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, 2007[   ]
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934






For
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.)


Room
1602 & 1603, Block A, Fortune Plaza, 357 Bayi Avenue


Nanchang
City, Jiangxi Province


China,
330006


(Address of Principal
Executive Offices, including zip code)





011-86-791-2189636
 (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                           No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes                        No  
x





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





Indicate
by check mark 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  
            
            Accelerated
      filer  Non-accelerated
      filer  
            (Do
      not check if a smaller reporting company)
            Smaller
      reporting company   x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes                           No x





On March
11 2008, 29,471,943 shares of the registrant’s common stock were
outstanding.





The
aggregate market value of the voting stock held by non-affiliates as of June 29,
2007 was approximately $74,187,363.





Documents
Incorporated by Reference: Portions of the registrant’s proxy statement for its
2008 annual meeting of shareholders, which the registrant expects to file with
the Securities and Exchange Commission ("SEC") within 120 days after December
31, 2007, are incorporated by reference into Part III of this annual
report.








TABLE
OF CONTENTS








PART
I







Item
    1.
            BusinessItem
    1A.
            Risk
      FactorsItem
    2.
            PropertiesItem
    3.
            Legal
      ProceedingsItem
      4.
            Submission of
      Matters to a Vote of Security Holders










PART
II





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


Item
      6.
            Selected
      Financial Data


Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsItem
      7A.
            Quantitative
      and Qualitative Disclosures About Market RiskItem
      8.
            Financial
      Statements and Supplementary DataItem
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      DisclosureItem
      9A.
            Controls
      and ProceduresItem
      9B.
            Other
      Information








PART
III







Item
      10.
            Directors and
      Executive Officers of the RegistrantItem
    11.
            Executive
      CompensationItem
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder MattersItem
      13.
            Certain
      Relationships and Related TransactionsItem
      14.
            Principal
      Accountant Fees and Services










PART
IV





Item
      15.
              Exhibits and
      Financial Statement Schedules








SIGNATURES





EXHIBITS











1


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 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 the
People's Republic of China (the “PRC”). As the result of a merger into a wholly
owned subsidiary, we changed our name to AgFeed Industries, Inc. on November 17,
2006. Our headquarters are located at Room 1602 & 1603, Block A, Fortune
Plaza, 357 Bayi Avenue, Nanchang City, Jiangxi Province, PRC 330006, Telephone:
+86-791-2189636. Our primary business consists of the research and development,
manufacture, marketing and sale of fodder and blended feed for use in the
domestic animal husbandry markets in the PRC.  As a result of the
acquisition of Lushan Breeder Pig Farm Co., Ltd. (“Lushan”) on November 9, 2007,
we are also engaged in the business of raising, breeding and selling hogs for
use in China’s pork production and hog breeding markets.


2


Business





We
operate through nine direct and indirect subsidiaries in the PRC.





Nanchang
Best Animal Husbandry Co., Ltd. (“Nanchang Best”) was incorporated under the
laws of the PRC on May 15, 1995, in Jiangxi Province.  It is
headquartered at 1095 Qinglan Avenue, Nanchang City, Jiangxi Province, PRC
330013. Nanchang Best is in the business of the research and development,
manufacture, marketing and sale of fodder and blended feed for use in China’s
domestic animal husbandry markets.  As of November 9, 2007, through
the acquisition of a majority ownership in a hog farm, Nanchang Best is also in
the business of raising, breeding and selling hogs for use in China’s pork
production and hog breeding markets.  Nanchang Best’s hog operations
are all located in Jiangxi Province.  Nanchang Best is the parent of
the following subsidiaries:





·
            Lushan,
      a majority-owned subsidiary headquartered in Gongtong Village, Town of
      Hualin, Xingzi County, Jiangxi Province, PRC
  332804





·
            Wannian
      Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), a
      majority-owned subsidiary located in Nanyan, Town of Peimei, Wannian
      County, Jiangxi Province, PRC
335500





·
            Jiangxi
      Huyun Livestock Co., Ltd. (“Huyun”), a majority-owned subsidiary located
      in the Town of Huyun, Wannian County, Jiangxi Province, PRC
      335505





·
            Ganzhou
      Green Animal Husbandry Develop. Co., Ltd. (“Ganzhou”), a majority-owned
      subsidiary located in Yuliang Village, Town of Hengshui, Chingyi County,
      Ganzhou City, Jiangxi Province, PRC
341300





·
            Gang
      Feng Animal Husbandry Co., Ltd. (“Gang Feng”), a wholly-owned subsidiary
      headquartered in the Town of Fenglin, Dean County, Jiangxi Province, PRC
      330402





·
            Yichun
      Tianpeng Domestic Livestock Farm, Ltd. ("Yichun"), a majority-owned
      subsidiary located in Nanmiao Township, Yichun City, Jiangxi Province, PRC
      336000.





Shanghai
Best Animal Husbandry Co., Ltd. (“Shanghai Best”) was incorporated under the
laws of the PRC on July 23, 1999, in Shanghai and is headquartered at No. 158
Huiping Road, Jia Ding District, Shanghai, PRC 201802. Shanghai Best is also in
the business of the manufacture, marketing and sale of fodder and blended feed
for use in the PRC’s domestic animal husbandry markets.





Guangxi Huijie Sci. & Tech. Feed
Co., Ltd., (“Guangxi Huijie”) was incorporated under the laws of the PRC on
August 2, 2004 and is headquartered at No. 5 Lianling Street, Nanning Industrial
Park, NanNing, Guangxi Province, PRC 530221. Guangxi Huijie is engaged in
the research and development, manufacture, marketing, distribution and sale of
premix fodder blended feed and feed additives primarily for use in China’s
domestic pork husbandry markets.





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 (the “Nanchang Purchase Agreement”). Pursuant to the
Nanchang Purchase 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.


3


Contemporaneously, on October 31, 2006,
we entered into and closed a share purchase agreement with Shanghai Best, and
each of Shanghai Best’s shareholders (the “Shanghai Purchase Agreement”).
Pursuant to the Shanghai Purchase Agreement, we acquired 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 the Nanchang Purchase Agreement and Shanghai Purchase
Agreement 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.





Nanchang Best and Shanghai Best share a
common founder and Chief Executive Officer, Junhong Xiong. Nanchang Best shares
the results of its research and development efforts with Shanghai Best. In
addition, Nanchang Best provides general management and administrative services
to Shanghai Best as well as human resources services at no expense. There are no
written enforceable agreements documenting the provision of these services as
Nanchang Best and Shanghai Best are each our wholly owned
subsidiaries.





On
December 20, 2006, we entered into and closed a share purchase agreement with
Guangxi Huijie, and the shareholders of Guangxi Huijie, pursuant to which we
acquired all the outstanding shares of Guangxi Huijie for a total purchase price
of 8,600,000 Chinese yuan renminbi (RMB), equivalent to approximately
US$1,100,420 at a conversion rate of RMB 7.815 = US$1.00. We obtained the funds
needed to complete this acquisition by borrowing 8,600,000 RMB 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
November 9, 2007, we acquired 90% of the issued and outstanding capital stock of
Lushan, a hog breeding operation. The acquisition was consummated pursuant to a
stock purchase agreement, dated November 6, 2007, between our company and
Huaping Yang and Hongyun Luo.  The aggregate purchase price was
20,112,020 RMB, equivalent to US$2,699,600 at a conversion rate of RMB 7.45 =
US$1.00. In connection with this transaction, we also assumed and satisfied at
closing 4,919,980 RMB (US $660,400) of indebtedness owed by Lushan.





On
January 3, 2008, we acquired 70% of the issued and outstanding capital stock of
Wannian.  The acquisition was consummated pursuant to a stock purchase
agreement, dated January 3, 2008, between our company and
Wannian.  The aggregate purchase price was 12,250,000 RMB, equivalent
to US$1,666,667 at a conversion rate of RMB 7.35 = US$1.00.  Under the
terms of the transaction documents, a master lease for the Wannian facilities
remains with the other shareholders of Wannian and we sublease the
facilities under a 10-year lease agreement.  The lease agreement calls
for semi-annual rent payments totaling 900,000 RMB (currently approximately
US$122,450) per year in exchange for use of the facilities.





On
January 3, 2008, we acquired 70% of the issued and outstanding capital stock of
Huyun.  The acquisition was consummated pursuant to a stock purchase
agreement, dated January 3, 2008, between our company and Huyun.  The
aggregate purchase price was 6,482,000 RMB, equivalent to US$881,905 at a
conversion rate of RMB 7.35 = US$1.00.  Under the terms of the
transaction documents, a master lease for the Huyun
facilities remains with the other shareholders of Huyun and we sublease the
facilities under a 10-year lease agreement.  The lease agreement calls
for semi-annual rent payments totaling 900,000 RMB (currently approximately
US$122,450) for the first year and 450,000 RMB (currently approximately
US$61,225) for every 10,000 hogs sold beginning in the second year and
thereafter in exchange for use of the facilities.


4





On
January 4, 2008, we acquired 60% of the issued and outstanding capital stock of
Ganzhou.  The acquisition was consummated pursuant to a stock purchase
agreement, dated January 4, 2008, between our company and
Ganzhou.  The aggregate purchase price was 6,480,000 RMB, equivalent
to US$881,632 at a conversion rate of RMB 7.35 = US$1.00.  Under the
terms of the transaction documents, a master lease for the Ganzhou facilities
remains with the other shareholders of Ganzhou and we sublease the facilities
under a 10-year lease agreement.  The lease agreement calls for
semi-annual rent payments totaling 700,000 RMB (currently approximately
US$97,000) per year in exchange for use of the facilities.





On
January 7, 2008, we acquired all of the hogs and stock of Gang
Feng.  The acquisition was consummated pursuant to a stock purchase
agreement, dated January 7, 2008, between our company and Gang
Feng.  The aggregate purchase price was 4,820,000 RMB, equivalent to
US$655,782 at a conversion rate of RMB 7.35 = US$1.00.  Under the
terms of the transaction documents, we are subleasing the Gang Feng facilities
under a 6 and 1/2-year lease agreement.  The lease agreement calls for
semi-annual rent payments totaling 450,000 RMB (currently approximately
US$61,225) per year in exchange for use of the facilities.





On
January 9, 2008, we acquired 55% of the issued and outstanding capital stock of
Yichun.  The acquisition was consummated pursuant to a stock purchase
agreement, dated January 9, 2008, between our company and Yichun.  The
aggregate purchase price was 8,855,000 RMB, equivalent to US$1,204,762 at a
conversion rate of RMB 7.35 = US$1.00.  Under the terms of the
transaction documents, a master lease for the Yichun facilities remains with the
other shareholders of Yichun and we sublease the facilities under a 10-year
lease agreement.  The lease agreement calls for semi-annual rent
payments totaling 800,000 RMB (currently approximately US$108,844) per year in
exchange for use of the facilities.





AgFeed
operates its hog breeding operations through each of Lushan, Wannian, Huyun,
Ganzhou, Gang Feng and Yichun.  We currently anticipate achieving
total production of approximately 120,000 hogs for 2008 from these
operations.





Description
of Feed Business





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 55-70% of a Chinese piggery’s expenses; therefore the quality of feed
and nutrition has a significant effect on piggery profits.





Nanchang
Best, Shanghai Best and Guangxi Huijie (collectively, the "feed operating
companies") are engaged in the manufacturing, distribution, marketing and sale
of two main product lines: additive premix fodder for use in all stages of a
pig’s life, and blended feeds designed specifically for the infant stage of a
pig’s life. Nanchang Best and Guangxi Huijie also engage in the research and
development of new products and improvement of existing formulas. Nanchang Best
shares the results of such work with Shanghai Best. Shanghai Best also
manufactures and markets pre-mixed chicken feed. Nanchang Best and Guangxi
Huijie produce substantially all of the feed operating companies sales of
blended feed.





In
combination, the feed operating companies’ total feed output in 2007 was
approximately 53,230 metric tons. Together they produced a combined 25,575
metric tons of premix fodder; Nanchang Best produced 8,213 metric tons of premix
fodder, Shanghai Best produced 8,834 metric tons and Guangxi Huijie produced
8,583 metric tons. Nanchang Best produced 16,109 metric tons of blended feed,
Shanghai Best produced 3,134 metric tons and Guangxi Huijie produced 3,939
metric tons. The feed operating companies produced an aggregate of approximately
4,418 metric tons of other feed product.


5





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. The feed operating companies 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. The feed operating companies 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. The feed operating
companies employ veterinarians to work with these large pig farms to determine
the optimal formulation of feed.





Premix
sales represent approximately 47.3% of annual revenues and carry a gross profit
margin of approximately 33.9%. The willingness of the feed operating companies
to formulate customized premix fodder to meet customer specifications allows
them to charge a premium for their products. The average price of premix sold by
the feed operating companies is $709/metric ton. Based on an informal survey
that we conducted of our clients, our competitors charge $500/metric ton on
average. The feed operating companies are able to justify premium pricing due to
their strong brand name recognition, hands-on after market support, and
superior, more effective products developed as a result of a strong R&D
program. According to management estimates, Shanghai Best is a market leader in
the lactating and pregnant sow market in the city of Shanghai. 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.




Guangxi
Huijie has approximately a 12% market share of pre-mix fodder category in its
home province of Guangxi.





The feed
operating companies also provide extensive technical and veterinary support free
of charge to their customers. Overall, the feed operating companies maintain
approximately one technical support person to every five salespersons while the
competitors generally average one technician to every twelve
salespersons.





Piglet
blended feed





Nanchang
Best and Guangxi Huijie produce piglet blended feed. It 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 $707/metric ton. Blended feed contributes
approximately 45% to our total revenues and has gross margins of approximately
22%. As a result of government policies aimed at increasing the economic success
of the agriculture industry as a whole and greater regulation requiring advanced
technology to provide safeguards to the country’s food supply, the smaller pig
farms are being forced out of business or are merging with larger pig raising
operations. The larger operations increasingly purchase premix as opposed to
blended feeds in order to realize significant cost savings by leveraging their
economies of scale. For this reason, we expect the blended feed business to
diminish over time. This was also a factor in Shanghai Best’s decision not to
enter this market. However, we believe that our blended feed revenue will be
replaced by selling more of the profitable premix products to the increasing
number of large scale pig farms.





Chicken
premix





We also
produce three brands of premix for the poultry industry. Most of this production
takes place at the Shanghai Best production facility. It produces approximately
314 metric tons annually and has a nominal impact on our total revenues. While
there are no current plans to expand the chicken feed product line, future
expansion remains a possibility.


6





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. (Data for 2007 has not yet been published.) 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 39.6kg per person in 2006.  (Data for 2007 has not yet been
published.)  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.





