·
              Implemented
      fixed assets module, Sales and Account Receivable module in Kingdee K3 to
      replace prior spreadsheets in these two business
  processes.
  As
of December 31, 2008, we have concluded that this material weakness has been
remediated.
  2.
              AgFeed
      did not maintain effective controls over changes to critical financial
      reporting applications and over access to these applications and related
      data. Specifically, certain of AgFeed’s personnel had unrestricted access
      to various financial application programs and data beyond the requirements
      of their individual job responsibilities in processing accounts payable,
      inventory and revenue transactions. Such access was beyond the
      requirements of their assigned responsibilities and was not appropriately
      monitored. This control deficiency did not result in audit adjustments to
      the 2007 interim or annual consolidated financial statements. However,
      this control deficiency could result in a material misstatement of
      significant accounts or disclosures, including those described above, that
      would result in a material misstatement to AgFeed’s interim or annual
      consolidated financial statements that would not be prevented or detected.
      Accordingly, management has determined that this control deficiency
      constitutes a material weakness.
  51
  A number
of actions were taken by AgFeed to remediate this, including:
  ·
              Established
      change management policy, including controls and procedures about system
      change, software change, network change, emergency change
    etc.
  ·
              Established
      controls that the impact, implementation plan, rollback plan, user test
      result and feedback of any change were required to be prepared and
      submitted to the IT manager for
approval.
  ·
              Established
      controls that different VLAN are used in finance and other departments and
      users of different departments could not visit each other
      VLAN.
  ·
              Established
      password management and configuration parameter in Kingdee K3
      system.
  ·
              Established
      Kingdee K3 user accounts management policy to authorize user rights
      delivery and change, restrict super user’s activity in K3 and detect
      redundant access rights
periodically.
  ·
              Established
      log management policy.  Servers, Kingdee K3 system and relevant
      database log functions have been activated and user’s activities in the
      system are recorded and inspected
periodically.
  As
of December 31, 2008, we have concluded that this material weakness has been
remediated.
  3.
              AgFeed
      does not maintain a sufficient level of IT personnel to execute general
      computing controls over our information technology structure, which
      include the implementation and assessment of information technology
      policies and procedures. This control deficiency did not result in an
      audit adjustment to the 2007 interim or annual consolidated financial
      statements, but could result in a material misstatement of significant
      accounts or disclosures, which would not have been prevented or
      detected.  Accordingly, management has determined that this
      control deficiency constitutes a material
  weakness.
  A number
of actions were taken by AgFeed to remediate this, including:
  ·
              Established
      IT function in the headquarter in China and employed three full-time IT
      staff in-charge of the company's network and database management, Kingdee
      K3 application system management and operational system management,
      respectively.  They all had academic background of information
      technology and a wealth of IT knowledge and experiences in their
      respective competence.  IT staff are required to perform KPI
      evaluation quarterly.
  ·
              IT
      function established and implemented the information technology policies
      and procedures. IT policies and procedures include (but not limited to):
      Kingdee ERP development policy, change management policy, password
      management rules, user accounts management policy, log management policy,
      information security management policy, system and database SOD rules,
      system configuration rules, and data operation procedures
      etc.  IT manager is responsible for monitoring and reviewing the
      operating effectiveness for the policies and procedures
      regularly.
  ·
              Appointed
      an independent third party consultant to assist the management to perform
      periodical review and evaluation of IT entity level control, IT general
      control, IT application control and end user
  control.
  52
  As
of December 31, 2008, we have concluded that this material weakness has been
remediated.
  4.
              AgFeed
      did not maintain adequate segregation of duties within its critical
      financial reporting applications, the related modules and financial
      reporting processes. This control deficiency did not result in audit
      adjustments to the 2007 interim or annual consolidated financial
      statements. This control deficiency  could result in a
      misstatement of balance sheet and income statement accounts, in AgFeed’s
      interim or annual consolidated financial statements that would not be
      prevented or detected. Accordingly, management has determined that these
      control deficiencies constitute a material
  weakness.
  A number
of actions were taken by AgFeed to remediate this, including:
  ·
              Allocated
      appropriate access rights to Kingdee K3 users, especially for finance
      department, roles and responsibilities in business processes according to
      positions.
  ·
              Developed
      segregation of duties checklists for all significant business
      processes.
  ·
              Detected
      segregation of duty conflicts by finance manager of each subsidiary
      periodically.
  ·
              Established
      Kingdee K3 user accounts management policy to authorize user rights
      delivery and change, restrict super user’s activity in K3 and detect
      redundant access rights
periodically.
  As
of December 31, 2008, we have concluded that this material weakness has been
remediated.
  Changes
in Internal Control Over Financial Reporting
  The
discussion above under "Remediation of Fiscal Year 2007 Material Weaknesses"
includes descriptions of the material actual changes to AgFeed's internal
control over financial reporting during the year of 2008 that materially
affected, or are reasonably likely to materially affect, AgFeed's internal
control over financial reporting.
  Item
9B.  Other Information.
  None.
  53
  PART
III
  Item
10.  Directors, Executive Officers and Corporate
Governance.
  The information required by this Item
is incorporated by reference to the information contained in our Proxy Statement
for our 2009 Annual Meeting of Shareholders, which we will file with the SEC
within 120 days after the end of 2008.
  Item
11.  Executive Compensation.
  The information required by this Item
is incorporated by reference to the information contained in our Proxy Statement
for our 2009 Annual Meeting of Shareholders, which we will file with the SEC
within 120 days after the end of 2008.
  Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters.
  The
information required by this Item is incorporated by reference to the
information contained in our Proxy Statement for our 2009 Annual Meeting of
Shareholders, which we will file with the SEC within 120 days after the end of
2008.
  Item
13.  Certain Relationships and Related Transactions, and Director
Independence.
  The information required by this Item
is incorporated by reference to the information contained in our Proxy Statement
for our 2009 Annual Meeting of Shareholders, which we will file with the SEC
within 120 days after the end of 2008.
  Item
14.  Principal Accounting Fees and Services.
  The information required by this Item
is incorporated by reference to the information contained in our Proxy Statement
for our 2009 Annual Meeting of Shareholders, which we will file with the SEC
within 120 days after the end of 2008.
  PART
IV
  Item
15.  Exhibit, Financial Statement Schedules.
  (a)(1)
Financial Statements
  See Item
8, "Financial Statements and Supplementary Data."
  (a)(2)
Financial Statement Schedules
  All
financial statement schedules for AgFeed and its subsidiaries have been included
in the consolidated financial statements or the related notes or they are either
inapplicable or not required.
  (a)(3)
Exhibits
  The
exhibits required by this item are set forth on the Exhibit Index attached
hereto.
  54
  AgFeed
Industries, Inc. and Subsidiaries
 Consolidated
Financial Statements
 For
the Years Ended December 31, 2008, 2007, and 2006
 
 Contents
 
 PageReport
      of Independent Registered Public Accounting Firm
                            
                            F-1Financial
      Statements:Consolidated
      Balance Sheet as of December 31, 2008 and 2007
                            
                            F-2Consolidated
      Statements of Income and Other Comprehensive Income for the years ended
      December 31, 2008, 2007 and 2006
                            
                            F-3Consolidated
      Statement of Stockholders' Equity for the years ended December 31, 2008,
      2007 and 2006
                            
                            F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007, and
      2006
                            
                            F-5Notes
      to Consolidated Financial Statements
                            
                            F-6toF-29
  
  Report of Independent
Registered Public Accounting Firm
 
 
 Board of
Directors and Stockholders of
 AgFeed
Industries, Inc.
 
 We have
audited the accompanying consolidated balance sheets of AgFeed Industries,
Inc  as of December 31, 2008 and 2007, and the related consolidated
statements of income and other comprehensive income, stockholders’ equity and
cash flows for the years ended December 31, 2008, 2007  and 2006. We
also have audited AgFeed Industries, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). AgFeed Industries, Inc. ‘s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting.  Management’s Report on Internal
Control is
included in ITEM 9A of AgFeed Industries, Inc’s Form 10-K for the year ended
December 31, 2008. Our responsibility is to express an opinion on these financial statements and an
opinion on the company’s internal control over financial reporting based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards required that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding on internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our audits.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of AgFeed Industries, Inc. as of
December 31, 2008,  and 2007, and the results of its operations and
its cash flows for the years ended December 31, 2008 , 2007 and 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, AgFeed Industries, Inc.  maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
 
 Management
has excluded certain newly acquired entities from its assessment of internal
control over financial reporting. These entities constitute 71.1%
of total assets as of December 31, 2008 and 67.6% and 97.0% of revenue
and  net income, respectively, for the year ended December 31, 2008.
Our opinion on internal control over financial reporting also excludes these
entities.
  
 Goldman
Parks Kurland Mohidin LLP
 Encino,
California
 March 12,
2009
  F-1
  AgFeed
Industries, Inc. and Subsidiaries
 Consolidated
Balance Sheet
 as
of December 31, 2008 and 2007
  2008
                                    
                                    
                                    2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                    
                                    $
                                    24,839,378
                                    
                                    
                                    $
                                    7,696,209Accounts
      receivable, net of allowance for doubtful accounts of $520,413 and
      $191,497
                                    
                                    
                                    9,462,380
                                    
                                    
                                    
                                    6,107,491Advances
      to suppliers
                                    
                                    
                                    518,829
                                    
                                    
                                    
                                    442,851Other
      receivable
                                    
                                    
                                    2,066,030
                                    
                                    
                                    
                                    459,034Inventory
                                    
                                    
                                    20,616,560
                                    
                                    
                                    
                                    2,728,160Prepaid
      expense
                                    
                                    
                                    1,166,646
                                    
                                    
                                    
                                    644,183Debt
      issue costs
                                    
                                    
                                    246,223
                                    
                                    
                                    
                                    -Total
      current assets
                                    
                                    
                                    58,916,046
                                    
                                    
                                    
                                    18,077,928PROPERTY
      AND EQUIPMENT, net
                                    
                                    
                                    20,810,094
                                    
                                    
                                    
                                    3,930,715CONSTRUCTION-IN-PROCESS
                                    
                                    
                                    10,853,389
                                    
                                    
                                    
                                    221,819INTANGIBLE
      ASSETS
                                    
                                    
                                    43,833,705
                                    
                                    
                                    
                                    839,802OTHER
      ASSETS
                                    
                                    
                                    2,641,902
                                    
                                    
                                    
                                    -TOTAL
      ASSETS
                                    
                                    $
                                    137,055,136
                                    
                                    
                                    $
                                    23,070,264LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                    
                                    $
                                    5,214,596
                                    
                                    
                                    $
                                    1,458,010Other
      payables
                                    
                                    
                                    5,766,741
                                    
                                    
                                    
                                    705,150Unearned
      revenue
                                    
                                    
                                    321,664
                                    
                                    
                                    
                                    99,848Accrued
      expenses
                                    
                                    
                                    164,558
                                    
                                    
                                    
                                    18,223Accrued
      payroll
                                    
                                    
                                    818,052
                                    
                                    
                                    
                                    168,560Short
      term loans
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,110,413Tax
      and welfare payable
                                    
                                    
                                    465,875
                                    
                                    
                                    
                                    9,534Interest
      payable
                                    
                                    
                                    121,139
                                    
                                    
                                    
                                    -Total
      current liabilities
                                    
                                    
                                    12,872,625
                                    
                                    
                                    
                                    3,569,738CONVERTIBLE
      NOTES, net of debt discount of $579,444 and $0
                                    
                                    
                                    3,220,556
                                    
                                    
                                    
                                    -TOTAL
      LIABILITIES
                                    
                                    
                                    16,093,181
                                    
                                    
                                    
                                    3,569,738COMMITMENTS
      AND CONTINGENCIES (Note 13)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -MINORITY
      INTEREST
                                    
                                    
                                    2,117,611
                                    
                                    
                                    
                                    -STOCKHOLDERS'
      EQUITY:Common
      stock, $0.001 per share; 75,000,000 shares authorized; 38,300,436 issued
      and 37,933,141 outstanding in 2008; and 27,026,756 issued and
      27,026,756 outstanding in 2007
                                    
                                    
                                    38,300
                                    
                                    
                                    
                                    27,027Additional
      paid-in capital
                                    
                                    
                                    90,903,261
                                    
                                    
                                    
                                    10,094,095Other
      comprehensive income
                                    
                                    
                                    4,167,217
                                    
                                    
                                    
                                    780,907Statutory
      reserve
                                    
                                    
                                    3,236,054
                                    
                                    
                                    
                                    752,225Treasury
      stock
                                    
                                    
                                    (1,811,746
                                    )Retained
      earnings
                                    
                                    
                                    22,311,258
                                    
                                    
                                    
                                    7,846,272Total
      stockholders' equity
                                    
                                    
                                    118,844,344
                                    
                                    
                                    
                                    19,500,526TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                    
                                    $
                                    137,055,136
                                    
                                    
                                    $
                                    23,070,264
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-2
  AgFeed
Industries, Inc. and Subsidiaries
 Consolidated
Statements of Income and Comprehensive Income
 For
the Years Ended December 31, 2008, 2007 and 2006
  2008
                          
