UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q/A


(Mark
One)





[X]
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2008




[ 
      ]
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT


For the
transition period from ________________ to _______________





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


(Exact
name of small business issuer as specified in its charter)









Nevada
            20-2597168(State
      or other jurisdiction
            (IRS
      Employerof
      incorporation or organization)
            Identification
      No.)







Rm.
A1001-1002, Tower 16


Hengmao Int'l
Center


333 S.
Guangchang Rd.


Nanchang,
Jiangxi Province


China
330003


(Address
of principal executive offices)





011-86-0791-6669099


(Issuer’s
telephone number)





1095
Qing Lan Avenue
 Economic
and Technical Development Zone
 Nan
Chang City, Jiangxi Provence
 China,
330013


(Former
name, former address and former fiscal year, if changed since last
report)





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.


Yesx                     Noo





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


Large
accelerated filer  o                                                                     Accelerated
filer o


Non-accelerated
filer    o                                                                   Smaller
reporting company x


(Do not
check if a smaller reporting company)





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


Yes o          No x







As of May
12, 2008 there were 32,434,304 shares of common stock were
outstanding.
















AGFEED
INDUSTRIES, INC.


Index

















Page

              NumberPART
      I.
            FINANCIAL
      INFORMATIONItem
    1.
            Financial
      StatementsConsolidated
      Balance Sheet as of March 31, 2008 (unaudited) and December 31,
      2007
            2Consolidated
      Statements of Income and Other Comprehensive Incomefor the three
      months ended March 31, 2008 and 2007 (unaudited)
            3Consolidated
      Statements of Cash Flows for thethree months
      ended March 31, 2008 and 2007 (unaudited)
            4Notes to
      Consolidated Financial Statements (unaudited)
            5Item
    2.
            Management’s
      Discussion and Analysis or Plan of Operations
            27Item
    3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            36Item
    4.
            Controls and
      Procedures
            36PART
    II.
            OTHER
      INFORMATION
            36Item
    1.
            Legal
      Proceedings
            36Item
    1A.
            Risk
      Factors
            36Item
    2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            36Item
      3.
            Defaults Upon
      Senior Securities
            36Item
    4.
            Submission of
      Matters to a Vote of Security Holders
            37Item
      5.
            Other
      Information
            37Item
      6.
            Exhibits
            37SIGNATURES
            
            38






EXPLANATORY
NOTE
  This
Amendment No. 1 on Form 10-Q/A (this “Amendment”) amends our quarterly report on
Form 10-Q for the fiscal quarter ended March 31, 2008 as filed with the
Securities and Exchange Commission on May 15, 2008, and is being filed solely to
amend Item 2 of Part I, in order to correct a minor editing error and a currency
conversion error.
  This
Amendment contains the complete text of the original report with the corrected
information appearing in Item 2 of Part I.


1


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET





March
      31,
              
              
              December
      31,2008
              
              
              2007(unaudited)ASSETSCURRENT
      ASSETS:Cash
      & cash equivalents
              
              $
              36,924,135
              
              
              $
              7,696,209Accounts
      receivable, net of allowance for doubtful accountsof
      $222,879 and $191,497
              
              
              8,073,297
              
              
              
              6,107,491Advances
      to suppliers
              
              
              151,175
              
              
              
              442,851Other
      receivable
              
              
              1,213,871
              
              
              
              459,034Inventory
              
              
              6,475,186
              
              
              
              2,728,160Prepaid
      expense
              
              
              157,758
              
              
              
              644,183Debt
      issue costs
              
              
              1,661,845
              
              
              
              -Total
      current assets
              
              
              54,657,267
              
              
              
              18,077,928PROPERTY
      AND EQUIPMENT, net
              
              
              6,537,575
              
              
              
              3,930,715CONSTRUCTION-IN-PROCESS
              
              
              1,039,692
              
              
              
              221,819INTANGIBLE
      ASSETS
              
              
              4,117,589
              
              
              
              839,802TOTAL
      ASSETS
              
              $
              66,352,123
              
              
              $
              23,070,264LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              2,601,268
              
              
              $
              1,458,010Other
      payables
              
              
              1,369,598
              
              
              
              705,150Unearned
      revenue
              
              
              48,916
              
              
              
              99,848Accrued
      expenses
              
              
              222,951
              
              
              
              18,223Accrued
      payroll
              
              
              134,573
              
              
              
              168,560Short
      term loans
              
              
              1,155,165
              
              
              
              1,110,413Advance
      from related party
              
              
              287,055
              
              
              
              -Tax
      and welfare payable
              
              
              104,479
              
              
              
              9,534Interest
      payable
              
              
              125,409
              
              
              