The hog
feed manufacturing industry is concentrated in the Yangtze River Basin. In the
past decade, feed mills have become more efficient, with new, high capacity
mills replacing old, small, inefficient ones. As part of its effort to improve
agricultural output and improve the economic vitality of China’s rural
industries, the government has adopted favorable tax policies for the industry,
such as exemption from the value-added tax.





Blended
Feed Industry





According to a recent China Animal Feed
Industry Development Report, 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 2005, blended feed sales have grown at an average
annual rate of 4.5%. From 2005 to 2006, blended feed sale growth was
4.6%.





Premix
Industry





In 2005, the premix market in China
totaled $1.45 billion and included over 2,500 companies. From 2000 to 2005,
premix industry sales grew at an average annual rate of 13.5%. In 2006, the
premix market increased 3% from 2005. There is no single dominant market
participant, with the largest player in the market realizing only 1.2% market
share. Of the various components that make up blended feed, the premix, which
constitutes the smallest proportion of the total blend at 4%, requires the most
sophisticated formulas to produce. The research, development and technology
necessary to produce premix makes it necessary for premix to carry a higher
price per ton than blended feed.


7




Sales and
Marketing





Since the
founding of Nanchang Best and the subsequent founding of Shanghai Best, the feed
operating companies have aggressively marketed and promoted the “Best” brand.
Guangxi Huijie markets its products under the “Huijie” brand name. The 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. The feed operating companies 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 the farmers to properly prepare and
mix the various feed components. Although not unique among premix manufacturers,
management believes its services in this area are superior to competitors due to
its high ratio of technicians to sales people, which allows the sales team to
develop a stronger relationship with its customers. As the feed operating
companies market and sell directly to pig farmers, they are able to collect and
analyze data from the farmer which assists in the preparation and design of new
products. The feed operating companies also attend agricultural conventions that
take place in the market areas where they currently conduct business as well as
in provinces that they expect to enter. The feed operating companies also place
advertisements and promotional pieces in agricultural trade
journals.





Historically,
the feed operating companies sold their products to distributors and large-scale
pig farms. Large-scale farms generally refer to those farms with more production
of more than 2,000 pigs and 100 sows annually, however it is not uncommon to
have a single farm raise from 20,000 to 30,000 pigs in one year. The
distributors sell to the smaller privately-owned farms. Recent sales data of
distributors indicates that smaller farms tend to be more sensitive to price
increases than the large-scale piggeries, whereas the large-scale hog farms
place more emphasis on customer service and other ancillary services provided by
the feed operating companies.




Starting
in January 2007, we began to open independently-owned and operated franchise
chain stores. The franchise 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. Some of the more successful franchise stores have
reached sales levels of 3 to 4 metric tons per month.  As of December
31, 2007, we had approximately 503 locations open and operating under the AgFeed
brand name.  Approximately 70% of the franchise store operators were
previously in the animal feed distribution business. The franchisees do not pay
an initiation fee to become franchised distributors but do receive marketing and
technical training from our staff. Each franchise operator signs an exclusive
agreement with us, agreeing not to sell any other brand of animal feed products
and to decorate their store with approved AgFeed marketing materials and
signage.





In
addition, each franchise operator 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 franchisee’s
territory, and (iv) remain within our guidelines for payment of products
purchased from us.





The
franchisees 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 franchisee 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 franchise agreement, they have a specified territory that
entitles them to the exclusive right to sell AgFeed products to the small farm
owners.


8


As of
December 31, 2007, each of the feed operating companies has the following
customers for their respective feed products:





Local
      Distributors
            Large
      Scale
              Pig Farms
            Franchise
              Chain Stores
            TotalNanchang
      Best
            188
            210
            168
            490Shanghai
      Best
            98
            220
            108
            385Guangxi
      Huijie
            195
            198
            227
            533





Suppliers





The feed
operating companies do not have any long-term supply contracts.  The
feed operating companies each maintain at least two suppliers for each type of
raw material purchased.  Management believes that any one of its
suppliers could easily be replaced.  Normally, purchases of raw
materials are made on an “as needed” basis each month. Orders are managed by
both the warehouse and purchasing manager together, each of whom are familiar
with the on-site inventory levels.





Research and
Development





To
maintain a competitive advantage in the marketplace and keep pace with current
developments, the feed operating companies engage in continuous research and
development, primarily through Nanchang Best and Guangxi Huijie. Historically,
Nanchang Best has shared its research and development results with Shanghai
Best. We sponsor research alliances with Jiangxi Agricultural University, South
China Agricultural University and Nanjing 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.





Intellectual
Property





Management
has registered the “Best” and “Huijie” trade names used on its products with the
China Trademark Bureau and their goods are known in the provinces in which the
feed operating companies conduct business.  None of the feed operating
companies hold any patents or intend to apply for patents on proprietary
technology or formulas. The formulas for the feed operating companies’ products
are considered trade secrets and are protected as such.





Government and Environmental
Regulation





Through
the laws and regulations of the PRC and the provincial governments of Jiangxi
Province, Guangxi Province and the Shanghai City government, our products and
services are subject to material regulation by governmental agencies responsible
for the agricultural and commerce industries.  As such, business and
company registrations, production license, and all 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.





All
products have earned formal approval pursuant to the National Code of Feed and
Feed Additives as dictated by the National State Council of the PRC. Product
approval includes qualified quality reports from the council’s technology and
supervision bureau prior to engaging in any production or marketing
activities.





There is
no material cost in obtaining and maintaining these licenses, but it is
illegal to do business without them.  The issuance of production
licenses and product permits is seen as a cost of doing business, and associated
fees are minimal.  If any production license or product permit was
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.


9


The feed
operating companies 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, 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.





Nanchang
Best’s production license was issued in 2004 (#3751) and is valid until
2009.





Shanghai
Best’s production license was issued in 2005 (#0216) and is valid until
2010.





Guangxi
Huijie’s production license was issued in 2005 (#4146) and is valid until
2010.





A
production permit is mandatory for all entities involved in the manufacture of
animal feed and feed components and is issued by the local provincial
authorities. The provincial permit is 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.





Prior to
engaging in any production or marketing of feed products, all products must
receive a formal approval production number pursuant to the Code of Premix and
Additive, promulgated by China State Council, and qualified products reports
from the Technology and Supervision Bureau. These formal approval production
numbers are also 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 a 3.5% market share
and also sells its product 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.  Management believes Da
Bei Nong’s service is considered inferior to Nanchang Best’s, which is a
contributing factor as to why Nanchang Best has been able to maintain its lead
in sales.





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 in Fujian
province.  However, based on informal discussions that we have had
with our clients, its prices tend to be higher than the prices at which
Nanchang Best and Shanghai Best sell their products, and it focuses only on the
distributor market.





Based on
our independent investigations in the Shanghai area, Xinnong leads the market in
sales with 7,800 metric tons, competing directly with Shanghai Best on both
pricing and service to large scale piggeries.





Guangxi
Huijie has approximately a 12% 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.


10


Employees




As of
December 31, 2007, we had a total of 372 employees.





Nanchang
Best had approximately 161 employees in the following departments: eight in
management, three in general administration, two in human resources, 34 in
production, five in sales administration, 81 in marketing, two in purchasing,
six in finance, 16 in technical services and four in quality
control.





Shanghai
Best has approximately 99 employees in the following departments: six in
management, four in general administrative, 19 in production, six in sales
administration, 48 in marketing, one in purchasing, five in finance, seven in
technical services and three in quality control.





Guangxi
Huijie had approximately 112 employees in the following departments: five in
management, three in general administration, four in human resources, 21 in
production, four in sales administration, 59 in marketing, two in purchasing,
four in finance, five in technical services and five in quality
control.





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 a
worker 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 the Nanxiang, Jia Ding 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
$33,000 and the lease runs through September, 2009.





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 a worker dormitory. The right to use the land was granted
by Housing Bureau and Land Administrative Bureau of Langqin District, Nanning
City through October, 2056.





Description
of Hog Farming Business





Overview





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, a PRC
company, formed on March 30, 2005.  Lushan owns and operates a hog
farm occupying 258,000 square meters located in the town 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 early January 2008, we
also acquired a majority interest in five additional hog farms in the Jiangxi
province through Nanchang Best.





Hog
Production





As of
December 31, 2007, Lushan had 2,705 head of purebred hogs (referred to in the
industry as breeder hogs), of which 720 were breeding sows and 17 were breeding
boar, 1,198 were piglets and 770 were mature hogs.





Lushan
generates revenue primarily from the sale of breeder hogs to other breeder hog
farms and, to a lesser extent, the sale of meat hogs to other meat hog farms and
to slaughterhouses.  It also generates revenue by providing consulting
services to hog farmers in the areas of feed production, feed formulation and
veterinary services.  Lushan sells its hogs and provides consulting
services to large-scale hog farms, mid-scale hog farms and small-scale
farms.  Lushan breeder hogs are sold throughout the PRC while its meat
hogs are sold in Jiangxi


11


Province,
Guangdong Province and other neighboring provinces.  Lushan’s primary
market is in the south of China.





Breeder
hogs are purebred hogs or 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.  Crossbreeding sows are used for gestating and producing
piglets.   Meat hogs are those hogs that do not meet the
standards to qualify as breeder hogs; they are raised and sold to commercial hog
farms and slaughterhouses.





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





According
to the U.S. Department of Agriculture’s Foreign Agriculture Service (the “FAS”),
pork prices in the PRC have risen sharply since 2006 during which time they
attracted nationwide attention from senior government officials.  The
FAS reported that pork prices increased 48% in the period from January to August
2007 over the same period in 2006.  This price increase was due in
part to reduced supply as a result of an outbreak of blue ear disease or Porcine
Respiratory and Reproductive Syndrome (PRRS), lower inventories caused by lower
hog prices in the prior year, and an increase in consumer
demand.





Breeder
Hogs





According to a report prepared by the
Agricultural University of China’s College of Animal Studies, as of 2003, there
were approximately 3,449 breeder hog farms in the PRC.  At that time,
the top nine provinces for raising hogs, representing 67.2% of the total hog
farms in China, had 2,319 hog farms, with more than 130 of those farms
maintaining an average inventory of 1,000 sows each.





Meat
Hogs





According to the FAS, the PRC is the
world’s largest producer of pork and pork is the most widely-consumed meat in
the PRC.  An article in the August 17, 2007 edition of Business Week
Asia stated that 70% of the protein consumed in the PRC is pork.  Pork
also dominates meat production.  The FAS determined that pork
accounted for 65% of the total meat production in the PRC in
2006.  According to the FAS, sow stocks were 48.9 million head and pig
crop production was 735 million head in 2006 and further increases in pork
production were predicted in 2007.  In addition to its domestic
production, the PRC is a large importer of pork.  The FAS reported
that the PRC’s pork imports from January to July 2007 increased 73% over the
same period in 2006 to 62,991 metric tons valued at $72.4 million.





Hog production in the PRC is dominated
by small-scale backyard farms, accounting for an estimated 70% of all PRC hog
production during 2007.





Suppliers





Feed is the most significant cost of
operating a hog farm.  Historically, Lushan purchased feed products
and raw materials such as corn and soybeans from several feed suppliers under
short-term contracts.  Under our ownership, Lushan will primarily use
our premix as the base of its feed supply and will seek to enter into long-term
contracts with the suppliers of feed additives in order to meet its feed
requirements.


12





Research and
Development





Lushan has a five member research and
development team devoted to hog farming.  Two members of the team have
doctorate degrees and the other three have masters degrees.  All of
the members of its research and development team are trained in the areas
of veterinary science and/or animal breeding and genetics.  Lushan has
two ongoing research programs.  One program 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.  Lushan employs proprietary techniques to segregate the mating
and pregnant sows from the nursing hogs and meat hogs.  It does not
hold any patents covering such technologies and has no present intention to
apply for patents on its proprietary breeding technologies.





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 Lushan a Breeder Hog Farm License (Registration No. G0901369)
which is valid until April 1, 2010 and is renewable in three-year
increments.





Competition





Lushan primarily competes with other
mid-scale hog farms in Jiangxi Province in the PRC.  According to a
report of the Agricultural Department of Jiangxi Province, in 2007, there were
183 breeder hog farms with total inventory of 84,048 sows and 1,783 boars in
Jiangxi Province.  In addition, surrounding Jiangxi Province are the
provinces of Zhejiang, Hunan, Guangdong, Fujian and Hubei, all of which
have a substantial number of breeder hog farms that could be deemed competitors
with our hog farming business.





Employees





As of December 31, 2007, Lushan had 32
employees. Three were in general management, eight were production
management and technicians, five were in research and development,
two were in finance, 11 were farm laborers, and three were in
administration.





Facilities





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 approximately 213,312 square meters of
land from the other shareholders of Wannian and includes pig houses, office
buildings, heating system, power and water supply system.  The rent on
the property is approximately 900,000 RMB (currently approximately
US$122,450).  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 approximately 179,982 square meters of land from the other
shareholders of Huyun and includes pig houses,


13


office
buildings, heating system, power and water supply system.  The rent on
the property is approximately 900,000 RMB (currently approximately US$122,450)
for the first year and 450,000 RMB (currently approximately US$61,225) for every
10,000 hogs sold beginning in the second year.  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 approximately 333,300
square meters of land from the other shareholders of Ganzhou and includes
pig houses, office buildings, heating system, power and water supply
system.  The rent on the property is approximately 700,000 RMB
(currently approximately US$97,000) per year.  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 approximately 139,986 square meters of land from the former
shareholders of Gang Feng and includes pig houses, office buildings, heating
system, power and water supply system.  The rent on the property is
approximately 450,000 RMB (currently approximately US$61,225) per
year.  The lease runs for 6 and 1/2 years from January 7,
2008.





Yichun is
located in Nanmiao Township, Yichun City, Jiangxi Province.  Yichun
subleases approximately 126,654 square meters of land from the
other shareholders of Yichun and includes pig houses, office buildings,
heating system, power and water supply system.  The rent on the
property is approximately 800,000 RMB (currently approximately US$108,844) per
year.  The lease runs for 10 years from January 9,
2008.


14


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.




Our
acquisition strategy involves a number of risks and we have a limited history of
successful acquisitions. Even when an acquisition is completed, we may have
integration issues that may not produce results as positive as management may
have projected.




We
have completed six acquisitions since 2006, including the Lushan hog farm
acquisition in November 2007 and the acquisition of controlling interests in the
Waanian, Huyun, Ganzhou, Gang Feng and Yichun hog farms in January
2008.  We intend to continue to look for strategic acquisitions to
grow both our feed product and hog farming lines of business.




We
are regularly engaged in acquisition discussions with a number of companies
located in the PRC and anticipate that one or more potential acquisition
opportunities, including those that would be material, may become available in
the near future. If and when appropriate acquisition opportunities become
available, we intend to pursue them actively. 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.