                          
                          2007
                          
                          
                          2006Net
      Revenue
                          
                          $
                          143,661,485
                          
                          
                          $
                          36,163,339
                          
                          
                          $
                          8,594,876Cost
      of Revenue
                          
                          
                          109,224,565
                          
                          
                          
                          25,763,479
                          
                          
                          
                          5,446,332Gross
      profit
                          
                          
                          34,436,920
                          
                          
                          
                          10,399,860
                          
                          
                          
                          3,148,544Operating
      expensesSelling
      expenses
                          
                          
                          3,941,247
                          
                          
                          
                          2,693,613
                          
                          
                          
                          1,287,110General
      and administrative expenses
                          
                          
                          5,754,742
                          
                          
                          
                          1,385,476
                          
                          
                          
                          827,540Total
      operating expenses
                          
                          
                          9,695,989
                          
                          
                          
                          4,079,089
                          
                          
                          
                          2,114,650Income
      from operations
                          
                          
                          24,740,931
                          
                          
                          
                          6,320,771
                          
                          
                          
                          1,033,894Non-operating
      income (expense):Other
      income (expense)
                          
                          
                          (710,683
                          )
                          
                          
                          160,496
                          
                          
                          
                          35,681Interest
      income
                          
                          
                          190,965
                          
                          
                          
                          142,148
                          
                          
                          
                          28,851Interest
      and financing costs
                          
                          
                          (5,704,358
                          )
                          
                          
                          (153,723
                          )
                          
                          
                          (23,532
                          )Foreign
      currency transaction loss
                          
                          
                          (559,299
                          )
                          
                          
                          -
                          
                          
                          
                          -Total
      non-operating income (expense)
                          
                          
                          (6,783,375
                          )
                          
                          
                          148,921
                          
                          
                          
                          41,000Income
      before minority interest and provision for income taxes
                          
                          
                          17,957,556
                          
                          
                          
                          6,469,692
                          
                          
                          
                          1,074,894Minority
      interest in subsidiaries
                          
                          
                          (421,519
                          )
                          
                          
                          -
                          
                          
                          
                          -Income
      before provision for income taxes
                          
                          
                          17,536,037
                          
                          
                          
                          6,469,692
                          
                          
                          
                          1,074,894Provision
      (benefit) for income taxes
                          
                          
                          587,222
                          
                          
                          
                          (193,203
                          )
                          
                          
                          (100,386
                          )Net
      income
                          
                          $
                          16,948,815
                          
                          
                          $
                          6,662,895
                          
                          
                          $
                          1,175,280Other
      comprehensive incomeForeign
      currency translation gain
                          
                          
                          3,386,310
                          
                          
                          
                          664,061
                          
                          
                          
                          84,382Comprehensive
      Income
                          
                          $
                          20,335,125
                          
                          
                          $
                          7,326,956
                          
                          
                          $
                          1,259,662Weighted
      average shares outstanding :Basic
                          
                          
                          31,557,742
                          
                          
                          
                          26,093,376
                          
                          
                          
                          17,911,296Diluted
                          
                          
                          31,713,977
                          
                          
                          
                          26,174,973
                          
                          
                          
                          17,911,296Earnings
      per share:Basic
                          
                          $
                          0.54
                          
                          
                          $
                          0.26
                          
                          
                          $
                          0.07Diluted
                          
                          $
                          0.53
                          
                          
                          $
                          0.25
                          
                          
                          $
                          0.07
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
  AgFeed
Industries, Inc. and Subsidiaries
 Consolidated
Statement of Shareholders' Equity
 For
The Years Ended December 31, 2008, 2007, and 2006
  Other
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          TotalCommon
      Stock
                                          
                                          
                                          Additional
      Paid
                                          
                                          
                                          Comprehensive
                                          
                                          
                                          Statutory
                                          
                                          
                                          Treasury
                                          
                                          
                                          Retained
                                          
                                          
                                          Stockholders'Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          in
      Capital
                                          
                                          
                                          Income
                                          
                                          
                                          Reserve
                                          
                                          
                                          Stock
                                          
                                          
                                          Earnings
                                          
                                          
                                          Equity15,006,720
                                          
                                          
                                          $
                                          15,007
                                          
                                          
                                          $
                                          722,527
                                          
                                          
                                          $
                                          32,464
                                          
                                          
                                          $
                                          118,061
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          642,261
                                          
                                          
                                          $
                                          1,530,320Issuance
      of common stock for cash
                                          
                                          
                                          4,193,283
                                          
                                          
                                          
                                          4,193
                                          
                                          
                                          
                                          221,890
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          226,083Recapitalization
      on reverse acquisition
                                          
                                          
                                          4,800,000
                                          
                                          
                                          
                                          4,800
                                          
                                          
                                          
                                          54,962
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          59,762Capital
      contribution by stockholders
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          300,000Change
      in foreign currency translation gain
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          84,382
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          84,382Net
      income for the year ended December 31, 2006
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,175,280
                                          
                                          
                                          
                                          1,175,280Transfer
      to statutory reserve
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          153,054
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (153,054
                                          )
                                          
                                          
                                          -Balance
      December 31, 2006
                                          
                                          
                                          24,000,003
                                          
                                          
                                          
                                          24,000
                                          
                                          
                                          
                                          1,299,379
                                          
                                          
                                          
                                          116,846
                                          
                                          
                                          
                                          271,115
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,664,487
                                          
                                          
                                          
                                          3,375,827Issuance
      of common stock for cash
                                          
                                          
                                          3,026,753
                                          
                                          
                                          
                                          3,027
                                          
                                          
                                          
                                          8,764,476
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          8,767,503Chinese
      government subsidy
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          16,451
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          16,451Stock
      compensation expense for options issued to employees
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          13,789
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          13,789Change
      in foreign currency translation gain
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          664,061
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          664,061Net
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          6,662,895
                                          
                                          
                                          
                                          6,662,895Transfer
      to statutory reserve
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          481,110
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (481,110
                                          )
                                          
                                          
                                          -Balance
      December 31, 2007
                                          
                                          
                                          27,026,756
                                          
                                          
                                          
                                          27,027
                                          
                                          
                                          
                                          10,094,095
                                          
                                          
                                          
                                          780,907
                                          
                                          
                                          
                                          752,225
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          7,846,272
                                          
                                          
                                          
                                          19,500,526Issuance
      of common stock for cash
                                          
                                          
                                          9,392,290
                                          
                                          
                                          
                                          9,392
                                          
                                          
                                          
                                          65,940,677
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          65,950,069Payment
      of offering costs
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (7,030,261
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (7,030,261
                                          )Value
      of warrants issued with convertible debt
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,269,442
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,269,442Beneficial
      conversion feature associated with convertible debt
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,770,443
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,770,443Cashless
      exercise of warrants (199,131 warrants exercised)
                                          
                                          
                                          91,934
                                          
                                          
                                          
                                          92
                                          
                                          
                                          
                                          (92
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Exercise
      of warrants for cash
                                          
                                          
                                          269,456
                                          
                                          
                                          
                                          269
                                          
                                          
                                          
                                          2,138,579
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,138,848Conversion
      of convertible debentures
                                          
                                          
                                          1,520,000
                                          
                                          
                                          
                                          1,520
                                          
                                          
                                          
                                          15,198,480
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          15,200,000Stock
      compensation expense for options issued to employees
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          231,368
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          231,368Value
      of re-priced warrants
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          22,782
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          22,782Value
      of change in conversion price of convertible notes
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          267,748
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          267,748Purchase
      of treasury shares (367,295 shares)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,811,746
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,811,746
                                          )Change
      in foreign currency translation gain
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,386,310
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,386,310Net
      income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          16,948,815
                                          
                                          
                                          
                                          16,948,815Transfer
      to statutory reserve
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,483,829
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (2,483,829
                                          )
                                          
                                          
                                          -Balance
      December 31, 2008
                                          
                                          
                                          38,300,436
                                          
                                          
                                          $
                                          38,300
                                          
                                          
                                          $
                                          90,903,261
                                          
                                          
                                          $
                                          4,167,217
                                          
                                          
                                          $
                                          3,236,054
                                          
                                          
                                          $
                                          (1,811,746
                                          )
                                          
                                          $
                                          22,311,258
                                          
                                          
                                          $
                                          118,844,344
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
  AgFeed
Industries, Inc.  and Subsidiaries
 Consolidated
Statements of Cash Flows
 For
The Years Ended December 31, 2008, 2007 and 2006
  2008
                        
                        
                        2007
                        
                        
                        2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                        
                        $
                        16,948,815
                        
                        
                        $
                        6,662,895
                        
                        
                        $
                        1,175,280Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                        
                        
                        1,580,843
                        
                        
                        
                        140,510
                        
                        
                        
                        100,469Amortization
                        
                        
                        86,543
                        
                        
                        
                        14,316
                        
                        
                        
                        5,228Loss
      on disposal of assets
                        
                        
                        17,248
                        
                        
                        
                        37,345
                        
                        
                        
                        -Stock
      based compensation
                        
                        
                        231,368
                        
                        
                        
                        13,789
                        
                        
                        
                        -Value
      of re-priced warrants
                        
                        
                        22,782
                        
                        
                        
                        -
                        
                        
                        
                        -Value
      of change in conversion price of convertible notes
                        
                        
                        267,748
                        
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of debt issuance costs
                        
                        
                        1,470,443
                        
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of discount on convertible debt
                        
                        
                        3,460,441
                        
                        
                        
                        -
                        
                        
                        
                        -Gain
      attributed to minority interest in subsidiaries
                        
                        
                        421,519
                        
                        
                        
                        -
                        
                        
                        
                        -(Increase)
      / decrease in assets:Accounts
      receivable
                        
                        
                        (2,324,978
                        )
                        
                        
                        (4,022,786
                        )
                        
                        
                        (312,364
                        )Other
      receivable
                        
                        
                        (5,464,327
                        )
                        
                        
                        (220,979
                        )
                        
                        
                        47,323Inventory
                        
                        
                        (8,815,870
                        )
                        
                        
                        (915,874
                        )
                        
                        
                        (113,084
                        )Due
      from related party
                        
                        
                        -
                        
                        
                        
                        102,280
                        
                        
                        
                        (46,550
                        )Advances
      to suppliers
                        
                        
                        (44,147
                        )
                        
                        
                        (345,646
                        )
                        
                        
                        (28,340
                        )Prepaid
      expense
                        
                        
                        (499,047
                        )
                        
                        
                        (628,446
                        )
                        
                        
                        1,725Other
      assets
                        
                        
                        (2,239,491
                        )
                        
                        
                        2,316
                        
                        
                        
                        (2,205
                        )Increase
      / (decrease) in current liabilities:Accounts
      payable
                        
                        
                        3,300,773
                        
                        
                        
                        465,573
                        
                        
                        
                        (101,564
                        )Other
      payables
                        
                        
                        8,509,638
                        
                        
                        
                        32,597
                        
                        
                        
                        34,645Due
      to related party
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (182,812
                        )Unearned
      revenue
                        
                        
                        211,081
                        
                        
                        
                        4,791
                        
                        
                        
                        (17,001
                        )Accrued
      expenses
                        
                        
                        119,325
                        
                        
                        
                        (77,717
                        )
                        
                        
                        90,545Accrued
      payroll
                        
                        
                        626,587
                        
                        
                        
                        123,689
                        
                        
                        
                        20,965Tax
      and welfare payable
                        
                        
                        447,753
                        
                        
                        
                        (281,837
                        )
                        
                        
                        (151,976
                        )Interest
      payable
                        
                        
                        121,139
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      cash provided by operating activities
                        
                        
                        18,456,186
                        
                        
                        
                        1,106,816
                        
                        
                        
                        520,284CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                        
                        
                        (10,696,569
                        )
                        
                        
                        (291,294
                        )
                        
                        
                        (107,460
                        )Acquisition
      of intangible assets
                        
                        
                        (140,580
                        )
                        
                        
                        (264,196
                        )
                        
                        
                        -Cash
      paid for purchase of subsidiary
                        
                        
                        -
                        
                        
                        
                        (3,360,000
                        )
                        
                        
                        (1,100,420
                        )Cash
      paid for purchase of hog farms, net
                        
                        
                        (67,490,049
                        )
                        
                        
                        -
                        
                        
                        
                        -Cash
      acquired with acquisitions
                        
                        
                        -
                        
                        
                        
                        661,216
                        
                        
                        
                        213,922Net
      cash used in investing activities
                        
                        
                        (78,327,198
                        )
                        
                        
                        (3,254,274
                        )
                        
                        
                        (993,958
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayment
      to shareholders
                        
                        
                        -
                        
                        
                        
                        (758,343
                        )
                        
                        
                        (24,783
                        )Advances
      to related parties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (425,674
                        )Proceeds
      from notes payable
                        
                        
                        -
                        
                        
                        
                        977,008
                        
                        
                        
                        1,664,855Proceeds
      from the sale of common stock
                        
                        
                        65,950,069
                        
                        
                        
                        9,830,259
                        
                        
                        
                        -Offering
      costs
                        
                        
                        (7,030,261
                        )
                        
                        
                        (1,062,756
                        )
                        
                        
                        -Proceeds
      from exercise of warrants
                        
                        
                        2,138,848
                        
                        
                        
                        -
                        
                        
                        