              -Total
      current liabilities
              
              
              6,049,414
              
              
              
              3,569,738CONVERTIBLE
      NOTES, net of debt discount of $3,910,874 and $0
              
              
              15,089,126
              
              
              
              -TOTAL
      LIABILITIES
              
              
              21,138,540
              
              
              
              3,569,738MINORITY
      INTEREST
              
              
              1,158,704
              
              
              
              -STOCKHOLDERS'
      EQUITY:Common
      stock, $0.001 per share; 75,000,000 shares authorized;29,558,091
      and 27,026,756 shares issued and outstanding
              
              
              29,558
              
              
              
              27,027Additional
      paid-in capital
              
              
              32,714,919
              
              
              
              10,094,095Other
      comprehensive income
              
              
              1,792,608
              
              
              
              780,907Statutory
      reserve
              
              
              811,785
              
              
              
              752,225Retained
      earnings
              
              
              8,706,009
              
              
              
              7,846,272Total
      stockholders' equity
              
              
              44,054,879
              
              
              
              19,500,526TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              66,352,123
              
              
              $
              23,070,264
  The
accompanying notes are an integral part of these consolidated financial
statements








2





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME







Three
      Month Periods Ended March 31,2008
            
            
            2007(unaudited)
            
            
            (unaudited)Net
      Revenue
            
            
            
            
            $
            12,147,084
            
            
            $
            4,978,295Cost
      of Revenue
            
            
            
            
            
            8,714,123
            
            
            
            3,435,089Gross
      profit
            
            
            
            
            
            3,432,961
            
            
            
            1,543,206Operating
      expensesSelling
      expenses
            
            
            
            
            
            753,622
            
            
            
            343,391General
      and administrative expenses
            
            
            
            
            
            954,221
            
            
            
            221,924Total
      operating expenses
            
            
            
            
            
            1,707,843
            
            
            
            565,315Income
      from operations
            
            
            
            
            
            1,725,118
            
            
            
            977,891Non-operating
      income (expense):Other
      income (expense)
            
            
            
            
            
            (14,571
            )
            
            
            9,070Interest
      income
            
            
            
            
            
            50,175
            
            
            
            10,167Interest
      and financing costs
            
            
            
            
            
            (326,642
            )
            
            
            (42,649
            )Foreign
      currency transaction loss
            
            
            
            
            
            (224,473
            )Total
      non-operating income (expense)
            
            
            
            
            
            (515,511
            )
            
            
            (23,412
            )Income
      before minority interest and provision for income taxes
            
            
            
            1,209,607
            
            
            
            954,479Minority
      Interest in Subsidiaries
            
            
            
            
            
            (194,047
            )
            
            
            -Income
      before provision for income taxes
            
            
            
            
            
            1,015,560
            
            
            
            954,479Provision
      for income taxes
            
            
            
            
            
            96,263
            
            
            
            175,298Net
      income
            
            
            
            
            $
            919,297
            
            
            $
            779,181Other
      comprehensive incomeForeign
      currency translation gain
            
            
            
            
            1,011,701
            
            
            
            50,906Comprehensive
      Income
            
            
            
            
            $
            1,930,998
            
            
            $
            830,087Weighted
      average shares outstanding :Basic
            
            
            
            
            
            
            27,802,640
            
            
            
            24,344,447Diluted
            
            
            
            
            
            
            28,046,455
            
            
            
            24,344,447Earnings
      per share:Basic
            
            
            
            
            
            $
            0.03
            
            
            $
            0.03Diluted
            
            
            
            
            
            $
            0.03
            
            
            $
            0.03













3


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS










Three
      Month Periods Ended March 31,2008
            
            
            2007(unaudited)
            
            
            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            919,297
            
            
            $
            779,181Adjustments
      to reconcile net income to net cashprovided
      in operating activities:Depreciation
            
            
            185,753
            
            
            
            39,845Amortization
            
            
            12,598
            
            
            
            46,360Loss
      on disposal of assets
            
            
            16,774
            
            
            
            -Stock
      based compensation
            
            
            16,108
            
            
            
            -Amortization
      of debt issuance costs
            
            
            54,821
            
            
            
            -Amortization
      of discount on convertible debt
            
            
            129,011
            
            
            
            -Gain
      attributed to minority interest in subsidiaries
            
            
            194,047
            
            
            
            -(Increase)
      / decrease in assets:Accounts
      receivable
            
            
            (2,082,250
            )
            
            
            (1,626,525
            )Other
      receivable
            
            
            (641,521
            )
            
            
            124,790Inventory
            
            
            (3,077,865
            )
            
            
            (143,070
            )Advances
      to suppliers
            
            
            304,242
            
            
            
            (165,678
            )Prepaid
      expense
            
            
            490,590
            
            
            