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.


15





We have faced, and expect to continue
to face, increased competition for acquisition candidates, which may limit the
number of opportunities we have to acquire companies and may lead to higher
acquisition prices. We cannot assure you that we will be able to identify,
acquire, or manage profitably additional businesses or to integrate successfully
any acquired businesses into our existing business without substantial costs,
delays or other operational or financial difficulties. 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.




Rising
energy prices could adversely affect our operating results.




In the
last few years, energy prices have risen dramatically, which has resulted in
increased fuel 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.





Risks Related to the Conduct
of Our Feed Product 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 the introduction, marketing and production of 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.




We
may not be able to reach our revenue and net income targets due to unpredictable
market conditions.




Our
primary end-user customers for our feed products are commercial hog farms,
individual farmers and slaughterhouses. Although hog prices in the PRC have
reached multi-year highs, we cannot predict how long such a favorable
environment may last or predict the buying behavior of our customers as they
adjust to market conditions. Therefore, our market expectations and projections
may exceed our actual financial performance.





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


16


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.





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.


17


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 substance melamine,
whether or not valid, 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.





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


18


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 the Conduct
of 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.





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.





Each
province in the PRC requires hog farmers to obtain a license for each hog farm
owned and operated in that province. Currently, all of our hog farms are located
in the Jiangxi province and we have obtained a license to own and operate each
of our hog farms. We need to maintain the licenses we have to operate our
current hog farms. I f we
pursue acquisitions of other hog farms, we will need to obtain additional
licenses to operate those farms. We have not yet applied for, nor have we
obtained, all the licenses required to expand our hog farming and sales business
throughout the PRC. 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
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.


19





Risks Related to Conducting
Our Business in the PRC





We
are subject to international economic and political risks 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 the PRC. Doing business outside the United
States, and particularly in the PRC, 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.





The
PRC’s economic policies could affect our business.





All
of our assets are located in the PRC and all of our revenue is derived from our
operations in the PRC. Accordingly, our results of operations and prospects are
subject, to a significant extent, to the economic, political and legal
developments in the PRC.




While
the PRC’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, operating results and financial conditions
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.





As
part of our growth strategy, we have acquired various companies with operations
in the PRC. If any of these acquisitions were reviewed by PRC regulatory
agencies or found not to comply with applicable laws or regulations, we might be
required to make filings or submissions to PRC regulators or amend the terms of
such acquisitions to meet PRC regulatory requirements.





We are
rapidly expanding our operations in the PRC and have completed several
acquisitions in the last year. While we believe that each of our
acquisitions has complied with all PRC laws and regulations applicable to such
transactions, the regulatory environment that governs merger and acquisition
transactions in the PRC has continued to evolve in recent years and remains
subject to interpretation by the agencies that have responsibility for reviewing
or approving such transactions. In particular, a new law  became effective
in September 2006 that has a broad scope applicable to certain merger and
acquisition transactions involving companies organized outside of the PRC. If
any of the acquisitions we completed were reviewed by a PRC regulator, it is
possible that we may be required to demonstrate how the transaction under review
complied with applicable PRC laws, including the law that took effect in
September 2006. This could require us to expend company resources that would
otherwise be used to manage our company. Further, if such regulators determine
that any of our transactions did not comply with applicable regulations, we may
be required to renegotiate or revise the terms of the acquisition with the
counterparties to the affected transaction. If such a scenario were to occur, we
cannot be sure that our efforts to meet the regulator’s requirements would be
successful, or that such efforts would not have an adverse effect on our
operations.


20


We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.





The
PRC 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 the PRC. 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 the PRC. 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.





As
we have limited business insurance coverage in the PRC, any loss which we suffer
may not be insured or may be insured to only a limited extent.





The
insurance industry in the PRC is still in an early stage of development and
insurance companies located in the PRC 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.





We
may face judicial corruption in the PRC.





Another
obstacle to foreign investment in the PRC 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
the PRC’s poorly developed and sometimes corrupt judicial systems.





We
may face obstacles from the communist system in the PRC.





Foreign
companies conducting operations in the PRC face significant political, economic
and legal risks. The Communist regime in the PRC, including a cumbersome
bureaucracy, may hinder Western investment.





If
relations between the United States and the PRC 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 the PRC 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 the PRC, whether or not directly
related to our business, could reduce the price of our common
stock.





The
government of the PRC 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 the PRC. Over the
past several years, the government of the PRC has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The government of the PRC 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 stockholders, 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.





21


If
the PRC enacts regulations in more industry segments that forbid or restrict
foreign investment, our ability to consummate a business combination could be
severely impaired.





Many of
the rules and regulations that companies face in the PRC are not explicitly
communicated. If new laws or regulations forbid foreign investment in our
industry, they could severely impair our business or opportunities for
acquisitions. Additionally, if the relevant PRC authorities find us to be in
violation of any existing or future laws or regulations, they would have broad
discretion in dealing with such a violation, including, without
limitation:





●
            levying
      fines;


●
            revoking
      our business and other licenses;


●
            requiring
      that we restructure ownership or operations;
and


●
            requiring
      that we discontinue any portion or all of our
  business.





The
nature and application of many laws of the PRC create an uncertain environment
for business operations and they could have a negative effect on
us.





The
legal system in the PRC 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, the PRC 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 the PRC 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.





Although
we do not import goods into or export goods out of the PRC, fluctuation of the
Renminbi (RMB) may indirectly affect our financial condition by affecting the
volume of cross-border money flow.





Although
we use the United States dollar for financial reporting purposes, all of the
transactions effected by our operating subsidiaries are denominated in the PRC’s
RMB. The value of the RMB fluctuates and is subject to changes in the PRC’s
political and economic conditions. We do not currently engage in hedging
activities to protect against foreign currency risks. Even if we chose to engage
in such hedging activates, we may not be able to do so effectively. Future
movements in the exchange rate of the RMB could adversely affect our financial
condition as we may suffer financial losses when transferring money raised
outside of China into the country or paying vendors for services performed
outside of China.





Recent changes in the PRC’s currency policies
may cause a target business’s ability to succeed in the international markets to
be diminished.





Historically,
the PRC “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 the PRC currency
low when compared to other countries gave PRC companies an unfair price
advantage over foreign companies. Due to mounting pressure from outside
countries, the PRC 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.





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


22


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 the PRC 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 the PRC 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 the PRC.





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 stockholder or group
of stockholders in the United States. Also, because our operating subsidiaries
and assets are located in the PRC, 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 the PRC 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 until February 28, 2008, the high and low sales prices
of our common stock were $16.36 and $7.11.  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;


·
            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.


23


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.





Shares
of our common stock lack a significant trading market.





On
August 29, 2007, shares of our common stock began trading on the Nasdaq Capital
Market. On October 12, 2007, shares of our common stock began trading on the
Nasdaq Global Market. Since August 29, 2007 through February 28, 2008, our
average daily trading volume has been less than 75,000 shares per day. As with
most initial listings on Nasdaq, it will take time for a significant active
trading market in our common stock to develop. There can be no assurance that a
significant active trading market in our common stock will develop, or if such a
market develops, that it will be sustained.





We believe we have material weaknesses in our disclosure controls
and internal controls over financial reporting and if we fail to develop and
maintain an effective system of disclosure controls and internal controls, we
may not be able to accurately report our financial results or prevent fraud; as
a result, current and potential shareholders could lose confidence in our
financial reports, which could harm our business and the trading price of our
common stock, as well as our ability to remain listed on
NASDAQ.





A
consultant we recently hired to assist us with compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 has informed us that, based on the preliminary
analysis conducted to date, the consultant has identified material deficiencies
in our finance and information technology controls which result in material
weaknesses in our disclosure controls and internal controls over financial
reporting. Effective internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal
controls over financial reporting beginning with this Annual Report on Form
10-K. Further, for each of our Annual Reports going forward, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we have our independent registered
public accounting firm annually attest to our evaluation of internal controls
over financial reporting. We plan to prepare for compliance with Section 404 by
further developing, strengthening, assessing and testing our system of internal
controls to provide the basis for our report. We have only recently hired a
consultant to assist us with these activities. The process of strengthening our
internal controls and complying with Section 404 is expensive and time
consuming, and requires significant management attention, especially given that
we have only recently undertaken any efforts to comply with the requirements of
Section 404. We cannot be certain that the measures we will undertake will
ensure that we will maintain adequate controls over our disclosure controls and
our financial processes and reporting in the future. Furthermore, if we are able
to rapidly grow our business, the disclosure controls and internal controls over
financial reporting that we will need will become more complex, and
significantly more resources will be required to ensure our controls remain
effective. Failure to implement required controls, or difficulties encountered
in their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations, or could result in a complete and material
restatement of any part or all of our financial statements. If we or our
auditors discover a material weakness in our internal controls or disclosure
controls, the disclosure of that fact, even if the weakness is quickly remedied,
could diminish investors’ confidence in us or our financial statements and could
harm our stock price. In addition, non-compliance with Section 404 could subject
us to a variety of administrative sanctions, including the suspension of
trading, ineligibility for listing on the Nasdaq Global Market or other Nasdaq
or national securities exchanges, and the inability of registered broker-dealers
to make a market in our common stock, which would further reduce our stock
price.


24


Future
sales of shares of our common stock by our stockholders 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 11,
2008, we had outstanding 29,471,943
shares of common stock.  An
aggregate of 2,891,787
shares of ourcommon stockare issuable upon conversion
of our outstanding convertible notes or upon exercise of our outstanding
warrants and an aggregate of 42,000 shares of ourcommon stock areissuable upon exercise ofour 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 stockholders.
 
 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 11, 2008, there were approximately 40,314,270
authorized and unissued shares of our common stock which have not been reserved
and accordingly, are available for future issuance.


·
            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.





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 stockholders.





Our
principal executive officers and directors, beneficially own approximately 46.45%
of our outstanding common stock. As a result, they are in a position to
significantly influence the outcome of matters requiring a stockholder 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 stockholders and may adversely affect your voting and
other stockholders rights.


25





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
stockholders’ 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
stockholders. 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 stockholders’ ability to approve a
transaction that stockholders 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
stockholders.





Provisions
of Nevada’s business combinations statute also restrict certain business
combinations with interested stockholders. 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 the PRC 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 the PRC. 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.





Item
2.  Properties.





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.





Lushan is located in Gongtong village
in the town of Hualin in Xingzi county, Jiuyang City, Jiangxi
Province.  Lushan rents approximately 258,000 square meters of land
from the Chinese government and includes two separated areas, one for sows and
the other for boars and gilts, with a total of 15,800 square meters of
buildings.  The annual rent on the property is approximately $2,000
per year for the first five years and $1,350 per year for the remaining term of
the lease.  The lease runs through April 13, 2034.





Wannian
is located in Nanyan village in the town of Peimei in Wannian county, Jiangxi
Province.  Wannian subleases approximately 213,312 square meters of
land from the former shareholders of Wannian and includes pig houses, office
buildings, heating system, power and water supply system.  The rent on
the property is approximately 900,000 RMB (currently approximately
US$122,450).  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 approximately 179,982 square meters of land from the former
shareholders of Huyun and includes pig houses, office buildings, heating system,
power and water supply system.  The rent on the property is
approximately 900,000 RMB (currently approximately US$122,450) for the first
year and 450,000 RMB (currently approximately US$61,225) for every 10,000 hogs
sold beginning in the second year.  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 approximately 333,300
square meters of land from the former shareholders of Ganzhou and includes pig
houses, office buildings, heating system, power and water supply
system.  The rent on


26


the
property is approximately 700,000 RMB (currently approximately US$97,000) per
year.  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 approximately 139,986 square meters of land from the former
shareholders of Gang Feng and includes pig houses, office buildings, heating
system, power and water supply system.  The rent on the property is
approximately 450,000 RMB (currently approximately US$61,225) per
year.  The lease runs for 6 and 1/2 years from January 7,
2008.





Yichun is
located in Nanmiao Township, Yichun City, Jiangxi Province.  Yichun
subleases approximately 126,654 square meters of land from the former
shareholders of Yichun and includes pig houses, office buildings, heating
system, power and water supply system.  The rent on the property is
approximately 800,000 RMB (currently approximately US$108,844) per
year.  The lease runs for 10 years from January 9, 2008.





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.





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, 2007.





27


PART
II





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





Our
common stock is currently listed on the Nasdaq Global Market under the symbol
“FEED.”  From October 31, 2006 through August 28, 2007, our common
stock was quoted on the Over-the-Counter Bulletin Board under the symbol
“AGFI.OB.”  The following table sets forth the high and low sale
prices per share of our common stock for the periods indicated, which
information was provided by NASDAQ Trading and Market Services. Prior to October
31, 2006, the shares traded very infrequently and the actual price information
is not readily available.





The quotations set forth below reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.









Fiscal 2006
            High
            LowFirst
      Quarter
            N/A
            N/ASecond
      Quarter
            N/A
            N/AThird
      Quarter
            N/A
            N/AFourth
      Quarter
            $3.00
            $2.01Fiscal 2007
            High
            LowFirst
      Quarter
            $5.00
            $1.85Second
      Quarter
            $6.00
            $4.55Third Quarter
      (through August 28, 2007)
            $8.25
            $5.55Third Quarter
      (commencing August 29, 2007)
            $9.00
            $7.11Fourth
      Quarter
            $16.36
            $7.16







As of March 5, 2007, there were
approximately 97 holders of record of our common stock.





Dividends





We have never paid any dividends on the
common stock.  We currently anticipate that any future earnings will
be retained for the development of our business and do not anticipate paying any
dividends on the common stock in the foreseeable future.





Securities authorized for issuance under equity
compensation plans





During
the year ended December 31, 2007, we did not have a formal equity compensation
plan in effect for employees.  However, for the year ended December
31, 2007, we had awarded individual stock option grants to our independent
directors.





On May
15, 2007, we issued options to purchase 22,000 shares of our common stock, at an
exercise price of $5.30 per share,  to our independent
directors.  On November 30, 2007, we issued options to purchase 20,000
shares of our common stock, at an exercise price of $8.85 per
share,  to our independent directors.  Accordingly
as of December 31, 2007, we had 42,000 options to purchase common stock
outstanding.


28


The
following table provides aggregate information as of December 31, 2007 with
respect to all compensation plans (including individual compensation
arrangements) under which equity securities are authorized for
issuance.





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
            
            
            -0-
            
            
            
            N/A
            
            
            
            -0-Equity
      compensation plans not approved by security holders
            
            
            42,000
            
            
            $
            7.00
            
            
            
            -0-Total
            
            
            42,000
            
            
            $
            7.00
            
            
            
            -0-





We did
not repurchase any of our common stock during 2007.