                        -Payment
      on note payable
                        
                        
                        (1,161,297
                        )
                        
                        
                        (1,723,414
                        )
                        
                        
                        -Collection
      of subscription receivable
                        
                        
                        -
                        
                        
                        
                        226,083
                        
                        
                        
                        -Collection
      from related parties
                        
                        
                        -
                        
                        
                        
                        950,707
                        
                        
                        
                        -Proceeds
      from the issuance of convertible notes
                        
                        
                        19,000,000
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      costs for convertible notes
                        
                        
                        (1,716,666
                        )
                        
                        
                        -
                        
                        
                        
                        -Government
      subsidy received
                        
                        
                        -
                        
                        
                        
                        16,451
                        
                        
                        
                        -Capital
      contributed by minority interest holders
                        
                        
                        1,097,690
                        
                        
                        
                        -
                        
                        
                        
                        -Purchase
      of treasury shares
                        
                        
                        (1,811,746
                        )
                        
                        
                        -
                        
                        
                        
                        -Contribution
      by stockholders to pay for merger expenses
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        300,000Net
      cash provided by financing activities
                        
                        
                        76,466,637
                        
                        
                        
                        8,455,995
                        
                        
                        
                        1,514,398Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        547,544
                        
                        
                        
                        183,572
                        
                        
                        
                        26,970NET
      INCREASE IN CASH & CASH EQUIVALENTS
                        
                        
                        17,143,169
                        
                        
                        
                        6,492,109
                        
                        
                        
                        1,067,694CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                        
                        
                        7,696,209
                        
                        
                        
                        1,204,100
                        
                        
                        
                        136,406CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                        
                        $
                        24,839,378
                        
                        
                        $
                        7,696,209
                        
                        
                        $
                        1,204,100SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                        
                        $
                        363,191
                        
                        
                        $
                        99,445
                        
                        
                        $
                        30,213Income
      taxes paid
                        
                        $
                        408,435
                        
                        
                        $
                        -
                        
                        
                        $
                        73,339
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Note
1 – Organization and Basis of Presentation
 
 Organization and Line of
Business
 
 AgFeed
Industries, Inc. formerly known as Wallace Mountain Resources Corp.,
(hereinafter referred to as the “Company” or “AgFeed”) was incorporated in the
State of Nevada on March 30, 2005.
 
 On
October 31, 2006, the Company entered into and closed a share purchase agreement
with Nanchang Best Animal Husbandry Co., Ltd., a corporation formed under the
laws of the People’s Republic of China (“Nanchang Best”), and each of Nanchang
Best’s shareholders (the “Nanchang Purchase Agreement”). Pursuant to the
Nanchang Purchase Agreement, the Company acquired all of the issued and
outstanding capital stock of Nanchang Best from the Nanchang Best shareholders
in exchange for 16,128,000 shares of common stock.
 
 Contemporaneously,
on October 31, 2006, the Company entered into and closed a share purchase
agreement with Shanghai Best Animal Husbandry Co., Ltd., a corporation formed
under the laws of the People’s Republic of China (“Shanghai Best”), and each of
Shanghai Best’s shareholders (the “Shanghai Purchase Agreement”). Pursuant to
the Shanghai Purchase Agreement, the Company acquired all of the issued and
outstanding capital stock of Shanghai Best from the Shanghai Best shareholders
in exchange for 3,072,000 shares of common stock.
 
 The
exchanges of shares with Nanchang Best and Shanghai Best were accounted for as a
reverse acquisition under the purchase method of accounting since the
stockholders of Nanchang Best and Shanghai Best obtained control of the Company.
On November 17, 2006, Wallace Mountain Resources Corp. changed its name to
AgFeed Industries, Inc.  Accordingly, the merger of Nanchang Best and
Shanghai Best into the Company were recorded as a recapitalization of Nanchang
Best and Shanghai Best, with Nanchang Best and Shanghai Best being treated as
the continuing entities. Nanchang Best and Shanghai Best had common shareholders
and common management. The historical financial statements presented are the
combined financial statements of both Nanchang Best and Shanghai Best. The share
exchange agreements have been treated as a recapitalization and not as a
business combination; therefore, no pro forma information is disclosed. At the
date of this transaction, the net assets of the legal acquirer were
$59,762.
 
 As a
result of the reverse merger transactions described above, the historical
financial statements presented are those of Nanchang Best and Shanghai Best, the
operating entities.
 
 On
December 20, 2006, the Company entered into and closed a share purchase
agreement with Guangxi Huijie Sci. & Tech. Feed Co, Ltd., a company formed
pursuant to the laws of the People's Republic of China (“Guangxi Huijie”), and
the shareholders of Guangxi Huijie pursuant to which the Company acquired all
the outstanding shares of Guangxi Huijie for a total purchase price of eight
million six hundred thousand Chinese Renminbi (8,600,000 RMB), equivalent to
approximately U.S. $1,100,420 based on exchange rates reported in the Wall
Street Journal for December 20, 2006.
 
 The
Company obtained the funds for the acquisition of the Guangxi Huijie shares by
borrowing 8,600,000 RMB from Sunrise Capital International, Inc. The proceeds of
the loan from Sunrise Capital International, Inc. were paid directly to the
selling shareholders of Guangxi Huijie as consideration and as provided by the
share purchase agreement. The Company's repayment obligation is evidenced by a
promissory note bearing interest at the rate of seven percent per annum (7%) and
maturing in six months. The Company, at its option, may extend the maturity of
the note an additional six months upon notice to the lender.  This
loan was repaid in March 2007.
 
 On
November 6, 2007, the Company entered into a Stock Purchase Agreement with
Lushan Breeder Pig Farm Co., Ltd. (“Lushan”), a Peoples Republic of China
company located in HuaLin Town of XingZi County in Jiangxi Province, Peoples
Republic of China, Huaping Yang and Hongyun Luo, the holders of ninety percent
(90%) of the issued and outstanding capital stock of Lushan.
  F-6
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 In 2008,
the Company has purchased an additional 29 producing hog farms and one
feed company.  The Company’s ownership interest in these hog farms
range from 55% to 100%.
 
 The
Company is engaged in the research and development, manufacturing, marketing,
distribution and sale of pre-mix fodder blended feed and feed additives
primarily for use in China's domestic pork husbandry market as well as raising,
breeding and sale of pigs. The Company operates production plants in Nanchang
City, Shanghai City, Nanning City and Haikou City and has swine farms located in
the southern provinces of the PRC.  The Company sells to distributors
and large-scale swine farms.
 
 Stock
Splits
 
 On
November 17, 2006, the Company declared a stock dividend of two additional
shares of common stock for each share of common stock outstanding (effectively a
three for one stock split). All share information for common shares has been
retroactively restated for this stock split.
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements include the accounts of AgFeed
Industries, Inc. and its wholly-owned and majority-owned subsidiaries.  All
significant inter-company accounts and transactions have been eliminated in
consolidation.
 
 The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the RMB; however the accompanying
consolidated financial statements have been translated and presented in
USD.
 
 Foreign Currency
Translation
 
 The
accounts of the Company were maintained, and their consolidated financial
statements were expressed in the Chinese Yuan Renminbi (RMB). Such consolidated
financial statements were translated into U.S. Dollars (USD) in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation," with the RMB as the functional currency. According to the
Statement, all assets and liabilities were translated at the exchange rate on
the balance sheet date, stockholder's equity are translated at the historical
rates and statement of operations items are translated at the weighted average
exchange rate for the year. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income”.
 
 Note
2 – Summary of Significant Accounting Policies
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Reclassification
 
 Certain
prior period amounts have been reclassified to conform to the year ended
December 31, 2008 presentation.
  F-7
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
 
 Accounts
Receivable
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves.
 
 Advances to
Suppliers
 
 The
Company makes advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured.
 
 Inventories
 
 Inventory
is stated at the lower of cost, as determined by weighted-average method, or
market. Management compares the cost of inventories with the market value, and
allowance is made for writing down the inventories to their market value, if
lower. Costs of raised animals include proportionate costs of breeding,
including depreciation of the breeding herd, plus the costs of maintenance
through the balance sheet date. Purchased cattle are carried at purchase cost
plus costs of maintenance through the balance sheet date.
 
 Property &
Equipment
 
 Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the
 respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
 
 Office
      equipment
                      5
      yearsOperating
      equipment
                      10
      yearsVehicles
                      5
      yearsBuildings
                      20
      years
 
 The
following are the details of the property and equipment at December 31, 2008 and
2007:
 
 2008
                    
                    
                    2007Office
      equipment
                    
                    $
                    433,157
                    
                    
                    $
                    100,072Operating
      equipment
                    
                    
                    2,042,522
                    
                    
                    
                    547,560Vehicles
                    
                    
                    655,853
                    
                    
                    
                    271,652Swines
      for reproduction
                    
                    
                    13,137,425
                    
                    
                    
                    1,568,816Buildings
                    
                    
                    6,673,822
                    
                    
                    
                    1,940,784Total
                    
                    
                    22,942,779
                    
                    
                    
                    4,428,884Less
      accumulated depreciation
                    
                    
                    (2,132,685
                    )
                    
                    
                    (498,169
                    )$
                    20,810,094
                    
                    
                    $
                    3,930,715
  F-8
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Depreciation
expense for the years ended December 31, 2008, 2007, and 2006 was $1,580,843,
$140,510 and $100,649, respectively.
 
 Construction-in-Process
 
 Construction-in-process
consists of amounts expended for building construction and for growing breeder
hogs. Once building construction is completed and the breeder hogs are grown,
the cost accumulated in construction-in-process is transferred to property and
equipment.
 
 Long-Lived
Assets
 
 The
Company applies the provisions of Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires 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. Based on its review, the Company believes
that, as of December 31, 2008 and 2007 there were no significant impairments of
its long-lived assets.
 
 Intangible
Assets
 
 Net
intangible assets at December 31, 2008 and 2007 are as follows:
 
 2008
                    
                    
                    2007Right
      to use land
                    
                    $
                    809,174
                    
                    
                    $
                    589,489Customer
      list
                    
                    
                    293,400
                    
                    
                    
                    274,176Computer
      software
                    
                    
                    108,135
                    
                    
                    
                    15,366Intangible
      related to hog farm acquisitions
                    
                    
                    42,744,247
                    
                    
                    
                    -Total
                    
                    
                    43,954,956
                    
                    
                    
                    879,031Less
      Accumulated amortization
                    
                    
                    (121,251
                    )
                    
                    
                    (39,229
                    )Intangibles,
      net
                    
                    $
                    43,833,705
                    
                    
                    $
                    839,802
 
 Per the
People's Republic of China's (“PRC”) governmental regulations, the PRC
Government owns all land. The Company leases land per real estate contracts with
the government of the PRC for fifty years.  Accordingly, the right to
use land for these feed companies is amortized over a period of 50 years and the
computer software is amortized over nine years.  For hog farms, the
Company generally signed land leasing contracts with original owners of the
farms.
 
 Amortization
expense for the Company’s intangible assets for the years ended December 31,
2008, 2007 and 2006 was $86,543, $14,316 and $5,228,
respectively.
  F-9
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Revenue
Recognition
 
 The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Revenue is recognized when services are rendered to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue. The Company is not subject to VAT withholdings.  The Company
gives volume rebates to certain customers based on volume achieved. The Company
accrues sales rebates based on actual sales volume. Sales returns and rebates
included in the Company's revenues were $1,192,157, $385,375 and $324,218 for
the years ended December 31, 2008, 2007 and 2006, respectively.
 
 Advertising
Costs
 
 The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place.  Advertising costs for the
years ended December 31, 2008, 2007 and 2006 were not significant.
 
 Stock-Based
Compensation
 
 The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123.”  The Company recognizes in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees and non-employees.  There were 180,000 options
outstanding at December 31, 2008.
 
 Income
Taxes
 
 The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. When
tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon
examination.  Interest associated with unrecognized tax benefits are
classified as interest expense and penalties are classified in selling, general
and administrative expenses in the statements of income. The adoption of FIN 48
did not have a material impact on the Company’s financial
statements.
  F-10
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Foreign Currency
Transactions and Comprehensive Income
 
 Accounting
principles generally require 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 Chinese
Renminbi. The unit of Renminbi is in Yuan. Translation gains of $4,167,217 and
$780,908 at December 31, 2008 and 2007, respectively, are classified as an item
of other comprehensive income in the stockholders’ equity section of the
consolidated balance sheet.  During the years ended December 31, 2008,
2007 and 2006, other comprehensive income in the consolidated statements of
income and other comprehensive income included translation gains of $3,386,310,
$664,062 and $84,382, respectively.
 
 Basic and Diluted Earnings
Per Share
 
 Earnings
per share is calculated in accordance with the Statement of financial accounting
standards No. 128 (SFAS No. 128), “Earnings Per Share”. SFAS No. 128 superseded
Accounting Principles Board Opinion No.15 (APB 15). Net earnings per share for
all periods presented has been restated to reflect the adoption of SFAS No. 128.
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period..
 