Item
6.  Selected Financial Data.





Not
required.





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





Our
primary business consists of the research and development, manufacture,
marketing and sale of fodder and blended feed for use in the domestic animal
husbandry markets in the PRC.  As a result of the acquisition of
Lushan on November 9, 2007, we are also engaged in the business of raising,
breeding and selling hogs for use in China’s pork production and hog breeding
markets.





We
operate through nine direct and indirect subsidiaries in the PRC.





Nanchang
Best located in Jiangxi Province - Nanchang Best is primarily engaged in the
business of the research and development, manufacture, marketing and sale of
fodder and blended feed for use in China’s domestic animal husbandry
markets.  As of November 9, 2007, through the acquisition of Lushan,
Nanchang Best is also in the business of raising, breeding and selling hogs for
use in China’s pork production and hog breeding markets.  Nanchang
Best’s hog operations are located in Jiangxi Province and were conducted solely
through


29


Lushan
until early 2008.  Subsequent to the end of 2007, we acquired a
majority interest in each of Wannian, Huyun, Ganzhou, Gang Feng and
Yichun.  Each of these hog farms is located in Jiangxi
Province.





Shanghai
Best located in Shanghai - Shanghai Best is also in the business of the
manufacture, marketing and sale of fodder and blended feed for use in the PRC’s
domestic animal husbandry markets.





Guangxi Huijie located in Guangxi
Province - Guangxi Huijie is engaged in the research and development,
manufacture, marketing, distribution and sale of premix fodder blended feed and
feed additives primarily for use in China’s domestic pork husbandry
markets.





We operate each subsidiary
independently with regard to manufacturing and marketing and sales
efforts.  We do have some sharing of sales referrals and leads amongst
the subsidiaries, but they do not compete against each other for new sales. Most
of our research and development occurs at Nanchang Best and Guangxi Huijie and
each shares their efforts with the other and Shanghai Best. In addition, many of
the administrative duties are performed by Nanchang Best for Shanghai Best, and
we are attempting to study the feasibility of centralizing more administrative
functions.





We are targeting growth through three
main channels: (i) organic growth through increasing sales at each of our
current operating subsidiaries, (ii) the distribution of our products through
new franchise chain stores, and (iii) an aggressive acquisition program to
increase the number of provinces in China in which we do business.





AgFeed had revenues of $36.2 million
for the year ended December 31, 2007, an increase of 321% over revenues of $8.6
million for the year ended December 31, 2006, and net income of $6.7 million for
the year ended December 31, 2007, an increase of 467% compared to net
income of $1.2 million for the year ended December 31, 2006.  The
increases we experienced in this period were the result of our organic growth at
each operating subsidiary.  In addition, the growth reflects the
acquisition of Guangxi Huijie in December 2006 and Lushan in late
2007.  Since we acquired Nanchang Best and Shanghai Best in October
2006, we have effectively marketed our products through a team-based approach,
sharing sales leads and referrals. We also developed the new "Airubao Series"
product at Nanchang Best and introduced the product at all three of our
subsidiaries.





Since January 2007, we established
approximately 503 franchise chain stores that sell our products exclusively to
complement our existing distribution channels. We will continue to market our
products to the operators of large swine farms and large distributors. We will
now rely on the franchisees to market and sell our products to the smaller swine
farms.  Even though the number of small swine farms in China is
declining, we did not want to lose revenues by forgoing sales to this market
segment.  We determined that the best and most efficient use of our
resources is to concentrate on the larger customers and allow the franchisees to
sell to the smaller farmers.





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
in these customized formulations fluctuates, often resulting in temporary
increases in the unit cost of goods sold.  We believe even though this
may have an effect on our short-term profits, we take the long-term view that it
increases customer loyalty and builds the AgFeed brand.  The increase
in our revenues during the year ended December 31, 2007 was mostly due to
increases in the volume of products sold as a direct result of new products
launched and our expansion into new markets.  We also experienced
increases in our cost of goods sold during the year ended December 31,
2007.  The costs of corn and soybean meal, which are two of our main
raw materials, increased approximately 12% and 20%, respectively.  In
order to remain competitive in our markets, we have not increased the prices of
our products to pass these cost increases on to our
customers.  Accordingly, our revenues have not increased during the
twelve month period ended December 31, 2007 in proportion to the increases in
our cost of goods sold.  We believe that this competitive pricing
strategy has and will continue to increase our sales volume and ultimately
increase our long-term revenue growth.  We also continue to
aggressively search for acquisition targets in our industry throughout
China.  The growth in sales and net revenues we experienced in year
ended December 31, 2007 compared to the year ended December 31, 2006 was due in
part to our acquisition of Guangxi Huijie late in December
2006.


30


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
maintains a reserve for estimated losses resulting from our customers’ inability
to make required payments. In determining the reserve, we evaluate the
collectibility 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
creditworthiness, geographic risk and the current business environment. Actual
future losses from uncollectible accounts may differ from our
estimates.





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


31


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 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.  We accrue sales rebates based on actual sales
volume.  Sales rebates for the years ended December 31, 2005, 2006 and
2007 were $ 74,046, $258,503 and $238,307, respectively.  We do not
offer any of our customers the unconditional right to return purchased
products.  Customers are only permitted to return defective
products.  In addition, we do not provide any price protection or
similar rights to our customers.  Sales returns for years ended
December 31, 2005, 2006 and 2007 were $68,312, $82,941 and $110,962,
respectively.





We make estimates and judgments when
determining whether the collectibility of revenue from customers is reasonably
assured.  Management estimates regarding collectibility impact the
actual revenues recognized each period and the timing of the recognition of
revenues.  Our assumptions and judgments regarding future
collectibility 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.





Recent
Accounting Pronouncements





Fair Value
Measurements





In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements,” which establishes a framework for measuring
fair value, and expands disclosures about fair value measurements required under
the accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. Additionally, it
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for the fiscal year,
including financial statements for an interim period within the fiscal year.
AgFeed is currently evaluating the impact, if any, that SFAS No. 157 will have
on its consolidated financial statements.





Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB
Statements No. 87, 88, 106, and 132R




In September 2006, the FASB, issued
SFAS, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and
132R,” which requires employers to recognize the underfunded or overfunded
status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in
the year in which the changes occur through accumulated other comprehensive
income. Additionally, SFAS No. 158 requires employers to measure the funded
status of a plan as of the date of its year-end statement of
financial


32


position.
The new reporting requirements and related new footnote disclosure rules of SFAS
No. 158 are effective for fiscal years ending after December 15, 2006. We
adopted the provisions of SFAS No. 158 for the year end 2006, and the effect of
recognizing the funded status in accumulated other comprehensive income was not
significant. The new measurement date requirement applies for fiscal years
ending after December 15, 2008.





Fair Value Option for
Financial Assets and Financial Liabilities





In February 2007, the FASB issued SFAS
159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115.” The statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. We are analyzing the potential accounting treatment.





Other-Than-Temporary
Impairment





FASB Staff Position on FAS No. 115-1
and FAS No. 124-1 (“the FSP”), “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments,” was issued in November 2005 and
addresses the determination of when an investment is considered impaired,
whether the impairment on an investment is other-than-temporary and how to
measure an impairment loss. The FSP also addresses accounting considerations
subsequent to the recognition of other-than-temporary impairments on a debt
security, and requires certain disclosures about unrealized losses that have not
been recognized as other-than-temporary impairments. The FSP replaces the
impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1
with references to existing authoritative literature concerning
other-than-temporary determinations. Under the FSP, losses arising from
impairment deemed to be other-than-temporary, must be recognized in earnings at
an amount equal to the entire difference between the securities cost and its
fair value at the financial statement date, without considering partial
recoveries subsequent to that date. The FSP also required that an investor
recognize other-than-temporary impairment losses when a decision to sell a
security has been made and the investor does not expect the fair value of the
security to fully recover prior to the expected time of sale. The FSP is
effective for reporting periods beginning after December 15, 2005. The adoption
of this statement will not have a material impact on our consolidated financial
statements.





We 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, we made a comprehensive
review of our portfolio of tax positions in accordance with recognition
standards established by FIN 48. As a result of the implementation of
Interpretation 48, we 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.




Considering the Effects of
Prior Year Misstatements in Current Year Financial
Statements





In September 2006, the SEC issued Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements,” (“SAB 108”), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. We adopted SAB
108 in the fourth quarter of 2006 with no impact on our consolidated financial
statements.


33





Results
of Operations





Comparison
of Fiscal Years Ended December 31, 2007 and December 31, 2006





Year
      ended
              December
      31, 2007
            
            
            Year
      ended December 31, 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.





The increase in the average sales price
of our blended products during the year ended December 31, 2007 compared to the
same period during 2006 contributed to our increase in revenues, as well as the
growth in sales volume in all of our product categories.





Feed
      Type
            
            Metric
      Tons Sold Year Ended December 31, 2007
            
            
            Metric
      Tons Sold Year Ended December 31, 2006
            Difference
            
            %
      changePremix
            
            
            25,555
            
            
            
            13,325
            
            
            
            12,230
            
            
            
            92
            %Blended
            
            
            21,257
            
            
            
            2,572
            
            
            
            18,685
            
            
            
            726
            %Condensed
            
            
            3,149
            
            
            
            
            
            
            
            3,149Airubao
            
            
            3,128
            
            
            
            
            
            
            
            3,128Other
            
            
            332
            
            
            
            534
            
            
            
            (202
            )
            
            
            (37.8
            )%Total
            
            
            53,421
            
            
            
            16,431
            
            
            
            36,990
            
            
            
            225
            %





34


The average sale price/metric ton
during the year ended December 31, 2007 and December 31, 2006 of each of our
product classes is set forth below.





Feed
      Type
            
            Average
      Price/MT Year Ended December 31, 2007
            
            Average
      Price/MT Year Ended December 31, 2006
            Difference
            
            %
      changePremix
            
            $709
            
            
            $
            574
            
            
            $135
            
            
            23.5%Blended
            
            707
            
            
            
            453
            
            
            254
            
            
            56%Other
            
            856
            
            
            
            791
            
            
            65
            
            
            8.2%





The average sale price/metric ton was
calculated in US dollars using a conversion factor of one US dollar to 7.62
RMB.  The average price for each product category was calculated by
multiplying the prices charged in each product category at each operating
subsidiary by a weighted average of revenues generated in each product category
at each operating subsidiary as compared to total revenues generated by that
product by all operating subsidiaries for the period. The Airubao Series is
included in the calculations for blended feed.





During the first quarter of 2007, we
launched the Airubao Series, a new special blended feed designed specifically
for baby pigs.  We have gained immediate acceptance of this product
from our customers. We shipped approximately $2.41 million of this new product
to customers during the year ended December 31, 2007.  This product
line consists of a series of three distinct formulations, the average gross
margin is approximately 25% and the average selling price is approximately $771
per metric ton.  The Annual Report on China’s Feed Industry, published
by the Chinese government, estimates that the market for premium baby pig feed
is approximately $3.8 billion per year.





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.





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.


35


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.





Comparison
of Fiscal Year Ended December 31, 2006 to Year Ended December 31,
2005





Year
      ended
              December
      31,2006
            
            
            Year
      ended
              December
      31,2005
            
            
            $ Change
            
            
            % ChangeRevenues
            
            $
            8,594,876
            
            
            $
            7,611,845
            
            
            $
            983,031
            
            
            
            12.9
            %Cost
      of Sales
            
            
            5,446,332
            
            
            
            5,339,067
            
            
            
            107,265
            
            
            
            02.0
            %Gross
      Profits
            
            
            3,148,544
            
            
            
            2,272,778
            
            
            
            875,766
            
            
            
            38.5
            %Selling,
      General andAdministrativeExpenses
            
            
            2,114,650
            
            
            
            1,392,007
            
            
            
            722,643
            
            
            
            51.9
            %Net
      Income
            
            
            1,175,280
            
            
            
            560,706
            
            
            
            614,574
            
            
            
            110.0
            %





Revenues. The increase in
revenues was due to an increase in the volume of all feed products sold by us.
While we expect sales of blended feed through Nanchang Best and Guangxi Huijie
to increase in volume, we anticipate that premix will become the principal
segment of total sales volume in the future. During the year ended December 31,
2006, the increase in revenues is primarily driven by an increase in volume of
the products sold. Our prices on a whole remained relatively flat, a 3% decrease
in the average price of premix and a 0.4% increase in the average price of
blended feed sold. Even though the average price of other feeds decreased 63.6%,
the volume of other feeds is approximately only 3.2% of the total volume sold
during the period. We did experience a 2% total increase in the cost of goods
sold while we had 17.3% increase in the number of metric tons we sold which
enables us to keep our pricing relatively flat.





Overall,
Nanchang Best provided approximately 61% and Shanghai Best provided 39% of our
total revenues for the year ended December 31, 2006 compared to the year ended
December 31, 2005, Nanchang Best providing 64% and Shanghai Best 36% of our
total revenues.





Nanchang Best and Shanghai Best
contributed approximately 63% and 37% respectively of our total volume during
the year ended December 31, 2006. During the year ended December 31, 2005
Nanchang Best and Shanghai Best provided 64% and 36% of our total
volume.





Nanchang Best’s revenues increased
approximately 8.8% during the year ended December 31, 2006 compared to the same
period in 2005. Shanghai Best’s revenues increased approximately 21.7% during
the year ended December 31, 2006 compared to the same period in
2005.


36


Metric
Tons Sold for the Year Ended December 31, 2006 Compared to Year Ended December
31, 2005





Feed Type
            
            Metric Tons Sold Year Ended December 31,
      2006
            
            Metric Tons Sold Year Ended December 31,2005
            
            Difference
            
            %
  changePremix
            
            
            13,325
            
            
            
            12,178
            
            
            
            1,147
            
            
            
            9.4Blended
            
            
            2,572
            
            
            
            1,724
            
            
            
            848
            
            
            
            49Other
            
            
            534
            
            
            
            111
            
            
            
            423
            
            
            
            381Total
            
            
            16,431
            
            
            
            14,013
            
            
            
            2,418
            
            
            
            17.3





Average
Price per Metric Ton sold for the Year Ended December 31, 2006 Compared to Year
Ended December 31, 2005





Feed
Type
            
            Average Price/MT Year Ended December 31,2006
            
            Average Price/MT Year Ended December 31,2005
            
            Difference
            
            %
  changePremix
            
            
            574
            
            
            
            592
            
            
            
            (18
            )
            
            
            (3
            )Blended
            
            
            453
            
            
            
            451
            
            
            
            2
            
            
            
            .4Other
            
            
            791
            
            
            
            2,173
            
            
            
            (1,382
            )
            
            
            (63.6
            )





Cost of Good Sold. The cost
of sales in the period ended December 31, 2006 was $5,446,332, an increase of
$107,265 or 2.0% compared to $5,339,067 for the same period ended December 31,
2005. On a unit basis, we experienced approximately a 10% decrease per metric
ton in the cost of goods sold for premix and blended feeds.