 The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations:
 
 2008
                        
                        
                        2007
                        
                        
                        2006Per
                          Share
                        
                        
                        
                        
                        
                        Per
                          Share
                        
                        
                        
                        
                        
                        Per
                          ShareShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        AmountBasic
      earnings per share
                        
                        
                        31,557,742
                        
                        
                        $
                        0.54
                        
                        
                        
                        26,093,376
                        
                        
                        $
                        0.26
                        
                        
                        $
                        17,911,296
                        
                        
                        $
                        0.07Effect
      of dilutive stock options
                        
                        
                        156,235
                        
                        
                        
                        -
                        
                        
                        
                        81,597
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Diluted
      earnings per share
                        
                        
                        31,713,977
                        
                        
                        $
                        0.53
                        
                        
                        
                        26,174,973
                        
                        
                        $
                        0.25
                        
                        
                        $
                        17,911,296
                        
                        
                        $
                        0.07
 
 Statement of Cash
Flows
 
 In
accordance with Statement of Financial Accounting Standards No. 95, “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 statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance
sheet.
  F-11
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Minority
Interest
 
 The
Company purchased interest in 29 producing hog farms and one feed company
ranging from 55% to 100%.  As a result of these purchases, the Company
recognized initial minority interest on its consolidated balance sheet in the
amount of $508,150. The income (loss) attributed to minority interest has been
separately designated in the accompanying statement of operations.
 
 Segment
Reporting
 
 Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. The Company has
determined that it has four reportable segments (See Note 11).
 
 Fair value of financial
instruments
 
 On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
“SAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest.  The three levels are defined
as follow:
 
 ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
 
 Recent
Pronouncements
 
 In June
2007, FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” which addresses whether nonrefundable
advance payments for goods or services that are used or rendered for research
and development activities should be expensed when the advance payment is made
or when the research and development activity has been
performed.  Management is currently evaluating the effect of this
pronouncement on financial statements.
 
 In
December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS 141R changes how a reporting enterprise accounts for
the acquisition of a business. SFAS 141R requires an acquiring entity to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value, with limited exceptions, and applies to a wider
range of transactions or events. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited.
  F-12
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which is an amendment of Accounting Research
Bulletin No. 51.  SFAS 160 clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  SFAS 160
changes the way the consolidated income statement is presented, thus requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both parent and the noncontrolling interest.  SFAS 160
is effective for the fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008.  Based on current
conditions, the Company does not expect the adoption of SFAS 160 to have a
significant impact on its results of operations or financial
position.
 
 In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.”  SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
 
 In May
2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.”  SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (“GAAP”) in the United
States (the “GAAP hierarchy”).  SFAS 162 will not have an impact on
the Company’s financial statements.
 
 In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.”  The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on the
Company’s financial statements.
 
 Note
3 – Notes Payable
 
 Notes
payable at December 31, 2008 and 2007 were as follows:
 
 2008
                    
                    
                    2007Short-term
      bank loan; interest rate of 7.884% and 7.02% payable monthly. The term of
      the loan is from May 28, 2007 to May 27, 2008 and May 18, 2006 to May 17,
      2007. This loan was collateralized by the Company’s office building,
      workshop, employee dorms and use right of land.  This loan was
      repaid on May 28, 2008.
                    
                    $
                    -
                    
                    
                    $
                    822,528Short-term
      bank loan; interest rate of 6.57% and 6.12%.  The term of the
      loan was from May 25, 2007 to May 24, 2008 and December 5, 2006 to
      December 4, 2007.  This loan was collateralized by the Company’s
      right to use land, machinery and equipment. This loan was repaid on May
      25, 2008.
                    
                    
                    -
                    
                    
                    
                    287,885$
                    -
                    
                    
                    $
                    1,110,413
  F-13
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Note
4 – Convertible Notes
 
 On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (the “Investors”) in
connection with a private placement transaction providing for, among other
things, the issuance of senior convertible notes for aggregate gross proceeds of
$19 million (the “Notes”) and warrants to purchase up to an aggregate of 380,000
shares (the “Warrants”) of the Company’s $0.001 par value per share common
stock.  The notes mature on the third anniversary of the issuance
date, bear interest at 7% per annum and are convertible into shares of the
Company’s common stock at an initial conversion price of $10.00 per
share.  The conversion price is subject to a “weighted average
ratchet” anti-dilution adjustment. The conversion price is also subject to
adjustment on a proportional basis, to the extent that the Company’s audited net
income for the fiscal years ending 2008 and 2009 is less than $30 million and
$40 million, respectively; subject to a per share floor price of
$5.00.  Due to the Company not generating $30 million net income for
the year ended December 31, 2008, the conversion price on the convertible notes
was reduced to $5.00.  Due to the re-pricing of the conversion price,
the Company recorded financing cost of $267,748 which represents the difference
between the fair value of the conversion feature at a $5.00 conversion price and
the original $10.00 conversion price.  The fair value was determined
by using the Black-Scholes pricing model with the following assumptions:
expected life of 2.2 years, a risk free interest rate of 2.0%, a
dividend yield of 0% and volatility of 102%.
 
 The Notes
impose penalties on the Company for any failure to timely deliver any shares of
its common stock issuable upon conversion.
 
 In
connection with the issuance of the Notes and the Warrants issued to the
Investor on February 25, 2008, the Company paid $1,716,666 in debt issuance cost
which is being amortized over the life of the Notes.  For the year
ended December 31, 2008, the Company amortized $1,470,443 of the aforesaid
issuance costs as interest and financing costs in the accompanying consolidated
statements of operations.
 
 The Notes
contain certain limitations on conversion. For example, they provide that no
conversion may be made if, after giving effect to the conversion, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Notes provide that no conversion may be made if the
conversion would cause the Company to be in breach of its obligations under the
rules and regulations of the Nasdaq Global Market, unless the Company obtains
stockholder approval for such issuances as required by such rules and
regulations.
 
 The
Warrants are immediately exercisable, expire on the third anniversary of their
issuance and entitle their holders, in the aggregate, to purchase up to
$3,800,000 worth of shares of common stock at an initial exercise price of
$10.00 per share.
 
 The
exercise price of the Warrants is subject to a “weighted average ratchet”
anti-dilution adjustment. The exercise price is also subject to adjustment, on a
proportional basis, to the extent that the Company’s audited net income for the
fiscal years ending 2008 and 2009 is less than $30 million and $40 million,
respectively; subject to a per share floor price of $5.00.  Due to the
Company not generating $30 million net income for the year ended December 31,
2008, the exercise price on the warrants was reduced to $5.00.  Due to
the re-pricing of the exercise price, the Company recorded financing cost of
$22,782 which represents the difference between the fair value of the $5.00
exercise price and the original $10.00 exercise price.  The fair value
was determined by using the Black-Scholes pricing model with the following
assumptions: expected life of 2.2 years, a risk free interest rate
of 2.0%, a dividend yield of 0% and volatility of 102%.
  F-14
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 The
Warrants contain certain limitations on exercise. For example, they provide that
no exercise may be made if, after giving effect to the exercise, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Warrants provide that no exercise may be made if it
would cause the Company to be in breach of its obligations under the rules and
regulations of the Nasdaq Global Market, unless the Company obtains stockholder
approval for such issuances as required by such rules and
regulations.
 
 The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the Warrants and the Notes since the
conversion price of the Notes have a floor of $5.00, which means the Company can
determine the maximum shares that could be issued upon conversion. The Company
determined the fair value of the detachable warrants issued in connection with
the Notes to be $1,269,442, using the Black-Scholes option pricing model and the
following assumptions:  expected life of 1 year, a risk free
interest rate of 2.10%, a dividend yield of 0% and volatility of 70%.
In addition, the Company determined the value of the beneficial conversion
feature to be $2,770,442. The combined total discount for the Notes
is $4,039,885 and is being amortized over the term of the Notes. For the
year ended December 31, 2008, the Company amortized $3,460,441of the aforesaid
discounts as interest and financing costs in the accompanying consolidated
statements of operations.
 
 During
the year ended December 31, 2008, $15,200,000 of the Notes were converted into
1,520,000 shares of common stock.
 
 Note
5 – Stockholders’ Equity
 
 Treasury
Stock
 
 During
the year ended December 31, 2008, the Company purchased 367,295 shares of its
own common stock on the open market (treasury shares) for gross proceeds of
$1,811,746.  The Company has accounted for the purchase of these
treasury shares using the cost method.
 
 2008
Transactions
 
 In
February 2008, the Company entered into a Securities Purchase Agreement with
Focus Trading Investments Limited, Advantage Consultants Limited, and CD Capital
Investments, Ltd.  In connection with a registered direct offering of
securities providing for the issuance of 2,444,448 shares of the Company’s
common stock at a price of $9.00 per share for aggregate gross proceeds of
$22,000,032.  The Company paid commissions and expenses associated
with this offering of $3,432,670. The Common Stock for the registered offering
was issued pursuant to a prospectus supplement filed with the Commission on
February 26, 2008, in connection with a shelf takedown from the Company’s
Registration Statement on Form S-3 (File No. 333-144386) which was declared
effective by the Commission on January 11, 2008.
 
 On April
16, 2008, the Company entered into a Securities Purchase Agreement with two
institutional investors in connection with a registered direct offering of
securities providing for the issuance of 625,000 shares of the Company’s Common
Stock at price of $16.00 per share for aggregate gross proceeds of $10,000,000.
The Common Stock for the registered offering was issued pursuant to a prospectus
supplement filed with the Commission on April 21, 2008, in connection with a
shelf takedown from the Company’s Registration Statement on Form S-3 (File No.
333-148386) which was declared effective by the Commission on January 11, 2008.
The closing under the Securities Purchase Agreement took place on April 21,
2008. The placement agent for this transaction was Rodman & Renshaw, LLC,
which received a fee of six percent (6%) of the gross proceeds, or $600,000. The
Securities Purchase Agreement contains representations, warranties, and
covenants of the Company and the Investors which are typical for transactions of
this type.
  F-15
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 On April
22, 2008, the Company entered into Securities Purchase Agreements with a group
of 14 institutional investors in connection with a registered direct offering of
securities providing for the issuance of 1,322,836 shares of the Company’s
common stock at price of $19.05 per share for aggregate gross proceeds of
$25,200,026.  The Common Stock for the registered offering was issued
pursuant to a prospectus supplement filed with the Commission on April 24, 2008,
in connection with a shelf takedown from the Company’s Registration Statement on
Form S-3 (File No. 333-148386) which was declared effective by the Commission on
January 11, 2008. The closing under the Securities Purchase Agreements took
place on April 24, 2008. The placement agent for the sale of 797,901 shares of
Common Stock at an aggregate purchase price of $15,200,014.05 was Rodman &
Renshaw, LLC, which received a fee of $638,401 (4.2% of the gross proceeds).
Additionally, the Company paid a finder’s fee of $350,000 to Advantage
Consultants Limited in connection with the offering.
 
 On
December 28, 2008, the Company entered into Securities Purchase Agreements with
four institutional investors in connection with a registered direct offering of
securities providing for the issuance of 5,000,006 units (the "Units"), each
consisting of one share of the Company’s common stock, par value $0.001 and a
warrant to purchase seven-tenths of one share of common stock at a purchase
price of $1.75 per unit for aggregate gross proceeds of $8,750,010. The
securities for the registered offering were issued pursuant to a prospectus
supplement filed with the Securities and Exchange Commission on December 31,
2008, in connection with a shelf takedown from the Company’s Registration
Statement on Form S-3 (File No. 333-144386) which was declared effective by the
Commission on January 11, 2008. The closing under the Securities Purchase
Agreement took place on December 31, 2008. The placement agent for this
transaction was Rodman & Renshaw, LLC, which received a cash fee of six
percent (6%) of the gross proceeds, or $525,000, and warrants to purchase up to
300,000 shares of the Company's Common Stock.  The warrants issued to
Rodman & Renshaw, LLC have the same terms and are subject to the same
limitations as the Warrants. The Warrants are exercisable in whole or in part
beginning on June 30, 2009 and remain exercisable until June 30,
2014.  The exercise price of the Warrants is $2.50 per share of the
Company's common stock, subject to adjustment in certain circumstances,
including merger, consolidation, sale of subsidiaries or significant assets, or
recapitalization  as set forth in the Warrant.
  During
the year ended December 31, 2008 the Company issued 91,934 shares upon the
cashless exercise of 197,500 warrants.  In addition, the Company
received proceeds of $2,138,848 upon the exercise of 269,456
warrants.
 
 2007
Transactions
 
 On
February 6, 2007, the Company’s Board of Directors approved the sale of
2,750,000 units in a private placement offering. Each unit consisted of one
common share and warrants to purchase common shares equal to 8% of the number of
common shares subscribed. The warrants expire in three years and have an
exercise price of $5.00 per share. On February 28, 2007, the Company received
the minimum required placement of $3,000,000 USD of units of its securities
consisting of shares of common stock and stock purchase warrants (8% warrant
coverage) in a private placement exempt from registration under the Securities
Act. A total of 1,000,000 units, each unit representing one share of the
Company’s common stock and a three year common stock purchase warrant, were sold
through the end of business February 28, 2007. Each unit was priced at $3.00
with $3,000,000 in total having been received. Fees of (i) 8% of the securities
placed payable in cash, and (ii) a number of common stock purchase warrants
equal to 8% of the number of units placed were paid to participating selected
dealers. The stock purchase warrants have a term of three years and are
exercisable for one share of common stock at an initial exercise price of $5.00.
The securities offered in the private placement were not registered under the
Securities Act, or any state securities laws, and until so registered, could not
be sold in the United States except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In connection with the above mentioned
private placement offering, the Company paid commissions and fees totaling
$276,335.
 