Nanchang
Best experienced a 4.2% increase in cost of goods sold during the year ended
December 31, 2006 compared to the same period in 2005.  Shanghai Best
experienced a 0.5% increase in cost of goods sold during the year ended December
31, 2006 compared to the same period in 2005.





Gross Profit. Gross margins
improved to 36.6% in 2006 from 29.9% for 2005. The increase in gross margin was
due to a strategic shift to focus on the sale of higher margin products,
particularly premix.  The increase in gross margin is attributable to
the decrease in the unit cost of goods sold during the year ended December 31,
2006 as compared to the same period a year ago.




The gross
profit for Nanchang Best for the year ended December 31, 2006 compared to the
year ended December 31, 2005 increased approximately 18.9%.  Gross
margins at Nanchang Best for the year ended December 31, 2006 was approximately
34% compared to approximately 32% for the year ended December 31, 2005. The
gross profit for Shanghai Best for the year ended December 31, 2006 compared to
the year ended December 31, 2005 increased approximately 79.2%. Gross margins at
Shanghai Best for the year ended December 31, 2006 was approximately 40%
compared to approximately 27% for the year ended December 31, 2005.




Selling, General and Administrative
Expenses.  Our general and administrative expense increased by
98%.  We incurred significant expenses associated with the share
purchase agreements with Nanchang Best and Shanghai Best. General and
administrative expense includes the overhead expenses of our office (rent,
management and staff salaries, general insurance, marketing, accounting and
legal).  Selling expenses for the period increased by 32% and is due
to the approximately 13% increase in revenues and the costs associated with
entering markets in neighboring provinces.





Net Income. Our net income
increased due to an approximately 17% increase in income from operations and non
operating income of $41,000 for the twelve months ended December 31, 2006,
compared to a non operating loss of $47,655 during the twelve months ended
December 31, 2005. In addition, due to an investment in us by a British Virgin
Island investor, we received favorable tax status and are exempt from income tax
in 2006, and a portion of taxes that were due for 2005. As such we received a
tax credit of $100,386 for the twelve months ended December 31,
2006.


37


Off-Balance
Sheet Arrangements





There were no off-balance sheet
arrangements during the year ended December 31, 2007 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, 2007, we had $7,696,209
cash and cash equivalents on hand. 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.





We used $1,131,000 of the net proceeds
from these private placement offerings to repay the short term bank loan we had
in connection with our acquisition of Guangxi Huijie.  We also used
$620,000 to make a good faith deposit with an agricultural feed company located
in China that we were in negotiations to acquire.  We conducted a due
diligence investigation of this company and have subsequently decided not to
pursue this acquisition.  We have signed a termination consent with
this company and fully expect that we will receive a full refund of the $620,000
on or before November 15, 2007.  In addition, we used $3,300,000 of
the net proceeds from these private placement offerings to purchase Nanchang
Best’s 90 percent acquisition in Lushan.





As of December 31, 2007, we had total
loans payable of approximately $1,107,450 comprised of two
loans.  There was one short term bank loan to Nanchang Best of
$820,333, with an interest rate of 7.88% per annum payable
monthly.  This loan matures on May 27, 2008, and is collateralized by
our office building, workshop, employee dorms, and land usage rights. There was
also one short-term bank loan to Guangxi Huijie of $287,116, with an
interest rate of 6.57% per annum payable monthly.  This loan matures
on May 24, 2008, and is collateralized by our land usage rights.





During the year ended December 31,
2007, we repaid a bank loan to Guangxi Huijie in the amount of $653,532 which
matured on October 11, 2007 and was repaid on that date.  During the
year ended December 31, 2007, we also repaid advances totaling $746,645 to
entities in which Mr. Junhong Xiong, our President and Chief Executive Officer,
had an equity interest. Mr. Xiong sold his interest in all of these
entities.





During the year ended December 31,
2007, our operating activities provided cash of $1,106,816. This provision of
cash was primarily due to net income of $6,662,895, depreciation of $140,510,
amortization of


38


$14,316
and an increase in accounts payable of $465,573, offset by an increase in
accounts receivable of $4,022,786, an increase in inventory of 915,874, and an
increase in prepaid expenses of $628,446.





We used $3,254,274 in investing
activities during the year ended December 31, 2007 for the acquisition of
property and equipment and $620,000 as a deposit for a potential acquisition
that we subsequently abandoned.





We received $8,455,995 in cash from
financing activities. We received $8,767,503, net of $1,062,756 of offering
costs, from the sale of our securities during the year ended December 31, 2007.
We also received $977,088 from the proceeds of loans. We collected $226,083 for
subscription receivables and $950,707 from related parties due to us. These
amounts were offset by the following payments we made: a $758,343 repayment to
shareholders and the payment of $1,723,414 on the note receivable associated
with the acquisition of Guangxi Huijie.





At December 31, 2007, our accounts
receivable balance was approximately $6.09 million, which was approximately 47%
of our net revenues for the three months ended December 31, 2007.  The
reason for the large increase in our accounts receivable at December 31, 2007 is
that our sales increased due to the introduction of our Airubao Series product
during the first quarter of 2007.  Approximately $69.9
million or 25% of our sales during the year ended December 31, 2007
occurred in August and September 2007. Given that our credit terms range from
30-90 days and in certain cases exceed 90 days, a significant portion of these
sales remained in accounts receivable at December 31, 2007.





Our principal demands for liquidity are
to increase capacity, raw materials purchase, sales distribution, and the
possible acquisition of new subsidiaries or joint ventures in our industry as
opportunities present themselves, as well as general corporate purposes. We
estimate that we will require approximately $6 million to maintain our current
operations and achieve these goals in 2008, which include a potential joint
venture outside of China and an additional acquisition for which we are
presently budgeting.  We will also require an additional $30 million
that we are budgeting for potential acquisitions in 2008.  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.  In light of surging pork prices in China due to rising
consumer demand and severe pork supply shortages, we entered into China’s
commercial hog farming business in November 2007 with the acquisition of the
Lushan hog farm and acquired five additional hog farms in January
2008.  We believe the commercial hog farm business will contribute
significant revenues to our financial performance in 2008 and
beyond.  We expect to expend approximately $30 million on purchasing
additional hog farm businesses in 2008.





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. We
may also use short term loans bank loans to meet our liquidity
requirements.





The majority of our revenues and
expenses were denominated primarily in RMB, the currency of the PRC. There is no
assurance that exchange rates between the RMB and the U.S. Dollar will remain
stable. We do not engage in currency hedging. Inflation has not had a material
impact on our business.


39


Contractual
Obligations





The
following table summarizes our contractual obligations at December 31, 2007 and
the effect those obligations are expected to have on our liquidity and cash flow
in future periods.





Payments
      Due by Period
              (in
      thousands)Contractual
      Obligations
            
            Total
            
            
            Less than
      1 Year
            
            
            1-3
    YearsLong-Term
      Debt Obligations
            
            
            0
            
            
            
            0
            
            
            
            0Capital
      Lease Obligations
            
            
            0
            
            
            
            0
            
            
            
            0Operating
      Lease Obligations
            
            $
            113.53
            
            
            $
            75.2
            
            
            $
            38.3Purchase
      Obligations
            
            
            0
            
            
            
            0
            
            
            
            0Other
      Obligations
            
            
            0
            
            
            
            0
            
            
            
            0Total
            
            $
            113.53
            
            
            $
            75.2
            
            
            $
            38.3





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.





Currency
Fluctuations and Foreign Currency Risk





Substantially
all of our operations are conducted in the PRC, with the exception of our export
business and limited overseas purchases of raw materials.  Most of our
sales and purchases are conducted within the PRC in Chinese Renminbi, which is
the official currency of the PRC.  As a result, 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
Renminbi.  However, we use the United States dollar for financial
reporting purposes.  Conversion of Renminbi into foreign currencies is
regulated by the People’s Bank of China through a unified floating exchange rate
system.  Although the PRC government has stated its intention to
support the value of the Renminbi, there can be no assurance that such exchange
rate will not again become volatile or that the Renminbi will not devalue
significantly against the US dollar.  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 our debt obligations are primarily
short-term in nature, with fixed interest rates.





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.





40


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, 2007 and 2006
            F-2Consolidated
      Statements of Income and Other Comprehensive Income for the
      Years Ended December 31, 2007, 2006 and
      2005
            F-3Consolidated
      Statement of Stockholders' Equity for the Years Ended
      December 31, 2007, 2006 and 2005
            F-4Consolidated
      Statements of Cash Flows for the Years Ended
      December 31, 2007, 2006 and 2005
            F-5Notes
      to Consolidated Financial Statements
            F-6 to
  F-31




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, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of December 31, 2007.





Our internal controls over financial
reporting are designed by, or under the supervision of, our Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions,
and effected by our board of directors, management and other personnel, 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. Our internal control over
financial reporting, and 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 our assets;





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 our receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and





3)  Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.





Management’s
Report on Internal Control Over Financial Reporting





Management has evaluated the
effectiveness of our internal control over financial reporting (ICFR) as of
December 31, 2007 based on the control criteria established in a report entitled
Internal Control—Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on our assessment and those criteria, our
management has concluded that our internal control over financial reporting has
the following deficiencies as of December 31, 2007:


41




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:





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.


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.





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.





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.


42


Remediation
of Material Weakness





As of
December 31, 2007, there were control deficiencies which constitute as a
material weakness in our internal control over financial reporting. To the
extent reasonably possible in our current financial condition, we have
authorized the addition of additional staff members to the finance department
and information technology department to ensure that it has the depth and
experience to implement and monitor the appropriate level of control procedures
related to all of our feed and pig farm locations and corporate
office.





In
addition, we are taking steps to unify the financial reporting of all of our
feed and pig farm entities.  We are in the initial planning phase of
upgrading, where possible, certain of our information technology systems
impacting financial reporting.  We are currently planning further
integration of information technology policy and procedures and evaluating them
as they impact all our subsidiaries to provide accurate and complete financial
reporting information.





Through
these steps, we believe we are addressing the deficiencies that affected our
internal control over financial reporting as of December 31, 2007. Because
the remedial actions require hiring of additional personnel, upgrading certain
of our information technology systems, and relying extensively on manual review
and approval, the successful operation of these controls for at least several
quarters may be required before management may be able to conclude that the
material weakness has been remediated.  We intend to continue to
evaluate and strengthen our ICFR systems. These efforts require significant time
and resources.  If we are unable to establish adequate ICFR systems,
we may encounter difficulties in the audit or review of our financial statements
by our independent public accountants, which in turn may have a material adverse
effect on our ability to prepare financial statements in accordance with GAAP
and to comply with our SEC reporting obligations.





In conducting an assessment of the
effectiveness of AgFeed’s internal control over financial reporting, the Company
purchased 90% ownership of Lushan, in a stock purchase agreement on November 6,
2007, which has been excluded from management’s report on internal control over
financial reporting. Lushan constituted 7.35% and
0.34% of AgFeed's total
assets and revenues,
respectively, as of December 31, 2007.





Inherent
Limitations Over Internal Controls





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect all errors
or misstatements and all fraud. Therefore, even those systems determined to be
effective can provide only reasonable, not absolute, assurance that the
objectives of the policies and procedures are met. 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.





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





Changes
in Internal Control Over Financial Reporting





There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


43


Item
9B.  Other Information.





None.





44


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 2008 Annual Meeting of Stockholders, which we will file with the SEC
within 120 days after the end of fiscal 2007.





Item
11.  Executive Compensation.





The information required by this Item
is incorporated by reference to the information contained in our Proxy Statement
for our 2008 Annual Meeting of Stockholders, which we will file with the SEC
within 120 days after the end of fiscal 2007.




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




The
information required by this Item is incorporated by reference to the
information contained in our Proxy Statement for our 2008 Annual Meeting of
Stockholders, which we will file with the SEC within 120 days after the end of
fiscal 2007.





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 2008 Annual Meeting of Stockholders, which we will file with the SEC
within 120 days after the end of fiscal 2007.





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 2008 Annual Meeting of Stockholders, which we will file with the SEC
within 120 days after the end of fiscal 2007.





45


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.





46


AgFeed
Industries, Inc. and Subsidiaries


Consolidated
Financial Statements


For
the Years Ended December 31, 2007, 2006, and 2005

















Contents







PageReport of Independent
      Registered Public Accounting Firm
            F-1Financial
      Statements:Consolidated
      Balance Sheet as of December 31, 2007 and 2006
            F-2Consolidated
      Statements of Income and Other Comprehensive Incomefor
      the years ended December 31, 2007, 2006 and 2005
            F-3Consolidated
      Statement of Stockholders' Equity for the years endedDecember
      31, 2007, 2006 and 2005
            F-4Consolidated
      Statements of Cash Flows for the years endedDecember
      31, 2007, 2006, and 2005
            F-5Notes to Consolidated Financial
      Statements
            F-6 to F-31




47














Report of
Independent Registered Public Accounting Firm


Board of
Directors and Stockholders of
 AgFeed
Industries, Inc.
 
 We have
audited the accompanying consolidated balance sheet of AgFeed Industries, Inc.
(a Nevada corporation) and subsidiaries as of December 31, 2007 and 2006, and
the related consolidated statements of income and other comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2007.  These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AgFeed
Industries, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
 
 
 Goldman
Parks Kurland Mohidin  LLP
 
 Encino,
California
 March 1,
2008


F-1





AgFeed
Industries, Inc. and Subsidiaries


Consolidated
Balance Sheet


as of December 31,
2007 and 2006





December
      31,
              
              
              December
      31,ASSETS
              
              2007
              
              
              2006CURRENT
      ASSETS:Cash
      & cash equivalents
              
              $
              7,696,209
              
              
              $
              1,204,100Accounts
      receivable, net of allowance for doubtful accounts of
    $191,497accounts
      of $191,497 and 49,845
              
              
              6,107,491
              
              
              
              1,796,085Advances
      to suppliers
              
              
              442,851
              
              
              
              77,649Other
      receivable
              
              
              459,034
              
              
              
              203,051Stock
      subscription receivable
              
              
              -
              
              
              
              226,083Due
      from related parties
              
              
              -
              
              
              
              87,018Advances
      to related parties
              
              
              -
              
              
              
              924,806Inventory
              
              
              2,728,160
              
              
              
              802,822Prepaid
      expense
              
              
              644,183
              
              
              
              11,885Other
      current assets
              
              
              -
              
              
              
              2,253Total
      current assets
              
              
              18,077,928
              
              
              
              5,335,752PROPERTY
      AND EQUIPMENT, net
              
              
              3,930,715
              
              
              
              1,390,611CONSTRUCTION-IN-PROCESS
              
              
              221,819
              
              
              
              -INTANGIBLE
      ASSETS
              
              
              839,802
              
              
              
              539,468TOTAL
      ASSETS
              
              $
              23,070,264
              
              
              $
              7,265,831LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              1,458,010
              
              
              $
              809,583Other
      payables
              
              
              705,150
              
              
              
              56,911Unearned
      revenue
              
              
              99,848
              
              
              
              81,541Accrued
      expenses
              
              
              18,223
              
              
              
              92,739Accrued
      payroll
              
              
              168,560
              
              
              
              37,216Short
      term loans
              
              
              1,110,413
              
              
              
              1,793,960Advance
      from related party
              
              
              
              
              
              
              737,846Tax
      and welfare payable
              
              
              9,534
              
              
              
              280,208Total
      current liabilities
              
              
              3,569,738
              
              
              
              3,890,004STOCKHOLDERS'
      EQUITY:Common
      stock, $0.001 per share; 75,000,000 shares authorized;27,026,756
      and 24,000,000 shares issued and outstanding
              
              
              27,027
              
              
              
              24,000Additional
      paid-in capital
              
              
              10,094,095
              
              
              
              1,299,379Other
      comprehensive income
              
              
              780,907
              
              
              
              116,846Statutory
      reserve
              
              
              752,225
              
              
              
              271,115Retained
      earnings
              
              
              7,846,272
              
              
              
              1,664,487Total
      stockholders' equity
              
              
              19,500,526
              
              
              
              3,375,827TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              23,070,264
              
              
              $
              7,265,831








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, 2007, 2006 and 2005





Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Net
      Revenue
              
              $
              36,163,339
              
              
              $
              8,594,876
              
              
              $
              7,611,845Cost
      of Revenue
              
              
              25,763,479
              
              
              
              5,446,332
              
              
              
              5,339,067Gross
      profit
              
              
              10,399,860
              
              
              
              3,148,544
              
              
              
              2,272,778Operating
      expensesSelling
      expenses
              
              
              2,693,613
              
              
              
              1,287,110
              
              
              
              974,332General
      and administrative expenses
              
              
              1,385,476
              
              
              
              827,540
              
              
              
              417,675Total
      operating expenses
              
              
              4,079,089
              
              
              
              2,114,650
              
              
              
              1,392,007Income
      from operations
              
              
              6,320,771
              
              
              
              1,033,894
              
              
              
              880,771Non-operating
      income (expense):Other
      income (expense)
              
              
              160,496
              
              
              
              35,681
              
              
              
              (27,695
              )Interest
      income
              
              
              142,148
              
              
              
              28,851
              
              
              
              -Interest
      expense
              
              
              (153,723
              )
              
              
              (23,532
              )
              
              
              (19,960
              )Total
      non-operating income (expense)
              
              
              148,921
              
              
              
              41,000
              
              
              
              (47,655
              )Income
      before income tax
              
              
              6,469,692
              
              
              
              1,074,894
              
              
              
              833,116Income
      tax benefit
              
              
              (193,203
              )
              
              
              (100,386
              )
              
              
              272,410Net
      income
              
              $
              6,662,895
              
              
              $
              1,175,280
              
              
              $
              560,706Other
      comprehensive incomeForeign
      currency translation gain
              
              
              664,061
              
              
              
              84,382
              
              
              
              32,457Comprehensive
      Income
              
              $
              7,326,956
              
              
              $
              1,259,662
              
              
              $
              593,163Weighted
      average shares outstanding :Basic
              
              
              26,093,376
              
              
              
              17,911,296
              
              
              
              15,006,720Diluted
              
              
              26,174,973
              
              
              
              17,911,296
              
              
              
              15,006,720Earnings
      per share:Basic
              
              $
              0.26
              
              
              $
              0.07
              
              
              $
              0.04Diluted
              
              $
              0.25
              
              
              $
              0.07
              
              
              $
              0.04







The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-3


AgFeed
Industries, Inc. and Subsidiaries


Consolidated
Statement of Stockholders' Equity


For The Years
Ended December 31, 2007, 2006, and 2005








Additional
              
              
              
              
              
              Other
              
              
              
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid
              
              
              Subscription
              
              
              Comprehensive
              
              
              Statutory
              
              
              Retained
              
              
              Stockholders'Shares
              
              
              Amount
              
              in
      Capital
              
              
              Receivable
              
              
              Income
              
              
              Reserve
              
              
              Earnings
              
              
              EquityBalance
      January 1, 2005
              
              
              15,006,720
              
              
              $
              15,007
              
              
              $
              722,527
              
              
              $
              (157,712
              )
              
              $
              7
              
              
              $
              33,955
              
              
              $
              165,661
              
              
              $
              779,445Cumulative
      translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              32,457
              
              
              
              
              
              
              
              
              
              
              
              32,457Net
      income for the year ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              560,706
              
              
              
              560,706Reduction
      in subscription receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              157,712
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              157,712Transfer
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              84,106
              
              
              
              (84,106
              )
              
              
              -Balance
      December 31, 2005
              
              
              15,006,720
              
              
              $
              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
              
              
              
              
              
              
              
              
              
              
              
              664,061-Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,662,895
              
              
              
              6,662,895-Transfer
      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
              
              
              $
              19,500,526
   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, 2007, 2006 and 2005




Years
      Ended December 31,2007
                
                2006
                
                
                2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                6,662,895
                
                $
                1,175,280
                
                
                $
                560,706Adjustments
      to reconcile net income to net cashprovided
      in operating activities:Depreciation
                
                
                140,510
                
                
                100,469
                
                
                
                79,465Loss
      on disposal of property and equipment
                
                
                37,345
                
                
                -
                
                
                
                30,112Amortization
                
                
                14,316
                
                
                5,228
                
                
                
                4,018Stock
      compensation expense for options issued to employees
                
                
                13,789
                
                
                -
                
                
                
                -(Increase)
      / decrease in assets:Accounts
      receivable
                
                
                (4,022,786
                )
                
                (312,364
                )
                
                
                (628,686
                )Other
      receivable
                
                
                (220,979
                )
                
                47,323
                
                
                
                (37,016
                )Inventory
                
                
                (915,874
                )
                
                (113,084
                )
                
                
                177,012Due
      from related party
                
                
                102,280
                
                
                (46,550
                )
                
                
                (50,962
                )Advances
      to suppliers
                
                
                (345,646
                )
                
                (28,340
                )
                
                
                (16,985
                )Prepaid
      expense
                
                
                (628,446
                )
                
                1,725
                
                
                
                (3,430
                )Other
      assets
                
                
                2,316
                
                
                (2,205
                )
                
                
                -Increase
      / (decrease) in current liabilities:Accounts
      payable
                
                
                465,573
                
                
                (101,564
                )
                
                
                203,235Unearned
      revenue
                
                
                4,791
                
                
                (17,001
                )
                
                
                81,284Other
      payables
                
                
                32,597
                
                
                34,645
                
                
                
                (45,818
                )Due
      to related party
                
                
                -
                
                
                (182,812
                )
                
                
                9,889Accrued
      expenses
                
                
                (77,717
                )
                
                90,545
                
                
                
                24,769Accrued
      payroll
                
                
                123,689
                
                
                20,965
                
                
                
                -Tax
      and welfare payable
                
                
                (281,837
                )
                
                (151,976
                )
                
                
                239,193Net
      cash provided by operating activities
                
                
                1,106,816
                
                
                520,284
                
                
                
                626,786CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of intangible assets
                
                
                (264,196
                )
                
                -
                
                
                
                -Acquisition
      of property and equipment
                
                
                (291,294
                )
                
                (107,460
                )
                
                
                (125,434
                )Issuance
      of loan receivable
                
                
                -
                
                
                -
                
                
                
                4,272Cash
      paid for purchase of subsidiary
                
                
                (3,360,000
                )
                
                (1,100,420
                )
                
                
                (8,920
                )Cash
      acquired with acquisitions
                
                
                661,216
                
                
                213,922
                
                
                
                -Net
      cash used in investing activities
                
                
                (3,254,274
                )
                
                (993,958
                )
                
                
                (130,082
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from shareholders
                
                
                -
                
                
                -
                
                
                
                61,023Repayments
      to shareholders
                
                
                (758,343
                )
                
                (24,783
                )
                
                
                (97,637
                )Advances
      from related parties
                
                
                -
                
                
                -
                
                
                
                68,423Repayments
      to related parties
                
                
                -
                
                
                -
                
                
                
                (4,959
                )Collection
      from related party
                
                
                950,707
                
                
                -
                
                
                
                393,112Advance
      to related parties
                
                
                -
                
                
                (425,674
                )
                
                
                (788,825
                )Proceeds
      from sale of common stock
                
                
                9,830,259
                
                
                -
                
                
                
                -Offering
      costs
                
                
                (1,062,756
                )
                
                -
                
                
                
                -Proceeds
      from notes payable
                
                
                977,008
                
                
                1,664,855
                
                
                
                (433,065
                )Payment
      on note payable
                
                
                (1,723,414
                )
                
                -
                
                
                
                -Contribution
      by stockholders to pay for merger expenses
                
                
                -
                
                
                300,000
                
                
                
                -Collection
      on subscription receivable
                
                
                226,083
                
                
                -
                
                
                
                157,712Government
      subisdy received
                
                
                16,451
                
                
                -
                
                
                
                -Net
      cash provided by (used in) financing activities
                
                
                8,455,995
                
                
                1,514,398
                
                
                
                (644,216
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                183,572
                
                
                26,970
                
                
                
                18,517NET
      INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
                
                
                6,492,109
                
                
                1,067,694
                
                
                
                (128,995
                )CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                
                
                1,204,100
                
                
                136,406
                
                
                
                265,401CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                
                $
                7,696,209
                
                $
                1,204,100
                
                
                $
                136,406SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                
                $
                99,445
                
                $
                30,213
                
                
                $
                21,238Income
      taxes paid
                
                $
                -
                
                $
                73,339
                
                
                $
                30,213


The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-5


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006





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


F-6


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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.





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 is engaged in 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 as well as raising,
breeding and sale of pigs. The Company operates production plants in Nanchang
City, Shanghai City and Nanning City and has a swine farm located in HuaLin Town
in Jiangxi Province.  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 100% wholly-owned subsidiaries Nanchang Best and
Shanghai Best (for all periods presented) and Guangxi Huiji  and its
90% wholly-owned subsidiary Lushan Breeder (from their respective dates of
acquisition).  For convenience of reporting the acquisition for
accounting purposes, December 31, 2006 has been designated as the acquisition
date for Guangxi and November 1, 2007 has been designated as the acquisition
date for Lushan. 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 Chinese Yuan
Renminbi (RMB); however the accompanying consolidated financial statements have
been translated and presented in United States Dollars ($).


F-7


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Foreign Currency
Translation





As of
December 31, 2007 and 2006, 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, 2007 presentation.





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. The allowance for doubtful accounts amounted to
$191,497 and $49,845 at of December 31, 2007 and 2006,
respectively.





Advances to
Suppliers





The
Company makes advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured.  The advances
to suppliers amounted to $442,851 and $77,649 at December 31, 2007 and 2006,
respectively.


F-8


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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, 2007 and
2006:








2007
            
            
            2006Office
      equipment
            
            $
            100,072
            
            
            $
            65,412Operating
      equipment
            
            
            547,560
            
            
            
            493,011Vehicles
            
            
            271,652
            
            
            
            235,207Swines
      for reproduction
            
            
            1,568,816
            
            
            
            -Buildings
            
            
            1,940,784
            
            
            
            926,162Total
            
            
            4,428,884
            
            
            
            1,719,792Less
      accumulated depreciation
            
            
            (498,169
            )
            
            
            (329,181
            )$
            3,930,715
            
            
            $
            1,390,611





Depreciation
expense for the years ended December 31, 2007, 2006, and 2005 was $140,510,
$100,649, and $79,465, respectively.





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


F-9


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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, 2007 and 2006
there were no significant impairments of its long-lived assets.





Intangible
Assets





Intangible
assets consist of the right to use land and computer software.  Net
intangible assets at December 31, 2007 and 2006 are as follows:





2007
            
            
            2006Right
      to use land
            
            $
            589,489
            
            
            $
            551,012Customer
      list
            
            
            274,176
            
            
            
            -Computer
      software
            
            
            15,366
            
            
            
            11,196Total
            
            
            879,031
            
            
            
            562,208Less
      Accumulated amortization
            
            
            (39,229
            )
            
            
            (22,740
            )Intangibles,
      net
            
            $
            839,802
            
            
            $
            539,468








Per the
People's Republic of China's governmental regulations, the Government owns all
land.  The Company leases land per a real estate contract with the
government of the People's Republic of China for a period from November 2006
through October 2056. The Company obtained possession of the land in July of
2005.  Accordingly, the Company is amortizing the cost of the right to
use land from that date.





The right
to use land is amortized over a period of 50 years, customer list is amortized
over ten years and the computer software is amortized over three
years.





Amortization
expense for the Company’s intangible assets for the years ended December 31,
2007, 2006 and 2005 was $14,316, $5,228 and $4,018, respectively.





Fair Value of Financial
Instruments





Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.


F-10


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006





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 $385,375, $324,218
and $137,567 for the years ended December 31, 2007, 2006 and 2005,
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, 2007, 2006 and 2005 were $33,714, $5,995 and 18,776,
respectively.





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 32,000 options
outstanding at December 31, 2007.





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


F-11


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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.





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 $780,908 and
$116,846 at December 31, 2007 and 2006, 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, 2007,
2006 and 2005, other comprehensive income in the consolidated statements of
income and other comprehensive income included translation gains of $664,062,
$84,382 and 32,457, 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.
There were no options, warrants or dilutive securities outstanding during the
years ended December 31, 2006 and 2005 and during year ended December 31, 2007,
there were 42,000 options outstanding and 611,787 warrants
outstanding.  For the year ended December 31, 2007, the Company’s
average stock price was


F-12


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


greater
than some of the exercise prices which resulted in additional common stock
equivalents of 81,597.





The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations:





2007
            
            
            2006
            
            
            2005Per
      Share
            
            
            
            
            
            Per
      Share
            
            
            
            
            
            Per
      ShareShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            AmountBasic
      earnings per share
            
            
            26,093,376
            
            
            $
            0.26
            
            
            
            17,911,296
            
            
            $
            0.07
            
            
            $
            15,006,720
            
            
            $
            0.04Effect
      of dilutive stock options
            
            
            81,597
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Diluted
      earnings per share
            
            
            26,174,973
            
            
            $
            0.25
            
            
            
            17,911,296
            
            
            $
            0.07
            
            
            $
            15,006,720
            
            
            $
            0.04








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.