 On April
6, 2007, the Company sold an additional 712,753 units for $3.00 per unit for
total proceeds of $2,138,259. Each unit represents one share of the Company’s
common stock and a three year common stock purchase warrant 8% coverage or
(57,020 warrants). Fees of (i) 8% of the securities placed payable in cash, and
(ii) a number of common stock purchase warrants equal to 8% of the number of
units placed were paid to participating selected dealers and a finder. The stock
purchase warrants have a term of three years and are exercisable for one share
of common stock at an initial exercise price of $5.00. The securities offered in
the private placement were not registered under the Securities Act, or any state
securities laws, and unless so registered, could not be sold in the United
States except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws.
  F-16
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 On April
29, 2007, the Company sold an additional 564,000 units for $3.00 per unit for
total proceeds of $1,692,000. Each unit represents one share of the Company’s
common stock and a three year common stock purchase warrant 8% coverage or
45,120 warrants). Fees of (i) 8% of the securities placed payable in cash, and
(ii) a number of common stock purchase warrants equal to 8% of the number of
units placed were paid to participating selected dealers and a finder. The stock
purchase warrants have a term of three years and are exercisable for one share
of common stock at an initial exercise price of $5.00. The securities offered in
the private placement were not registered under the Securities Act, or any state
securities laws, and unless so registered, could not be sold in the United
States except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws.
 
 The value
of the 364,280 warrants mentioned above of $664,717 was determined using the
Black-Scholes pricing model with the following assumptions: discount rate -
5.0%; dividend yield - 0%; expected volatility - 50% and term of 3 years. The
recording of the value of these warrants had no impact in the financial
statements as the entry was to debit and credit additional paid in capital for
the value of the warrants.
 
 On June
22, 2007, the Company completed a private placement offering of units pursuant
to which it sold 750,000 units at an offering price of $4.00 per unit for
aggregate gross proceeds of $3,000,000. Each unit consisted of one share of
common stock and a warrant to purchase 25% of one share of common stock
(187,500). The warrants are exercisable for a period of three years at an
exercise price of $5.60 per share. The Company compensated Four Tong
Investments, Ltd. for assisting it in the sale of securities in this private
placement offering by (i) paying them $240,000, plus (ii) issuing them warrants
to purchase 60,000 shares of its common stock on the same terms and conditions
as the warrants granted in the offering.
 
 The value
of the 247,500 warrants mentioned above of $546,511 was determined using the
Black-Scholes pricing model with the following assumptions: discount rate -
5.0%; dividend yield - 0%; expected volatility - 50% and term of 3 years. The
recording of the value of these warrants had no impact in the financial
statements as the entry was to debit and credit additional paid in capital for
the value of the warrants.
 
 In
connection with the private placement, the Company gave the investors
registration rights whereby the Company was obligated to file a registration
statement within 60 days of the final closing of the offering or be subject to
non-registration penalties equal to 2% per month. The Company has filed the
registration statement within 60 days of the closing and does not expect to
incur any non-registration penalties. In addition, there were penalties if the
registration statement was not effective within 180 days. The registration
statement was declared effective by the Securities and Exchange Commission on
October 25, 2007.
 
 During
the year ended December 31, 2007, one of the Company’s subsidiaries received a
$16,451 subsidy from the Chinese government which has been recorded directly to
additional paid in capital.
 
 Note
6 – Employee Common Welfare
 
 The total
expense for the employee common welfare was $207,709, $18,525 and $62,431 for
the years ended December 31, 2008, 2007 and 2006, respectively.  The
Company has recorded welfare payable of $3,336 and $5,383 at December 31, 2008
and 2007, which is included in tax and welfare payable in the accompanying
consolidated balance sheet.  The Chinese government abolished the 14%
welfare plan policy at the beginning of 2007.  The Company is not
required to establish welfare and common welfare reserves. The balance of
welfare payable is remaining amount due under the welfare plan provided for
prior to 2007.
  F-17
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Note
7 – Statutory Common Welfare Fund
 
 As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:
 
 i.
              Making
      up cumulative prior years’ losses, if
any;
 
 ii.
              Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company’s registered
  capital;
 
 iii.
              Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company’s “Statutory common welfare fund”, which is
      established for the purpose of providing employee facilities and other
      collective benefits to the Company’s employees;
  and
 
 iv.
              Allocations
      to the discretionary surplus reserve, if approved in the stockholders’
      general meeting.
 
 Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10 percent of income
after tax, not to exceed 50 percent of registered capital.
 
 The
Company has appropriated $2,483,829, $481,110 and $153,054 as reserve for the
statutory surplus reserve and welfare fund for the years ended December 31,
2008, 2007 and 2006, respectively.
 
 Note
8 – Stock Options and Warrants
 
 Stock
Options
 
 Following
is a summary of the stock option activity:
  Options
                          outstanding
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted
                          average
                          remaining
                          contractual
      life
                        
                        
                        Aggregate
                          Intrinsic
      ValueOutstanding,
      December 31, 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        $
                        -Granted
                        
                        
                        42,000
                        
                        
                        $
                        7.00Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      December 31, 2007
                        
                        
                        42,000
                        
                        
                        $
                        7.00
                        
                        
                        
                        4.62
                        
                        
                        $
                        80,620Granted
                        
                        
                        185,000
                        
                        
                        $
                        9.32Forfeited
                        
                        
                        (47,000
                        )
                        
                        $
                        7.43Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      December 31, 2008
                        
                        
                        180,000
                        
                        
                        $
                        9.27
                        
                        
                        
                        4.65
                        
                        
                        $
                        -Exercisable,
      December 31, 2008
                        
                        
                        6,666
                        
                        
                        $
                        8.85
                        
                        
                        
                        3.92
                        
                        
                        $
                        -
  F-18
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model for options granted during the years ended
December 31, 2008 and 2007 are as follows:
 
 2008
                    
                    
                    2007Risk-free
      interest rate
                    
                    
                    3.0
                    %
                    
                    
                    5.0
                    %Expected
      life of the options
                    
                    5
      years
                    
                    
                    5
      yearsExpected
      volatility
                    
                    
                    76
                    %
                    
                    
                    34
                    %Expected
      dividend yield
                    
                    
                    0
                    
                    
                    
                    0
 
 The
exercise price for options outstanding at December 31, 2008 is as
follows:
 
 Number
      of
                                  Options
                                
                                
                                Exercise
                                  Price20,000
                                
                                
                                $
                                8.85160,000
                                
                                
                                $
                                9.32180,000
 
 For
options granted during the year ended December 31, 2008 where the
exercise price equaled the stock price at the date of the grant, the
weighted-average fair value of such options was $5.81 and the
weighted-average exercise price of such options was $9.32.  No
options were granted during the year ended December 31, 2008, where
the exercise price was less than the stock price at the date of the grant or the
exercise price was greater than the stock price at the date of
grant.  At December 31, 2008, the compensation costs related to
nonvested options amounted to $822,417, which will be expensed through the third
quarter of 2011.
 
 Warrants
 
 Following
is a summary of the warrant activity:
 
 Outstanding,
      December 31, 2006
                    
                    
                    -Granted
                    
                    
                    611,787Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding,
      December 31, 2007
                    
                    
                    611,787Granted
                    
                    
                    4,180,004Forfeited
                    
                    
                    -Exercised
                    
                    
                    (468,587
                    )Outstanding,
      December 31, 2008
                    
                    
                    4,323,204
 
 The
exercise price for warrants outstanding at December 31, 2008 is as
follows:
 
 Number
      of
                              Options
                            
                            
                            Exercise
                              Price3,800,004
                            
                            
                            $
                            2.50123,200
                            
                            
                            $
                            5.00180,000
                            
                            
                            $
                            5.60220,000
                            
                            
                            $
                            10.004,323,204
 
 Note
9 – Related Party Transactions
 
 Sales to
related parties amounted to $0, $0 and $170,069 for the years ended December 31,
2008, 2007 and 2006, respectively.
  F-19
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Purchases
from related parties amounted to $0, $0 and $708 for the years ended December
31, 2008, 2007 and 2006, respectively.
 
 The
parties are related through one common shareholder who is a majority shareholder
in all the related entities.
 
 Note
10 – Taxes
 
 Local PRC
Income Tax
 
 Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 25% for the year ended December 31, 2008 and 33% for the years
ended December 31, 2007 and 2006.
 
 A
reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
 
 For
      the YearsEnded
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006Tax
      provision (credit) at statutory rate
                    
                    
                    34
                    %
                    
                    
                    34
                    %
                    
                    
                    34
                    %Foreign
      tax rate difference
                    
                    
                    (9
                    )%
                    
                    
                    (1
                    )%
                    
                    
                    (1
                    )%US
      NOL for which no benefit is realized
                    
                    
                    (2
                    )%
                    
                    
                    (2
                    )%
                    
                    
                    (2
                    )%Effect
      of tax holiday and waiver of current and prior year's tax
      liability
                    
                    
                    (20
                    )%
                    
                    
                    (34
                    )%
                    
                    
                    (40
                    )%3
                    %
                    
                    
                    (3
                    )%
                    
                    
                    (9
                    )%
 
 In July
2006, as a result of an investment by a foreign investor in one of the Company’s
subsidiaries, the Company’s subsidiary (Nanchang Best) became a Sino-Foreign
Joint Venture. Pursuant to the Chinese income tax law, the Company’s subsidiary
became fully exempt from income tax for a period of two years from July 14, 2006
to July 14, 2008, followed by a reduced tax rate of 15% for the next three
years. Concurrent with the exemption, the tax authorities waived approximately
3,400,000 RMB ($425,429) in taxes due.
 
 On June
5, 2007, Shanghai Best received a tax exemption certificate from the local tax
bureau and is exempt from income tax from January 1, 2007 to December 31, 2008,
followed by a reduced tax rate of 15% for the next three years.
  On April
25, 2007, Guangxi Huijie also received an exemption from income tax for the
period from January 1, 2006 to December 31, 2008. The exemption was issued by
the local government because Guangxi Huijie is located in a zone where the
federal government encourages the establishment of new entities. However, a new
income tax law came into effect on January 1, 2008, that eliminated Guangxi
Huijie exemption from income tax.  Effective January 1, 2008, Guangxi
Huijie’s income tax rate is 25%.
 
 The
effect of the change of tax status has been accounted for in accordance with
SFAS No. 109, par. 28, which states that the effect of a change in tax status is
computed as of the date of change and is included in the tax provision for
continuing operations. Management believes that the local tax authorities would
not have waived past taxes had it not been for the change in the Company’s
subsidiary’s tax status.
 
 If the
Company had not been exempt from paying income taxes due to the Sino-Foreign
Joint Venture described above, income tax expense for the year ended December
31, 2008 would have been approximately $4,384,000 and earnings per share would
have been reduced from $0.54 to $0.42; income tax expense for the year ended
December 31, 2007 would have been approximately $2,255,000 and earnings per
share would have been reduced from $0.26 to $0.17 and income tax expense for the
year ended December 31, 2006 would have been approximately $325,000 and earnings
per share would have been reduced from $0.07 to $0.04.
  F-20
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 The
Company also has approximately $1.6 million in net operating loss carryforwards
for United States tax purposes that begin to expire in 2021.  A 100%
valuation allowance has been made for the tax benefit of such net operating loss
due to the uncertainty of its realization.
 
 Note
11 – Acquisitions
 
 Purchases of Hog
Farms
 
 On
January 3, 2008, the Company acquired 70% of the issued and outstanding capital
stock of Wannian Xiandai Animal Husbandry Limited Liability Co., a PRC company
located in Jiangxi Province.  The aggregate purchase price was
12,250,000 RMB, equivalent to $1,666,666 based on the exchange rate at the time
of the acquisition.  Under the terms of the transaction documents, the
master lease position for the facilities remains with the shareholders of the
selling party and the Company will lease the underlying facilities under a
10-year lease agreement.  The lease agreement calls for semi-annual
rent payments totaling 900,000 RMB (approximately $122,450) per year in exchange
for use of the facilities.
 
 On
January 3, 2008, the Company acquired 70% of the issued and outstanding capital
stock of Jiangxi Huyun Livestock Co., Ltd., a PRC company located in
Jiangxi Province.  The aggregate purchase price was 6,482,000
RMB, equivalent to $881,905 based on the exchange rate at the time of the
acquisition.  Under the terms of the transaction documents, the master
lease position for the facilities remains with the shareholders of the selling
party and the Company will lease the underlying facilities under a 10-year lease
agreement.  The lease agreement calls for semi-annual rent payments
totaling 900,000 RMB (approximately $122,450) for the first year and 450,000 RMB
(approximately $61,225) for every 10,000 hogs sold beginning in the second year
and thereafter in exchange for use of the facilities.
 