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).





Recent
Pronouncements





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”. This statement requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. The provisions of SFAS No. 158 are effective for


F-13


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


employers
with publicly traded equity securities as of the end of the fiscal year ending
after December 15, 2006. The adoption of this statement had no effect on the
Company‘s reported financial position or results of operations.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements“. The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company‘s future reported financial position or results of
operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities“. This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of
operations.





In June
2007, the 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” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that 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, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) 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 No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement 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.  This statement 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.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on


F-14


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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.





Note 3 – Notes Payable





Notes
payable at December 31, 2007 and 2006 were as follows:







2007
            
            
            2006Short-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 is collateralized by the Company’s office building,
      workshop, employee dorms and use right of land
            
            $
            822,528
            
            
            $
            576,630Short-term
      bank loan; interest rate of 6.57% and 6.12%.  The term of the
      loan is from May 25, 2007 to May 24, 2008 and December 5, 2006 to December
      4, 2007.  This loan is collateralized by the Company’s right to
      use land, machinery and equipment.
            
            
            287,885
            
            
            
            115,326Short-term
      bank loan related to the acquisition of Guangxi Huijie. The term of the
      loan is from December 20, 2006 to June 20, 2007 with an interest rate of
      7%. The Company has the ability to extend the maturity of the note an
      additional six months upon notice to the lender. The Company may also
      prepay the note at any time without penalty.
            
            
            -
            
            
            
            1,102,004$
            1,110,413
            
            
            $
            1,793,960





Note
4 - Stockholders’ Equity





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


F-15


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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.





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


F-16


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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 bee recorded
directly to additional paid in capital.





Note
5 – Employee Welfare Plan





The
Company has established its own employee welfare plan in accordance with Chinese
law and regulations. The Company makes annual contributions of 14% of all
employees’ salaries to employee welfare plan. The total expense for the above
plan was $18,525, $62,431, and $30,474 for the years ended December 31, 2007,
2006 and 2005, respectively.  The Company has recorded welfare payable
of $5,383 and $81,897 at December 31, 2007 and 2006, which is included in tax
and welfare payable in the accompanying consolidated balance sheet.





Note
6 – 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.


F-17


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Pursuant
to the "Circular of the Ministry of Finance ( MOF) on the Issue of Corporate
Financial Management after the Corporate Law Enforced" (No.67 [2006]), effective
on April 1, 2006, issued by the MOF, the companies will transfer the balance of
SCWF as of December. 31, 2005 to
Statutory Surplus Reserve. Any deficit in the SCWF will be charged in turn to
Statutory Surplus Reserve, additional paid-in capital and undistributed profit
of previous years. If a deficit still remains, it should be transferred
to  retained earnings and be reduced to zero by a transfer from after
tax profit of following years. At December 31,
2007, the Company did not have a deficit in the SCWF





The
Company has appropriated $481,110 and $153,054 as reserve for the statutory
surplus reserve and welfare fund for the years ended December 31, 2007 and 2006,
respectively.





Note
7 – 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
            
            
            $
            80,620Exercisable
      December 31, 2007
            
            
            -





The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model are as follows:





Risk-free
      interest rate
            5.0%Expected
      life of the options
            5
      yearsExpected
      volatility
            34.42%Expected
      dividend yield
            0





F-18


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Warrants





Following
is a summary of the warrant activity:





Outstanding,
      December 31, 2006
            -Granted
            611,787Forfeited
            -Exercised
            -Outstanding,
      December 31, 2007
            611,787





Note 8 – Related Party
Transactions





Due to
related parties and due from related parties represent amounts payable and
receivable from related arising from purchases and sales
transactions.





Advances
to and from related parties and shareholders are non interest bearing and are
payable or receivable on demand.





Sales to
related parties amounted to $0, $170,069 and $82,050 for the years ended
December 31, 2007, 2006 and 2005, respectively.





Purchases
from related parties amounted to $0, $708 and $1,757 for the years ended
December 31, 2007, 2006 and 2005, respectively.





Due from
related parties amounted to $87,018 as of December 31, 2006.





Advance
to related parties amounted to $924,806 as of December 31, 2006.





Advance
from related parties and shareholders amounted to $737,846 as of December 31,
2006.





The
parties are related through one common shareholder who is a majority shareholder
in all the related entities.


F-19


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Note 9 –
Taxes





Local PRC
Income Tax





Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 33%. 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 31,2007
            
            2006
            
            2005Tax
      provision (credit) at statutory rate
            
            
            34
            %
            
            
            34
            %
            
            
            34
            %Foreign
      tax rate difference
            
            
            (1
            %)
            
            
            (1
            %)
            
            
            (1
            %)US
      NOL for which no benefit isRealized
            
            
            (2
            %)
            
            
            (2
            %)
            
            
            -Effect
      of tax holiday and waiver ofcurrent
      and prior year's tax liability
            
            
            (34
            %)
            
            
            (40
            %)
            
            
            -(3
            %)
            
            
            (9
            %)
            
            
            33
            %





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, 1007, 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.





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, 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 SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


The
Company also has approximately $679,804 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
10 – Acquisitions





Acquisition of Guangxi 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 plants 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








Acquisition
of Lushan 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


F-21


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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 it 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





The
following pro forma financial information presents the consolidated operations
of the Company as if the Guangxi Huijie and Lushan acquisitions had occurred as
of the beginning of the periods presented.





F-22


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


For
the year ended December 31, 2005




As
      Reportedby
      the
              
              
              GuangxiCompany
              
              
              Huijie
              
              
              Lushan
              
              
              Adjustments
              
              
              
              
              Pro
      formaNet
      Revenue
              
              $
              7,611,845
              
              
              $
              439,880
              
              
              $
              -
              
              
              $
              -
              
              
              
              
              $
              8,051,725Cost
      of Revenue
              
              
              5,339,067
              
              
              
              370,812
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              5,709,879Gross
      Profit
              
              
              2,272,778
              
              
              
              69,068
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              2,341,846Operating
      expenses:Selling
      expenses
              
              
              974,332
              
              
              
              59,829
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              1,034,161General
      and administrative expenses
              
              
              417,675
              
              
              
              70,152
              
              
              
              20,177
              
              
              
              5,425
              a
              
              
              
              
              513,429Total
      operating expenses
              
              
              1,392,007
              
              
              
              129,981
              
              
              
              20,177
              
              
              
              5,425
              
              
              
              
              
              1,547,590Income
      from operations
              
              
              880,771
              
              
              
              (60,913
              )
              
              
              (20,177
              )
              
              
              (5,425
              )
              
              
              
              
              794,256Non-operating
      income (expense):Other
      income (expense)
              
              
              (27,695
              )
              
              
              -
              
              
              
              311
              
              
              
              
              
              
              
              
              
              (27,384
              )Interest
      income
              
              
              -
              
              
              
              -
              
              
              
              468
              
              
              
              -
              
              
              
              
              
              468Interest
      expense
              
              
              (19,960
              )
              
              
              (2,351
              )
              
              
              -
              
              
              
              (77,691
              )b
              
              
              
              
              (100,002
              )Total
      non-operating income (expense)
              
              
              (47,655
              )
              
              
              (2,351
              )
              
              
              779
              
              
              
              (77,691
              )
              
              
              
              
              (126,918
              )Income
      before income tax
              
              
              833,116
              
              
              
              (63,264
              )
              
              
              (19,398
              )
              
              
              (83,116
              )
              
              
              
              
              667,338Income
      tax
              
              
              272,410
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              272,410Net
      income
              
              $
              560,706
              
              
              $
              (63,264
              )
              
              $
              (19,398
              )
              
              $
              (83,116
              )
              
              
              
              $
              394,928Earnings
      per share
              
              $
              0.04
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              0.03Weighted
      average shares outstanding
              
              
              15,006,720
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,006,720





a.
            to
      record additional amortization for the increase in basis of the land use
      rights as a result of the purchase of Guangxi Huijie.b.
            to
      record interest expense on the acquisition note of Guangxi
      Huijie.





F-23


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


For
the year ended December 31, 2006




As
      Reportedby
      the
              
              
              GuangxiCompany
              
              
              Huijie
              
              
              Lushan
              
              
              Adjustments
              
              
              
              
              Pro
      formaNet
      Revenue
              
              $
              8,594,876
              
              
              $
              2,574,836
              
              
              $
              -
              
              
              
              -
              
              
              
              
              $
              11,169,712Cost
      of Revenue
              
              
              5,446,332
              
              
              
              1,794,033
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              7,240,365Gross
      Profit
              
              
              3,148,544
              
              
              
              780,803
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              3,929,347Operating
      expenses:Selling
      expenses
              
              
              1,287,110
              
              
              
              167,393
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              1,454,503General
      and administrative expenses
              
              
              827,540
              
              
              
              110,953
              
              
              
              39,913
              
              
              
              5,425
              a.
              
              
              
              
              983,831Total
      operating expenses
              
              
              2,114,650
              
              
              
              278,346
              
              
              
              39,913
              
              
              
              5,425
              
              
              
              
              
              2,438,334Income
      from operations
              
              
              1,033,894
              
              
              
              502,457
              
              
              
              (39,913
              )
              
              
              (5,425
              )
              
              
              
              
              1,491,013Non-operating
      income (expense):Other
      income (expense)
              
              
              35,681
              
              
              
              2,657
              
              
              
              (943
              )
              
              
              
              
              
              
              
              
              37,395Interest
      income
              
              
              28,851
              
              
              
              265
              
              
              
              58
              
              
              
              -
              
              
              
              
              
              29,174Interest
      expense
              
              
              (23,532
              )
              
              
              (6,684
              )
              
              
              (7,594
              )
              
              
              (77,691
              )b.
              
              
              
              
              (115,501
              )Total
      non-operating income (expense)
              
              
              41,000
              
              
              
              (3,762
              )
              
              
              (8,479
              )
              
              
              (77,691
              )
              
              
              
              
              (48,932
              )Income
      before income tax
              
              
              1,074,894
              
              
              
              498,695
              
              
              
              (48,392
              )
              
              
              (83,116
              )
              
              
              
              
              1,442,081Income
      tax
              
              
              (100,386
              )
              
              
              39,138
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              (61,248
              )Net
      income
              
              $
              1,175,280
              
              
              $
              459,557
              
              
              $
              (48,392
              )
              
              
              (83,116
              )
              
              
              
              $
              1,503,329Earnings
      per share
              
              $
              0.07
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              0.08Weighted
      average shares outstanding
              
              
              17,911,296
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,911,296





a.
            to
      record additional amortization for the increase in basis of the land use
      rights as a result of the purchase of Guangxi Huijie.b.
            to
      record interest expense on the acquisition note of Guangxi
      Huijie.





F-24


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


For
the year ended December 31, 2007





As
      Reportedby
      theCompany
              
              
              Lushan
              
              
              Adjustments
              
              
              Pro
      formaNet
      Revenue
              
              $
              36,163,339
              
              
              $
              37,253
              
              
              
              -
              
              
              $
              36,200,592Cost
      of Revenue
              
              
              25,763,479
              
              
              
              44,807
              
              
              
              -
              
              
              
              25,808,286Gross
      Profit
              
              
              10,399,860
              
              
              
              (7,554
              )
              
              
              -
              
              
              
              10,392,306Operating
      expenses:Selling
      expenses
              
              
              2,693,613
              
              
              
              433
              
              
              
              -
              
              
              
              2,694,046General
      and administrative expenses
              
              
              1,385,476
              
              
              
              115,558
              
              
              
              
              
              
              
              1,501,034Total
      operating expenses
              
              
              4,079,089
              
              
              
              115,991
              
              
              
              -
              
              
              
              4,195,080Income
      from operations
              
              
              6,320,771
              
              
              
              (123,545
              )
              
              
              -
              
              
              
              6,197,226Non-operating
      income (expense):Other
      income (expense)
              
              
              160,496
              
              
              
              (8,300
              )
              
              
              
              
              
              
              152,196Interest
      income
              
              
              142,148
              
              
              
              114
              
              
              
              -
              
              
              
              142,262Interest
      expense
              
              
              (153,723
              )
              
              
              (5,207
              )
              
              
              
              
              
              
              (158,930
              )Total
      non-operating income (expense)
              
              
              148,921
              
              
              
              (13,394
              )
              
              
              -
              
              
              
              135,527Income
      before income tax
              
              
              6,469,692
              
              
              
              (136,939
              )
              
              
              -
              
              
              
              6,332,753Income
      tax
              
              
              (193,203
              )
              
              
              -
              
              
              
              -
              
              
              
              (193,203
              )Net
      income
              
              $
              6,662,895
              
              
              $
              (136,939
              )
              
              
              -
              
              
              $
              6,525,956Earnings
      per share
              
              $
              0.26
              
              
              
              
              
              
              
              
              
              
              $
              0.25Weighted
      average shares outstanding
              
              
              26,093,376
              
              
              
              
              
              
              
              
              
              
              
              26,093,376







F-25


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Note
11 – Segment Information





The
Company’s predominant business is 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.  The Company is organized into three wholly owned subsidiaries
and one 90% owned subsidiary:  Shanghai Best Animal Husbandry Co.,
LTD. (“Shanghai”) – 100% owned, Guangxi Huijie Sci. & Tech. Feed Co., LTD.
(“Guangxi”) – 100% owned, Nanchang Best Animal Husbandry Co., LTD. (“Nanchang”)
– 100% owned, and Lushan Breeder Pig Farm Co., Ltd. (“Lushan”) – 90%
owned.





Shanghai
is located in the Nanxiang, Jia Ding district, Shanghai and sells its products
to approximately 360 customers, consisting of 170 local distributors and 190
large scale pig farms.  Guangxi is located in Coastal Industrial Park,
Liangquin district, Nanning city, Guangxi Province and sells its products to
approximately 325 customers, consisting of 140 local distributors and 185 large
scale pig farms.  Nanchang is located in Chang Bei District Industrial
Park, in Nanchang, Jiangxi province and sells its products to approximately 300
customers, consisting of 90 local distributors and 210 large scale pig
farms.  Lushan is located in HuaLin Town of XingZi County in
Jiangxi Province and is a mid-scale swine farm engaged mainly in raising,
breeding, and sale of pigs all over the country.