 On
January 4, 2008, the Company acquired 60% of the issued and outstanding capital
stock of Ganzhou Green Animal Husbandry Development Co., Ltd., a PRC company
located in Jiangxi Province.  The aggregate purchase price was
6,480,000 RMB, equivalent to $881,633 based on the exchange rate at the time of
the acquisition.  Under the terms of the transaction, the master lease
position for the facilities remains with the shareholders of the selling party
and the Company will lease the underlying facilities under a 10-year lease
agreement.  The lease agreement calls for semi-annual rent payments
totaling 700,000 RMB (approximately $97,000) per year in exchange for use of the
facilities.
 
 On
January 7, 2008, the Company acquired 100% of the hogs and stock of Gang Feng
Animal Husbandry Co., Ltd., a PRC company located in
Jiangxi Province.  The aggregate purchase price was 4,820,000
RMB, equivalent to $655,782 based on the exchange rate at the time of the
acquisition,  Under the terms of the transaction, the master lease position
for the facilities remains with the shareholders of the selling party and the
Company will lease the underlying facilities under a 6.5-year lease
agreement.  The lease agreement calls for semi-annual rent payments
totaling 450,000 RMB (approximately $61,225) per year in exchange for use of the
facilities.
 
 On
January 9, 2008, the Company acquired 55% of the issued and outstanding capital
stock of Yichun Tianpeng Domestic Livestock Farm, Ltd., a PRC company located in
Jiangxi Province.  The aggregate purchase price was 8,855,000
RMB, equivalent to $1,204,761 based on the exchange rate at the time of the
acquisition. Under the terms of the transaction, the master lease position
for the facilities remains with the shareholders of the selling party and the
Company will lease the underlying facilities under a 10-year lease
agreement.  The lease agreement calls for semi-annual rent payments
totaling 800,000 RMB (approximately $108,844) per year in exchange for use of
the facilities.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Guangxi Nanning Wanghua Hog Farm,
located in Guangxi Province, PRC from Fan Xianfang and Wu Yuhua for a purchase
price of RMB26,030,000 (USD$3,722,300 based on the exchange rate at the time of
the acquisition). Guangxi Nanning Wanghua Hog Farm has annual hog production
capability of 36,000 hogs.
  F-21
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 In April
2008, the Company acquired all of the equity interest, together with all of
their assets, including existing rights for land use, pig houses, office
buildings, power and water supply facilities, existing inventory of hogs, feed
and veterinary drugs, in the Guangxi Guigang Gangda Hog Farm, located in Guangxi
Province, PRC for a purchase price of RMB14,520,000 (USD$2,076,400 based on the
exchange rate at the time of the acquisition). Guangxi Guigang Gangda Hog Farm
has annual hog production capability of approximately 12,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, together with all of
their assets, including existing rights for land use, pig houses, office
buildings, power and water supply facilities, existing inventory of hogs, feed
and veterinary drugs, in the Guangxi Xingye Guihong Hog Farm, located in Guangxi
Province, PRC, for a purchase price of RMB42,500,000 (USD$6,077,500 based on the
exchange rate at the time of the acquisition). Guangxi Xinye Guihong Hog Farm
has annual hog production capability of approximately 50,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, together with all of
their assets, including existing rights for land use, pig houses, office
buildings, power and water supply facilities, existing inventory of hogs, feed
and veterinary drugs, in the Hainan Haikou Meilan Hog Farm, located in Hainan
Province, PRC, for a purchase price of RMB14,700,000 (USD$2,102,100 based on the
exchange rate at the time of the acquisition). Hainan Haikou Meilan Hog Farm has
annual hog production capability of approximately 21,500 hogs.
 
 In April
2008, the Company acquired all of the equity interest, together with all of
their assets, including existing rights for land use, pig houses, office
buildings, power and water supply facilities, existing inventory of hogs, feed
and veterinary drugs, in the Hainan Haikou Wohao Hog Farm, located in Hainan
Province, PRC, for a purchase price of RMB15,200,000 (USD$2,173,600 based on the
exchange rate at the time of the acquisition). Hainan Haikou Wohao Hog Farm has
annual hog production capability of approximately 20,000 hogs.
 
 In April
2008, the Company acquired ninety percent (60%) of the equity interest, as well
as the inventory of hogs, feed and veterinary drugs, in the Guangxi Guilin Fuzhi
Hog Farm, located in Guangxi Province, PRC, for a purchase price of
RMB12,000,000 (USD$1,716,000 based on the exchange rate at the time of the
acquisition). Guangxi Guilin Fuzhi Hog Farm has annual hog production capability
of approximately 20,000 hogs.
 
 In April
2008, the Company acquired eighty percent (80%) of the equity interest, as well
as the inventory of hogs, feed and veterinary drugs, in the Guangdong Lianjiang
Xinfa Hog Farm, located in Guangdong Province, PRC, for a purchase price of
RMB11,000,000 (USD$1,573,000 based on the exchange rate at the time of the
acquisition). Guangdong Lianjiang Xinfa Hog Farm has annual hog production
capability of approximately 22,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Zhejiang Pinghu Yongxin Hog Farm,
located in Zhejiang Province, PRC for a purchase price of RMB10,480,000
(USD$1,498,600 based on the exchange rate at the time of the acquisition).
Zhejiang Pinghu Yongxin Hog Farm has annual hog production capability of
approximately 11,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Shanghai Fengxian Hog Farm, located
in Shanghai City, PRC, for a purchase price of RMB35,000,000 (USD$5,005,000
based on the exchange rate at the time of the acquisition). Shanghai Fengxian
Hog Farm has annual hog production capability of approximately 32,000
hogs.
  F-22
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Shanghai Tuanxi Hog Farm, located in
Shanghai, PRC, for a purchase price of RMB7,000,000 (USD$1,001,000 based on the
exchange rate at the time of the acquisition). Shanghai Tuanxi Hog Farm has
annual hog production capability of approximately 8,500 hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Shanghai Senrong Hog Farm, located in
Shanghai, PRC, for a purchase price of RMB30,000,000 (USD$4,290,000 based on the
exchange rate at the time of the acquisition). Shanghai Senrong Hog Farm has
annual hog production capability of approximately 30,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Fujian Xiamen Muxin Hog Farm, located
in Xiamen City, PRC, for a purchase price of RMB29,320,000 (USD$4,192,800 based
on the exchange rate at the time of the acquisition). Fujian Xiamen Muxin Hog
Farm has annual hog production capability of approximately 50,000
hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Xiamen Yuanshengtai Food Co., Ltd., a
hog farm located in Fujian Province, PRC, for a purchase price of RMB26,200,000
(USD$3,746,600 based on the exchange rate at the time of the acquisition).
Xiamen Yuanshengtai Food Co. has annual hog production capability of
approximately 38,000 hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Fujian Jianhua Hog Farm, located in
Fujian Province, PRC, for a purchase price of RMB32,000,000 (USD$4,576,000
based on the exchange rate at the time of the acquisition). Fujian Jianhua Hog
Farm has annual hog production capability of approximately 34,000
hogs.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in Fujian Fengxiang Agribusiness Co., Ltd.,
a hog farm locatedin Fujian Province, PRC, for a purchase price of RMB8,100,000
(USD$1,158,300 based on the exchange rate at the time of the acquisition).
Fujian Fengxiang Agribusiness has annual hog production capability of
approximately 10,000.
 
 In April
2008, the Company acquired all of the equity interest, as well as the inventory
of hogs, feed and veterinary drugs, in the Jiangxi Zhiliang Hog Farm, located in
Jiangxi Province, PRC, for a purchase price of RMB8,000,000
(USD$1,144,000  based on the exchange rate at the time of the
acquisition). Jiangxi Zhiliang Hog Farm has annual hog production capability of
approximately 10,000 hogs.
 
 In May
2008, the Company acquired all of the equity interest in Nanping Kangda Animal
Husbandry Co., Ltd., a hog farm located in Fujian Province, PRC, for a purchase
price of RMB5,821,000 (USD$838,664 based on the exchange rate at the time of the
acquisition). Nanping Kangda Animal Husbandry Co., Ltd. has annual hog
production capability of approximately 12,000 hogs.
 
 In May
2008, the Company acquired all of the equity interest in Fujian Jianxi Breeder
Hog Farm Co., Ltd., a breeder hog farm located in Fujian Province, PRC, for a
purchase price of RMB16,338,166 (USD$2,353,931 based on the exchange rate at the
time of the acquisition). Fujian Jianxi Breeder Hog Farm Co., Ltd. has annual
hog production capability of approximately 8,000 breeder hogs and 13,000 meat
hogs.
 
 In June
2008, the Company acquired all of the equity interest in Shanghai WeiSheng Hog
Raising Co., Ltd.(“Shanghai Weisheng”), a hog farm located in Shanghai City,
PRC, for a negotiated purchase price of RMB12,820,000 (USD$1.87 million based on
the exchange rate at the time of the acquisition). Shanghai Weisheng has annual
hog production capability of approximately 15,000 hogs.
 
 On
September 8, 2008, the Company acquired all of the equity interest in a hog farm
located in the Fujian Province, PRC, for a negotiated purchase price of
RMB9,865,000 (US$1,441,451 based on the exchange rate at the time of the
acquisition). The acquired farm has annual hog production capability of
approximately 13,500 hogs, with existing facilities for additional
expansion.
  F-23
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 In
addition on September 8, 2008, the Company acquired the remaining 30% equity
interest in Wannian Xiandai Animal Husbandry Limited Liability Co. for a
negotiated purchase price of RMB6,012,500 (US$878,532 based on the exchange rate
at the time of the acquisition).
  On
September 10, 2008, the Company acquired of all of the equity interest in a hog
farm located in the Guangxi Province, PRC, for a negotiated purchase price of
RMB9,256,000 (US$1,354,206 based on the exchange rate at the time of the
acquisition). This farm has annual hog production capability of approximately
12,500 hogs, with existing facilities for additional expansion.
 
 On
September 10, 2008, the Company acquired of all of the equity interest in a hog
farm located in the Guangxi Province, PRC, for a negotiated purchase price of
RMB8,569,000 (US$1,253,694 based on the exchange rate at the time of the
acquisition). This farm has annual hog production capability of approximately
11,000 hogs, with existing facilities for additional expansion.
 
 On
October 28, 2008, the Company, completed the acquisition of all of the equity
interest in a commercial producing hog farm located in the Guangxi Province, PRC
for a negotiated purchase price of RMB7,850,000 (US$1,147,913 based on the
exchange rate based on the exchange rate at the time of the
acquisition).  On October 29, 2008, the Company completed the
acquisition of all of the equity interest in a second commercial producing hog
farm located in the Guangxi Province, PRC for a negotiated purchase price of
RMB8,260,000 (US$1,207,777 based on the exchange rate on October 29, 2008).
These two farms have an aggregate annual hog production capability of
approximately 29,000 hogs, with existing facilities for additional
expansion.
 
 Acquisition of Feed
Company
 
 In June
2008, the Company acquired all of the equity interest in Hainan HopeJia Feed
Co., Ltd. ("HopeJia"), located in the Hainan province of the PRC. for a
negotiated purchase price of RMB28,600,000 or approximately US$4.16 million
based on the exchange rate at the time of the acquisition.
 
 The hog
farms and feed company were purchased as part of the Company’s strategic growth
plan.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the exchange rates at the date of
acquisition.
 
 Cash
                      
                      $
                      95,573Accounts
      receivable
                      
                      
                      388,384Other
      receivables
                      
                      
                      20,795Inventory
                      
                      
                      9,300,800Other
      assets
                      
                      
                      353,753Property
      and equipment
                      
                      
                      16,102,598Construction
      in process
                      
                      
                      1,375,372Intangible
      assets
                      
                      
                      41,164,296Accounts
      payable
                      
                      
                      (318,197
                      )Other
      payables
                      
                      
                      (389,602
                      )Minority
      Interest
                      
                      
                      (508,150
                      )$
                      67,585,622
 
 The
intangible asset related to the purchase of the hog farms is a preliminary
allocation that is subject to change upon the completion of a formal
appraisal.
  F-24
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 The
following pro forma financial information presents the consolidated operations
of the Company as if the 30 above mentioned acquisitions had occurred on January
1, 2007.
 
 For the
year ended December 31, 2008 and 2007:
 
 2008
                    
                    
                    2007Net
      Revenue
                    
                    $
                    149,863,158
                    
                    
                    $
                    60,915,880Gross
      profit
                    
                    $
                    36,206,682
                    
                    
                    $
                    16,218,816Income
      from operations
                    
                    $
                    26,109,067
                    
                    
                    $
                    10,721,020Minority
      Interest in Subsidiaries
                    
                    $
                    421,519
                    
                    
                    $
                    73,925Net
      income
                    
                    $
                    18,209,692
                    
                    
                    $
                    10,708,965Basic
      earnings per share
                    
                    $
                    0.58
                    
                    
                    $
                    0.41
 
 Acquisition ofLushan Breeder Pig Farm Co.,
Ltd.
 