The
following tables summarize segment information:





12/31/2007
            
            
            
            
            
            12/31/2006
            
            
            
            
            
            12/31/2005Revenues
      from unrelated entitiesShanghai
            
            $
            9,659,457
            
            
            
            
            
            $
            3,180,407
            
            
            
            
            
            
            2,770,107Guangxi
            
            
            11,048,487
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            15,366,849
            
            
            
            
            
            
            5,414,469
            
            
            
            
            
            
            4,841,738Lushan
            
            
            88,546
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -36,163,339
            
            
            
            
            
            
            8,594,876
            
            
            
            
            
            
            7,611,845Intersegment
      revenuesShanghai
            
            
            -
            
            
            
            
            
            
            182,564Guangxi
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            2,280,320
            
            
            
            
            
            
            708
            
            
            
            
            
            
            -Lushan
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -2,280,320
            
            
            
            
            
            
            183,272
            
            
            
            
            
            
            
            -Total
      RevenuesShanghai
            
            
            9,659,457
            
            
            
            
            
            
            3,362,971
            
            
            
            
            
            
            
            2,770,107Guangxi
            
            
            11,048,487
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -Nanchang
            
            
            17,647,169
            
            
            
            
            
            
            5,415,177
            
            
            
            
            
            
            
            4,841,738Lushan
            
            
            88,546
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -Less
      Intersegment revenues
            
            
            (2,280,320
            )
            
            
            
            
            
            (183,272
            )
            
            
            
            
            
            
            -36,163,339
            
            
            
            
            
            
            8,594,876
            
            
            
            
            
            
            
            7,611,845








F-26


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006




Income
      from operationsShanghai
            
            
            1,737,962
            
            
            
            
            
            
            516,364
            
            
            
            
            
            
            123,765Guangxi
            
            
            2,224,098
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            2,807,786
            
            
            
            
            
            
            846,243
            
            
            
            
            
            
            757,006Lushan
            
            
            847
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Holding
      Company
            
            
            (449,922
            )
            
            
            
            
            
            (328,713
            )
            
            
            
            
            
            -6,320,771
            
            
            
            
            
            
            1,033,894
            
            
            
            
            
            
            880,771Interest
      incomeShanghai
            
            
            1,092
            
            
            
            
            
            
            262
            
            
            
            
            
            
            -Guangxi
            
            
            2,738
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            22,640
            
            
            
            
            
            
            28,589
            
            
            
            
            
            
            -Lushan
            
            
            56
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Holding
      Company
            
            
            115,622
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -142,148
            
            
            
            
            
            
            28,851
            
            
            
            
            
            
            -Interest
      ExpenseShanghai
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            
            
            
            2,143Guangxi
            
            
            33,597
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            61,078
            
            
            
            
            
            
            23,532
            
            
            
            
            
            
            17,817Lushan
            
            
            28,468
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Holding
      Company
            
            
            30,580
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -153,723
            
            
            
            
            
            
            23,532
            
            
            
            
            
            
            19,960Income
      tax expense (benefit)Shanghai
            
            
            (152,108
            )
            
            
            
            
            
            171,370
            
            
            
            
            
            
            40,622Guangxi
            
            
            (41,095
            )
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            -
            
            
            
            
            
            
            (271,756)
            
            
            
            
            
            
            231,788Lushan
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -(193,203
            )
            
            
            
            
            
            (100,386
            )
            
            
            
            
            
            272,410Net
      IncomeShanghai
            
            
            1,904,894
            
            
            
            
            
            
            358,671
            
            
            
            
            
            
            90,106Guangxi
            
            
            2,263,795
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            2,887,001
            
            
            
            
            
            
            1,145,322
            
            
            
            
            
            
            470,600Lushan
            
            
            (27,915
            )
            
            
            
            
            
            -
            
            
            
            
            
            
            -Holding
      Company
            
            
            (364,880
            )
            
            
            
            
            
            (328,713
            )
            
            
            
            
            
            -6,662,895
            
            
            
            
            
            
            1,175,280
            
            
            
            
            
            
            560,706Provision
      for depreciationShanghai
            
            
            25,624
            
            
            
            
            
            
            74,347
            
            
            
            
            
            
            11,322Guangxi
            
            
            46,177
            
            
            
            
            
            
            -
            
            
            
            
            
            
            -Nanchang
            
            
            81,529
            
            
            
            
            
            
            26,122
            
            
            
            
            
            
            68,143Lushan
            
            
            (12,820
            )
            
            
            
            
            
            -
            
            
            
            
            
            
            -140,510
            
            
            
            
            
            
            100,469
            
            
            
            
            
            
            79,465






F-27


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006






Total
      AssetsShanghai
            
            
            3,206,606
            
            
            
            
            
            
            
            1,504,142Guangxi
            
            
            4,652,914
            
            
            
            
            
            
            
            2,219,456Nanchang
            
            
            13,312,356
            
            
            
            
            
            
            
            3,521,509Lushan
            
            
            693,893
            
            
            
            
            
            
            
            -Holding
      Company
            
            
            1,204,495
            
            
            
            
            
            
            
            20,72423,070,264
            
            
            
            
            
            
            
            7,265,831








Note
12– Subsequent Events





Purchase 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 acquisition was consummated
pursuant to a stock purchase agreement, dated January 3, 2008, among
the Company and Wannian Xiandai Animal Husbandry Limited Liability Co., the
selling party.  The aggregate purchase price was 12,250,000 RMB,
equivalent to $1,666,667.  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 acquisition was consummated pursuant to a
stock purchase agreement, dated January 3, 2008, among the Company and
Jiangxi Huyun Livestock Co., Ltd., the selling party.  The aggregate
purchase price was 6,482,000 RMB, equivalent to $881,905.  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 acquisition was consummated
pursuant to a stock purchase agreement, dated January 4, 2008, among
the Company and Ganzhou Green Animal Husbandry Development Co., the selling
party.  The aggregate purchase price was 6,480,000 RMB, equivalent to
$881,632.  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.


F-28


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


On
January 7, 2008, the Company acquired all of the hogs and stock of Gang Feng
Animal Husbandry Co., Ltd., a PRC company located in
Jiangxi Province.  The acquisition was consummated pursuant to a
stock purchase agreement, dated January 7, 2008, among the Company and Gang Feng
Animal Husbandry Co., Ltd., the selling party.  The aggregate purchase
price was 4,820,000 RMB, equivalent to $655,782.  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 acquisition was consummated pursuant to a
stock purchase agreement, dated January 9, 2008, among the Company and
Yichun Tianpeng Domestic Livestock Farm, Ltd., the selling party.  The
aggregate purchase price was 8,855,000 RMB, equivalent to
$1,204,762.  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.





Saleof 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 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 and
warrants to purchase up to an aggregate of 380,000 shared of the Company’s
common stock. This transaction was facilitated by Deutsche Bank Securities Inc.,
who received an 8.6% financial advisory fee in the amount of $1,634,000. The
following is a brief summary of each of the Debt Securities Purchase Agreement,
the Notes, the Warrants and the Registration Rights Agreement.





DEBT
SECURITIES PURCHASE AGREEMENT





The Debt
Securities Purchase Agreement provides for the purchase by the Investors and the
sale by the Company of the Notes in the aggregate principal amount of $19
million and the Warrants to purchase common stock.





SENIOR CONVERTIBLE NOTES





The Notes
have an aggregate principal amount of $19 million and are convertible into
shares of the Company’s Common Stock at an initial conversion price of $10.00
per share, subject to adjustment.  The Notes mature on the third
anniversary of the issuance date which date may be extended at the option of the
Investor. 100% of the outstanding principal balance ($19,000,000) and any
accrued but unpaid interest shall be due and payable in full on the Maturity
Date. The Note bears interest at the rate of 7% per annum.





The Notes
are convertible at the option of the holder into shares of the Company’s common
stock at an initial Conversion Price of $10.00 per share, subject to adjustment
for stock splits, combinations or similar events. The Conversion Price is also
subject to a “weighted average


F-29


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


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.





The Notes
impose penalties on the Company for any failure to timely deliver any shares of
its common stock issuable upon conversion.





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.





WARRANTS





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.





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.





REGISTRATION
RIGHTS AGREEMENT





The
Registration Rights Agreement requires that the Company file a registration
statement covering 130% times the number of shares of common stock issuable to
the Investors upon full conversion of the Notes and exercise of the Warrants at
the initial conversion price and exercise price, respectively (the “Registrable
Securities”). The Company is required to file the Initial Registration Statement
with the Commission within 10 business days of the issuance of the Notes and
Warrants.


F-30


AgFeed Industries, Inc. and SubsidiariesNotes to
Consolidated Financial StatementsFor the Years Ended December 31, 2007 and
2006


Sale of Common
Stock





In late
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 price of $9.00 per share for aggregate gross proceeds of
$22,000,032.





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.





The
transaction documents memorializing the direct registered offering financing
include the Equity Securities Purchase Agreement and various ancillary
certificates, disclosure schedules and exhibits in support thereof. This
transaction was facilitated by Median Asset Investments Limited, which received
an 8.6% fee in the amount of $1,892,002.








F-31


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 13th day of March 2008.








AgFeed Industries Inc.








By: /s/ Junhong
Xiong______________


Junhong Xiong


Chief 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 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, 2007 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
      13, 2008Junhong
      Xiong/s/
      Liangfan Yan
            Chief
      Financial Officer and Chief Accounting Officer
            March
      13, 2008Liangfan
      Yan/s/
      Songyan Li
            Chairman
      of the Board and Director
            March
      13, 2008Songyang
      Li/s/
      Lixiang Zhang
            Director
            March
      13, 2008Lixiang
      Zhang/s/
      Fredric W. Rittereiser
            Director
            March
      13, 2008Fredric
      W. Rittereiser/s/
      Arnold Staloff
            Director
            March
      13, 2008Arnold
      Staloff





EXHIBIT
INDEX





Exhibit
No.                                Description


2.1
            Share
      Purchase Agreement with Nanchang Best Animal Husbandry Co., Ltd., and each
      of Nanchang Best’s shareholders is incorporated herein by reference to
      Exhibit 2.1 of our Current Report on Form 8-K dated November 6,
      2006.2.2
            Share
      Purchase Agreement with Shanghai Best Animal Husbandry Co., Ltd., and each
      of Shanghai Best’s shareholders is incorporated herein by reference to
      Exhibit 2.2 of our Current Report on Form 8-K dated November 6,
      2006.3.1
            Articles
      of Incorporation, is incorporated herein by reference to Exhibit 3.1 to
      our Registration Statement on Form SB-2 filed with the SEC on July 18,
      2005.3.2
            Amended
      and Restated Bylaws, is incorporated herein by reference to Exhibit 3.2 to
      our Current Report on Form 8-K dated May 15, 2007.3.3
            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., is incorporated
      herein by reference to Exhibit 3.3 to our original Registration Statement
      on Form SB-2 filed with the SEC on June 28, 2007.4.1
            Specimen
      common stock certificate, incorporated herein by reference to Exhibit 4 to
      our Annual Report on Form 10-KSB for the year ended December 31,
      2006.4.2
            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, is incorporated herein by
      reference to Exhibit 4.2 to our Amended Registration Statement on Form
      SB-2 filed with the SEC on August 17, 2007.4.3
            Form
      of Registration Rights Agreements dated February 2007, is incorporated
      herein by reference to Exhibit 4.3 to our Amended Registration Statement
      on Form SB-2 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, is incorporated herein by reference to Exhibit 4.4 to
      our original Registration Statement on Form SB-2 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., is incorporated herein by
      reference to Exhibit 4.5 to our original Registration Statement on Form
      SB-2 filed with the SEC on June 28, 2007.10.1
            Share
      Purchase Agreement dated October 31, 2006 among AgFeed, Nanchang Best
      Animal Husbandry Co., Ltd. and the shareholders of Nanchang Best Animal
      Husbandry Co., Ltd., is incorporated herein by reference to Exhibit 2.1 of
      our Current Report on Form 8-K dated November 6, 2006.10.2
            Share
      Purchase Agreement dated October 31, 2006 among AgFeed, Shanghai Best
      Animal Husbandry Co., Ltd. and the shareholders of Shanghai Best Animal
      Husbandry Co., Ltd., is incorporated herein by reference to Exhibit 2.2 of
      our Current Report on Form 8-K dated November 6, 2006.10.3
            Share
      Purchase Agreement dated December 20, 2006 among AgFeed, Guangxi Huijie
      Sci. & Tech. Feed Co., Ltd. and the shareholders of Guangxi Huijie
      Sci. & Tech. Feed Co., Ltd., is incorporated herein by reference to
      Exhibit 10.1 of our Current Report on From 8-K dated December 20,
      2006.













10.4
            Promissory
      Note of AgFeed payable to order of Sunrise Capital International, Inc. in
      the amount of 8,600,000 RMB is incorporated herein by reference to Exhibit
      10.2 of our Current Report on Form 8-K dated December 26,
      2006.10.5
            Form
      of Subscription Package for private placement offering that had final
      closing on April 29, 2007, is incorporated herein by reference to
      Exhibit 10.5 to our Amended Registration Statement on Form SB-2 filed
      with the SEC on August 17, 2007.10.6
            Subscription
      Agreement by and between AgFeed and Apollo Asia Opportunity Master Fund,
      L.P. dated June 22, 2007, is incorporated herein by reference to
      Exhibit 10.6 to our Amended Registration Statement on Form SB-2 filed
      with the SEC on August 17, 2007.10.7
            Stock
      Purchase Agreement as of November 6, 2007 by and among AgFeed, Lushan
      Breeder Pig Farm Co., Ltd. and Huaping Yang and Hongyun Luo, being the
      holders of ninety percent of the issued and outstanding shares of Lushan
      Breeder Pig Farm Co., Ltd. , is incorporated by reference to Exhibit 10.1
      to our Current Report on Form 8-K dated November 9,
  2007.10.8
            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, is incorporated by reference to Exhibit 10.1 to our
      Current Report on Form 8-K dated February 28, 2008.10.9
            Form
      of Registration Rights Agreement dated February 2008, is incorporated
      herein by reference to Exhibit 10.2 to our Current Report on Form 8-K
      dated February 28, 2008.10.10
            Form
      of Senior Convertible Note dated February 2008, is incorporated herein by
      reference to Exhibit 10.3 to our Current Report on Form 8-K dated February
      28, 2008.10.11
            Form
      of Warrant dated February 2008, is incorporated herein by reference to
      Exhibit 10.4 to our Current Report on Form 8-K dated February 28,
      2008.10.12
            Equity
      Securities Purchase Agreement, dated February 25, 2008, by and among
      Agfeed and the certain investors listed on the Axhibit A to such Equity
      Securities Purchase Agreement, is incorporated by reference to Exhibit
      10.5 to our Current Report on Form 8-K dated February 28,
      2008.21
            List
      of Subsidiaries23
            Consent
      of Goldman Parks Kurland Mohidin, LLP, independent registered public
      accounting firm.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.