 On
November 6, 2007, the Company entered into a Stock Purchase Agreement with
Lushan Breeder Pig Farm Co., Ltd. (“Lushan”), a Peoples Republic of China
company located in HuaLin Town of XingZi County in Jiangxi Province, Peoples
Republic of China, Huaping Yang and Hongyun Luo, the holders of ninety percent
(90%) of the issued and outstanding capital stock of Lushan. Under the terms of
the Stock Purchase Agreement, the Company agreed to purchase 90% of the issued
and outstanding capital stock of Lushan from Hongyun Luo for an aggregate
purchase price of 20,112,020 RMB, equivalent to $2,699,600. In addition, under
the terms of the Stock Purchase Agreement, the Company assumed 4,919,980 RMB
equivalent to $660,400 of indebtedness owed by Lushan.  The Company
assigned the Shares to Nan Chang Best Animal Husbandry Co., Ltd, its wholly
owned subsidiary.  The Company purchased Lushan to expand its
operations into the pre-mix fodder blended feed and feed additives for use in
the pork husbandry market as well as raising, breeding and the sale of
pigs.
 
 The
operating results of Lushan are included in the accompanying consolidated
statements of operations from the acquisition date. For convenience of reporting
the acquisition for accounting purposes, November 1, 2007 has been designated as
the acquisition date.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
 
 Cash
                    
                    $
                    661,216Accounts
      receivable
                    
                    
                    7,663Other
      receivables
                    
                    
                    11,544Inventory
                    
                    
                    896,848Advances
      to related parties
                    
                    
                    190Other
      current assets
                    
                    
                    611Property
      and equipment
                    
                    
                    1,784,049Construction-in-process
                    
                    
                    709,563Intangible
      assets
                    
                    
                    2,513Accounts
      payable
                    
                    
                    (106,070
                    )Other
      payables
                    
                    
                    (597,603
                    )Unearned
      revenue
                    
                    
                    (7,468
                    )Tax
      and welfare payable
                    
                    
                    (3,056
                    )Purchase
      price
                    
                    $
                    3,360,000
  F-25
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Acquisition
ofGuangxi
Huijie Sci. & Tech. Feed Co, Ltd
 
 On
December 20, 2006, the Company completed its acquisition of Guangxi Huijie. The
Company acquired 100% of Guangxi Huijie’s issued and outstanding shares of
common stock for $1,100,420 which was paid in cash. Guangxi Huijie is engaged in
the research & development, manufacture, marketing, distribution and sale of
premix fodder blended feed and feed additives primarily for use in China’s
domestic pork husbandry market. Guangxi Huijie operates a production plant in
Nanning City and sells to distributors and large-scale swine farms. The Company
acquired Guangxi Huijie as part of its strategic growth plan.
 
 The
operating results of Guangxi Huijie are included in the accompanying
consolidated statements of operations from the acquisition date. For convenience
of reporting the acquisition for accounting purposes, December 31, 2006 has been
designated as the acquisition date. Net income for the 11 days from December 20,
2006 to December 31, 2006 was approximately $31,000.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.  The fair values are
based on third-party valuation.
 
 Cash
                    
                    $
                    151,990Accounts
      receivable
                    
                    
                    473,976Other
      receivables
                    
                    
                    166,741Inventory
                    
                    
                    290,184Other
      current assets
                    
                    
                    57,809Property
      and equipment
                    
                    
                    614,510Intangible
      assets
                    
                    
                    464,246Accounts
      payable
                    
                    
                    (218,131
                    )Notes
      payable
                    
                    
                    (115,326
                    )Advances
      from related party
                    
                    
                    (737,827
                    )Other
      current liabilities
                    
                    
                    (47,752
                    )Purchase
      price
                    
                    $
                    1,100,420
 
 Note
12 – Segment Information
 
 The
Company’s predominant businesses are the research and development, manufacture,
marketing, distribution, and sale of pre-mix fodder blended feed and feed
additives primarily for use in China’s domestic pork husbandry market and the
raising, breeding, and selling of pigs.  The Company operates in four
segments:  Shanghai, Guangxi, Nanchang, and hog farms.
 
 Shanghai
is located in the Qingcun Town, Fengxian district, Shanghai and sells its
products to approximately 535 customers, consisting
of 329 distributors and 206 large scale pig farms.  Guangxi
is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi
Province and sells its products to approximately 616 customers, consisting
of 427 distributors and 189 large scale pig farms.  Nanchang is
located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province and
sells its products to approximately 607 customers, consisting of 405
distributors and 202 large scale pig farms. The hog farms are engaged
mainly in raising, breeding, and sale of pigs all over the country and are
located in the PRC provinces of Jiangxi, Shanghai, Hainan, Guangxi and
Fujian.
  F-26
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 The
following tables summarize segment information for the years ended December 31,
2008, 2007 and 2006:
  Years
      Ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Revenues
      from unrelated entitiesShanghai
                                  
                                  $
                                  18,063,213
                                  
                                  
                                  $
                                  9,659,457
                                  
                                  
                                  $
                                  3,180,407Guangxi
                                  
                                  
                                  13,698,616
                                  
                                  
                                  
                                  11,048,487
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  19,983,515
                                  
                                  
                                  
                                  15,366,849
                                  
                                  
                                  
                                  5,414,469Hog
      farms
                                  
                                  
                                  91,916,141
                                  
                                  
                                  
                                  88,546
                                  
                                  
                                  
                                  -$
                                  143,661,485
                                  
                                  
                                  $
                                  36,163,339
                                  
                                  
                                  $
                                  8,594,876Intersegment
      revenuesShanghai
                                  
                                  $
                                  1,193,171
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  182,564Guangxi
                                  
                                  
                                  4,116,154
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  2,865,221
                                  
                                  
                                  
                                  2,280,320
                                  
                                  
                                  
                                  708Hog
      farms
                                  
                                  
                                  1,518,230
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  9,692,776
                                  
                                  
                                  $
                                  2,280,320
                                  
                                  
                                  $
                                  183,272Total
      RevenuesShanghai
                                  
                                  $
                                  19,256,384
                                  
                                  
                                  $
                                  9,659,457
                                  
                                  
                                  $
                                  3,362,971Guangxi
                                  
                                  
                                  17,814,770
                                  
                                  
                                  
                                  11,048,487
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  22,848,736
                                  
                                  
                                  
                                  17,647,169
                                  
                                  
                                  
                                  5,415,177Hog
      farms
                                  
                                  
                                  93,434,371
                                  
                                  
                                  
                                  88,546
                                  
                                  
                                  
                                  -Less
      Intersegment revenues
                                  
                                  
                                  (9,692,776
                                  )
                                  
                                  
                                  (2,280,320
                                  )
                                  
                                  
                                  (183,272
                                  )$
                                  143,661,485
                                  
                                  
                                  $
                                  36,163,339
                                  
                                  
                                  $
                                  8,594,876Income
      from operationsShanghai
                                  
                                  $
                                  3,688,912
                                  
                                  
                                  $
                                  1,737,962
                                  
                                  
                                  $
                                  516,364Guangxi
                                  
                                  
                                  959,795
                                  
                                  
                                  
                                  2,224,098
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  3,131,770
                                  
                                  
                                  
                                  2,807,786
                                  
                                  
                                  
                                  846,243Hog
      farms
                                  
                                  
                                  18,041,498
                                  
                                  
                                  
                                  847
                                  
                                  
                                  
                                  -Holding
      Company
                                  
                                  
                                  (1,081,044
                                  )
                                  
                                  
                                  (449,922
                                  )
                                  
                                  
                                  (328,713
                                  )$
                                  24,740,931
                                  
                                  
                                  $
                                  6,320,771
                                  
                                  
                                  $
                                  1,033,894Interest
      incomeShanghai
                                  
                                  $
                                  2,825
                                  
                                  
                                  $
                                  1,092
                                  
                                  
                                  $
                                  262Guangxi
                                  
                                  
                                  24,830
                                  
                                  
                                  
                                  2,738
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  63,331
                                  
                                  
                                  
                                  22,640
                                  
                                  
                                  
                                  28,589Hog
      farms
                                  
                                  
                                  20,405
                                  
                                  
                                  
                                  56
                                  
                                  
                                  
                                  -Holding
      Company
                                  
                                  
                                  79,574
                                  
                                  
                                  
                                  115,622
                                  
                                  
                                  
                                  -$
                                  190,965
                                  
                                  
                                  $
                                  142,148
                                  
                                  
                                  $
                                  28,851
  F-27
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Interest
      and financing costsShanghai
                                  
                                  $
                                  4,045
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Guangxi
                                  
                                  
                                  8,465
                                  
                                  
                                  
                                  33,597
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  27,351
                                  
                                  
                                  
                                  61,078
                                  
                                  
                                  
                                  23,532Hog
      farms
                                  
                                  
                                  22
                                  
                                  
                                  
                                  28,468
                                  
                                  
                                  
                                  -Holding
      Company
                                  
                                  
                                  5,664,475
                                  
                                  
                                  
                                  30,580
                                  
                                  
                                  
                                  -$
                                  5,704,358
                                  
                                  
                                  $
                                  153,723
                                  
                                  
                                  $
                                  23,532Income
      tax expense (benefit)Shanghai
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (152,108
                                  )
                                  
                                  $
                                  171,370Guangxi
                                  
                                  
                                  338,795
                                  
                                  
                                  
                                  (41,095
                                  )
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  248,428
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (271,756
                                  )Hog
      farms
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Holding
      Company
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  587,223
                                  
                                  
                                  $
                                  (193,203
                                  )
                                  
                                  $
                                  (100,386
                                  )Net
      IncomeShanghai
                                  
                                  $
                                  3,689,684
                                  
                                  
                                  $
                                  1,904,894
                                  
                                  
                                  $
                                  358,671Guangxi
                                  
                                  
                                  483,279
                                  
                                  
                                  
                                  2,263,795
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  2,517,285
                                  
                                  
                                  
                                  2,887,001
                                  
                                  
                                  
                                  1,145,322Hog
      farms
                                  
                                  
                                  16,923,585
                                  
                                  
                                  
                                  (27,915
                                  )
                                  
                                  
                                  -Holding
      Company
                                  
                                  
                                  (6,665,018
                                  )
                                  
                                  
                                  (364,880
                                  )
                                  
                                  
                                  (328,713
                                  )$
                                  16,948,815
                                  
                                  
                                  $
                                  6,662,895
                                  
                                  
                                  $
                                  1,175,280Provision
      for depreciationShanghai
                                  
                                  $
                                  21,834
                                  
                                  
                                  $
                                  25,624
                                  
                                  
                                  $
                                  74,347Guangxi
                                  
                                  
                                  40,047
                                  
                                  
                                  
                                  46,177
                                  
                                  
                                  
                                  -Nanchang
                                  
                                  
                                  59,932
                                  
                                  
                                  
                                  81,529
                                  
                                  
                                  
                                  26,122Hog
      farms
                                  
                                  
                                  1,459,030
                                  
                                  
                                  
                                  (12,820
                                  )
                                  
                                  
                                  -$
                                  1,580,843
                                  
                                  
                                  $
                                  140,510
                                  
                                  
                                  $
                                  100,469
 
 As
      of December 31,2008
                          
                          
                          2007Total
      AssetsShanghai
                          
                          $
                          8,633,418
                          
                          
                          $
                          3,206,606Guangxi
                          
                          
                          14,356,062
                          
                          
                          
                          4,652,914Nanchang
                          
                          
                          8,087,484
                          
                          
                          
                          13,312,356Hog
      farms
                          
                          
                          96,454,117
                          
                          
                          
                          693,893Holding
      Company
                          
                          
                          9,524,055
                          
                          
                          
                          1,204,495$
                          137,055,136
                          
                          
                          $
                          23,070,264
 
 Note
13 – Commitments and Contingencies
 
 At
December 31, 2008, the Company had commitments to expend $7,372,875 in
connection to building construction currently in process and $984,804 in
connection with the growing of breeder hogs.
  F-28
  AgFeed
Industries, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2008 and 2007
 
 Note
14 – Selected Quarterly Data (unaudited)
 
 Quarterly
      Periods EndedMarch
      31,
                                                                        
                                                                        
                                                                        June
      30,
                                                                        
                                                                        
                                                                        September
      30,
                                                                        
                                                                        
                                                                        December
      31,2008
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2008Net
      Revenue
                                                                        
                                                                        $
                                                                        12,147,084
                                                                        
                                                                        
                                                                        $
                                                                        35,635,327
                                                                        
                                                                        
                                                                        $
                                                                        49,426,274
                                                                        
                                                                        
                                                                        $
                                                                        46,452,800Gross
      Profit
                                                                        
                                                                        $
                                                                        3,432,961
                                                                        
                                                                        
                                                                        $
                                                                        11,034,825
                                                                        
                                                                        
                                                                        $
                                                                        12,302,216
                                                                        
                                                                        
                                                                        $
                                                                        7,666,918Income
      from operation
                                                                        
                                                                        $
                                                                        1,725,118
                                                                        
                                                                        
                                                                        $
                                                                        8,772,157
                                                                        
                                                                        
                                                                        $
                                                                        9,310,399
                                                                        
                                                                        
                                                                        $
                                                                        4,933,257Other
      income (expense)
                                                                        
                                                                        $
                                                                        (515,511
                                                                        )
                                                                        
                                                                        $
                                                                        (4,566,771
                                                                        )
                                                                        
                                                                        $
                                                                        (828,031
                                                                        )
                                                                        
                                                                        $
                                                                        (873,062
                                                                        )Net
      income
                                                                        
                                                                        $
                                                                        919,297
                                                                        
                                                                        
                                                                        $
                                                                        3,921,513
                                                                        
                                                                        
                                                                        $
                                                                        8,216,155
                                                                        
                                                                        
                                                                        $
                                                                        3,891,850Earnings
      per share (basic)
                                                                        
                                                                        $
                                                                        0.03
                                                                        
                                                                        
                                                                        $
                                                                        0.12
                                                                        
                                                                        
                                                                        $
                                                                        0.25
                                                                        
                                                                        
                                                                        $
                                                                        0.13Quarterly
      Periods EndedMarch
      31,
                                                                        
                                                                        
                                                                        June
      30,
                                                                        
                                                                        
                                                                        September
      30,
                                                                        
                                                                        
                                                                        December
      31,2007
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        2007Net
      Revenue
                                                                        
                                                                        $
                                                                        4,978,295
                                                                        
                                                                        
                                                                        $
                                                                        6,891,153
                                                                        
                                                                        
                                                                        $
                                                                        11,888,283
                                                                        
                                                                        
                                                                        $
                                                                        12,405,608Gross
      Profit
                                                                        
                                                                        $
                                                                        1,543,206
                                                                        
                                                                        
                                                                        $
                                                                        2,009,926
                                                                        
                                                                        
                                                                        $
                                                                        3,243,065
                                                                        
                                                                        
                                                                        $
                                                                        3,603,663Income
      from operation
                                                                        
                                                                        $
                                                                        977,891
                                                                        
                                                                        
                                                                        $
                                                                        1,220,524
                                                                        
                                                                        
                                                                        $
                                                                        2,057,364
                                                                        
                                                                        
                                                                        $
                                                                        2,064,992Other
      income (expense)
                                                                        
                                                                        $
                                                                        (23,412
                                                                        )
                                                                        
                                                                        $
                                                                        24,719
                                                                        
                                                                        
                                                                        $
                                                                        17,515
                                                                        
                                                                        
                                                                        $
                                                                        130,099Net
      income
                                                                        
                                                                        $
                                                                        779,181
                                                                        
                                                                        
                                                                        $
                                                                        1,461,002
                                                                        
                                                                        
                                                                        $
                                                                        2,075,174
                                                                        
                                                                        
                                                                        $
                                                                        2,347,538Earnings
      per share (basic)
                                                                        
                                                                        $
                                                                        0.03
                                                                        
                                                                        
                                                                        $
                                                                        0.06
                                                                        
                                                                        
                                                                        $
                                                                        0.08
                                                                        
                                                                        
                                                                        $
                                                                        0.09
  F-29
  SIGNATURES
 
 Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this
Annual Report to be signed on our behalf by the undersigned, thereunto duly
authorized on the 16th day of March, 2009.
 
 AgFeed
      Industries Inc.By:
                    /s/ Junhong
    XiongJunhong XiongChief Executive Officer, President,Director and Vice
Chairman
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
has been signed below by the following persons on behalf of AgFeed and in the
capacities and on the dates indicated.  The undersigned hereby
appoints Songyan Li and Junhong Xiong, each with full power of substitution, as
his true and lawful attorney-in-fact and agent, for him and in his name and
place, to sign the name of the undersigned in the capacity or capacities
indicated below to the Annual Report of AgFeed Industries, Inc. on Form 10-K for
the year ended December 31, 2008 and any and all amendments to such Form 10-K
and to file the same, with all exhibits thereto and other documents in
connection therewith, with all necessary or appropriate governmental or other
entities, including, but not limited to, the Securities and Exchange Commission
and the NASDAQ Stock Market LLC, granting to such attorney-in-fact and agent
full power and authority to perform each act necessary to be done as fully to
all intents and purposes as he might do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
 
 Signature
                                                      
                                                      Title
                                                      
                                                      Date/s/
      Junhong Xiong
                                                      
                                                      Director,
      President, Chief Executive Officer and Vice Chairman
                                                      
                                                      March
      16, 2009Junhong
      Xiong/s/
      Liangfan Yan
                                                      
                                                      Chief
      Financial Officer and Chief Accounting Officer
                                                      
                                                      March
      16, 2009Liangfan
      Yan/s/
      Songyan Li
                                                      
                                                      Chairman
      of the Board and Director
                                                      
                                                      March
      16, 2009Songyan
      Li/s/
      Lixiang Zhang
                                                      
                                                      Director
                                                      
                                                      March
      16, 2009Lixiang
      Zhang/s/
      Fredric W. Rittereiser
                                                      
                                                      Director
                                                      
                                                      March
      16, 2009Fredric
      W. Rittereiser/s/
      Arnold Staloff
                                                      
                                                      Director
                                                      
                                                      March
      16, 2009Arnold
      Staloff
  
  EXHIBIT
INDEX
 
 Exhibit No.
                  
                  Description2.1
                  
                  Share
      Purchase Agreement with Nanchang Best and each of Nanchang Best’s
      shareholders (incorporated by reference to Exhibit 2.1 of AgFeed's Current
      Report on Form 8-K (Commission File No. 001-33674) filed with the SEC on
      November 6, 2006)2.2
                  
                  Share
      Purchase Agreement with Shanghai Best and each of Shanghai Best’s
      shareholders (incorporated by reference to Exhibit 2.2 of AgFeed's Current
      Report on Form 8-K (Commission File No. 001-33674) filed with the SEC on
      November 6, 2006)3(i).1
                  
                  Articles
      of Incorporation (incorporated by reference to Exhibit 3.1 of AgFeed's
      Registration Statement on Form SB-2 (Commission File No. 333-126674) filed
      with the SEC on July 18, 2005)3(i).2
                  
                  Articles
      of Merger dated November 14, 2006 pursuant to which AgFeed Industries,
      Inc. was merged into Wallace Mountain Resources Corp. and the name of the
      surviving entity was changed to AgFeed Industries, Inc. (incorporated by
      reference to Exhibit 3.3 of AgFeed's Registration Statement on Form SB-2
      (Commission File No. 333-144131), filed with the SEC on June 28,
      2007)3(ii).1
                  
                  Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 of AgFeed's
      Current Report on Form 8-K (Commission File No. 001-33674) filed with the
      SEC on May 15, 2007)4.1
                  
                  Specimen
      common stock certificate (incorporated by reference to Exhibit 4 of
      AgFeed's Annual Report on Form 10-KSB (Commission File No. 001-33674)
      filed with the SEC on March 13, 2007)4.2
                  
                  Form
      of Common Stock Purchase Warrant forming part of units sold, and also
      issued as compensation to selected dealers in our private placement
      offering that had a final closing in April 2007 (incorporated by reference
      to Exhibit 4.2 of AgFeed's Amended Registration Statement on Form SB-2
      (Commission File No. 333-144131) filed with the SEC on August 17,
      2007)4.3
                  
                  Form
      of Registration Rights Agreements dated February 2007 (incorporated by
      reference to Exhibit 4.3 of AgFeed's Amended Registration Statement on
      Form SB-2 (Commission File No. 333-144131) filed with the SEC on August
      17, 2007)4.4
                  
                  Form
      of Common Stock Purchase Warrant forming part of units sold and also
      issued as compensation to selected dealers in our June 2007 private
      placement offering (incorporated by reference to Exhibit 4.4 of AgFeed's
      Registration Statement on Form SB-2 (Commission File No. 333-144131) filed
      with the SEC on June 28, 2007)4.5
                  
                  Registration
      Rights Agreement dated as of June 22, 2007 by and between AgFeed and
      Apollo Asia Opportunity Master Fund, L.P. (incorporated by reference to
      Exhibit 4.5 of AgFeed's Registration Statement on Form SB-2 (Commission
      File No. 333-144131) filed with the SEC on June 28,
  2007)10.1
                  
                  Share
      Purchase Agreement dated December 20, 2006 among AgFeed, Guangxi Huijie
      and the shareholders of Guangxi Huijie (incorporated by reference to
      Exhibit 10.1 of AgFeed's Current Report on Form 8-K (Commission File No.
      001-33674) filed with the SEC on December 20, 2006)10.2
                  
                  Promissory
      Note of AgFeed payable to order of Sunrise Capital International, Inc. in
      the amount of 8,600,000 RMB (incorporated by reference to Exhibit 10.2 of
      AgFeed's Current Report on Form 8-K (Commission File No. 001-33674) filed
      with the SEC on December 26,
2006)
  
 
 10.3
                
                Form
      of Subscription Package for private placement offering that had final
      closing on April 29, 2007 (incorporated by reference to Exhibit 10.5 of
      AgFeed's Amended Registration Statement on Form SB-2 (Commission File No.
      333-144131) filed with the SEC on August 17, 2007)10.4
                
                Subscription
      Agreement by and between AgFeed and Apollo Asia Opportunity Master Fund,
      L.P. dated June 22, 2007 (incorporated by reference to Exhibit 10.6 of
      AgFeed's Amended Registration Statement on Form SB-2 (Commission File No.
      333-144131) filed with the SEC on August 17, 2007)10.5
                
                Stock
      Purchase Agreement as of November 6, 2007 by and among AgFeed, Lushan and
      Huaping Yang and Hongyun Luo, being the holders of ninety percent of the
      issued and outstanding shares of Lushan (incorporated by reference to
      Exhibit 10.1 of AgFeed's Current Report on Form 8-K (Commission File No.
      001-33674) filed with the SEC on November 9, 2007)10.6
                
                Securities
      Purchase Agreement, dated February 25, 2008, by and among Agfeed and the
      certain investors listed on the Schedule of Buyers to such Securities
      Purchase Agreement (incorporated by reference to Exhibit 10.1 of AgFeed's
      Current Report on Form 8-K (Commission File No. 001-33674) filed with the
      SEC on February 28, 2008)10.7
                
                Form
      of Registration Rights Agreement dated February 2008 (incorporated by
      reference to Exhibit 10.2 of AgFeed's Current Report on Form 8-K
      (Commission File No. 001-33674) filed with the SEC on February 28,
      2008)10.8
                
                Form
      of Senior Convertible Note dated February 2008 (incorporated by reference
      to Exhibit 10.3 of AgFeed's Current Report on Form 8-K (Commission File
      No. 001-33674) filed with the SEC on February 28, 2008)10.9
                
                Form
      of Warrant dated February 2008 (incorporated by reference to Exhibit 10.4
      of AgFeed's Current Report on Form 8-K (Commission File No. 001-33674)
      filed with the SEC on February 28, 2008)10.10
                
                Equity
      Securities Purchase Agreement, dated February 25, 2008, by and among
      Agfeed and the certain investors listed on the Exhibit A to such Equity
      Securities Purchase Agreement (incorporated by reference to Exhibit 10.5
      of AgFeed's Current Report on Form 8-K (Commission File No. 001-33674)
      filed with the SEC on February 28, 2008)10.11
                
                Securities
      Purchase Agreement, dated April 16, 2008, by and between AgFeed and
      certain investors named on Exhibit A thereto (incorporated by
      reference to Exhibit 10.13 of AgFeed's Current Report on Form 8-K
      (Commission File No. 001-33674) filed with the SEC on April 22,
      2008)10.12
                
                Securities
      Purchase Agreement, dated April 22, 2008, by and between AgFeed and
      certain investors named on Exhibit A thereto (incorporated by
      reference to Exhibit 10.14 of AgFeed's Current Report on Form 8-K
      (Commission File No. 001-33674) filed with the SEC on April 29,
      2008)10.13
                
                Securities
      Purchase Agreement, dated April 22, 2008, by and between AgFeed and
      certain investors named on Exhibit A thereto (incorporated by
      reference to Exhibit 10.15 of AgFeed's Current Report on Form 8-K
      (Commission File No. 001-33674) filed with the SEC on April 29,
      2008)10.14
                
                Employment
      Agreement, dated as of the 19th
      day of August, 2008, by and between Nanchang Best Animal Husbandry Co.,
      Ltd. and Gerard Daignault (incorporated by reference to Exhibit 10.16 of
      AgFeed's Current Report on Form 8-K (Commission File No. 001-33674) filed
      with the SEC on August 20,
2008)
  
 
 10.15
                
                AgFeed
      Industries, Inc. 2008 Long-Term Incentive Plan (incorporated by reference
      to Appendix A of AgFeed's Definitive Proxy Statement filed with the
      SEC on April 29, 2008 (Commission File No. 001-33674))10.16
                
                Securities
      Purchase Agreement, dated as of December 28, 2008, by and between AgFeed
      and each of certain Investors (incorporated by reference to Exhibit 10.18
      of AgFeed's Current Report on Form 8-K (Commission File No. 001-33674)
      filed with the SEC on January 9, 2009)10.17
                
                Form
      of Common Stock Purchase Warrant, dated December 31, 2008 (incorporated by
      reference to Exhibit 10.19 of AgFeed's Current Report on Form 8-K
      (Commission File No. 001-33674) filed with the SEC on January 9,
      2009)21.1
                
                List
      of Subsidiaries23.1
                
                Consent
      of Goldman Parks Kurland Mohidin, LLP, independent registered public
      accounting firm.24.1
                
                Power
      of Attorney (included in signature page)31.1
                
                Certification
      of the Company’s Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Company’s Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                Certification
      of the Company’s Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                
                Certification
      of the Company’s Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.