            (150,247
            )Other
      assets
            
            
            -
            
            
            
            535Increase
      / (decrease) in current liabilities:Accounts
      payable
            
            
            1,482,467
            
            
            
            519,177Unearned
      revenue
            
            
            (54,019
            )
            
            
            (31,388
            )Other
      payables
            
            
            539,211
            
            
            
            (12,995
            )Accrued
      expenses
            
            
            177,017
            
            
            
            (44,618
            )Accrued
      payroll
            
            
            (40,086
            )
            
            
            (13,371
            )Tax
      and welfare payable
            
            
            92,948
            
            
            
            128,147Due
      to related party
            
            
            287,055
            
            
            
            -Interest
      payable
            
            
            125,409
            
            
            
            -Net
      cash used in operating activities
            
            
            (868,393
            )
            
            
            (549,857
            )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
            
            
            (635,952
            )
            
            
            (24,125
            )Acquisition
      of intangible assets
            
            
            (70,654
            )
            
            
            -Cash
      paid for purchase of subsidiary
            
            
            (5,290,747
            )
            
            
            -Net
      cash used in investing activities
            
            
            (5,997,353
            )
            
            
            (24,125
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from stockholders
            
            
            -
            
            
            
            (753,521
            )Advance
      to related parties
            
            
            -
            
            
            
            930,623Proceeds
      from the sale of common stock
            
            
            22,000,032
            
            
            
            3,000,000Offering
      costs
            
            
            (3,432,670
            )
            
            
            (276,335
            )Payment
      on note payable
            
            
            -
            
            
            
            (1,102,004
            )Collection
      on subscription receivable
            
            
            -
            
            
            
            226,083Proceeds
      from the issuance of convertible notes
            
            
            19,000,000
            
            
            
            -Issuance
      costs for convertible notes
            
            
            (1,716,666
            )
            
            
            -Net
      cash provided by financing activities
            
            
            35,850,696
            
            
            
            2,024,846Effect
      of exchange rate changes on cash and cash equivalents
            
            
            242,976
            
            
            
            17,925NET
      INCREASE IN CASH & CASH EQUIVALENTS
            
            
            29,227,926
            
            
            
            1,468,789CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
            
            
            7,696,209
            
            
            
            1,204,100CASH
      & CASH EQUIVALENTS, ENDING BALANCE
            
            $
            36,924,135
            
            
            $
            2,672,889SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
            
            $
            51,223
            
            
            $
            42,649Income
      taxes paid
            
            $
            -
            
            
            $




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




4
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


Note
1 - Organization and Basis of Presentation





The
unaudited consolidated financial statements have been prepared by AgFeed
Industries, Inc. (the “Company”), pursuant to the rules and regulations of the
Securities Exchange Commission.  The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K.  The results for
the three months ended March 31, 2008 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2008.





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


5
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


acquired
all the outstanding shares of Guangxi Huijie for a total purchase price of eight
million six hundred thousand Chinese Renminbi (8,600,000 CNY), 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 CNY from Sunrise Capital International, Inc. The proceeds of
the loan from Sunrise Capital International, Inc. were paid directly to the
selling shareholders of Guangxi Huijie as consideration and as provided by the
share purchase agreement. The Company's repayment obligation is evidenced by a
promissory note bearing interest at the rate of seven percent per annum (7%) and
maturing in six months. 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.





On
January 3, 2008, the Company acquired 70% of the issued and outstanding capital
stock of Wannian Xiandai Animal Husbandry Limited Liability Co. (“Wannian”), 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, 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. (“Huyun”), 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
Huyun, 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. (“Ganzhou”), 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, 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.


6
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)





On
January 7, 2008, the Company acquired all of the hogs and stock of Gang Feng
Animal Husbandry Co., Ltd. (“Gang Feng”), 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, 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. (“Yichun”), 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, 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.





On March
19, 2008, Jiangxi Best Swine Development Co. (“Jiangxi Best”), a wholly owned
subsidiary of the Company, was incorporated with registered capital of
$6,000,000 with paid in capital from Agfeed Industries, Inc. of
$3,500,000.





The
Company is engaged in the research and development, manufacturing, marketing,
distribution and sale of pre-mix fodder blended feed and feed additives
primarily for use in China's domestic pork husbandry market as well as raising,
breeding and sale of pigs. The Company operates production plants in Nanchang
City, Shanghai City and Nanning City and has swine farms located in Town of
HuaLin, Town of Peimei, Town of Huyun, Town of Hengshui, Ganzhou City and Yichun
City.  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, Shanghai
Best, Guangxi Huijie, and Jiangxi Best and Nanchang Best’s partially and wholly
owned subsidiaries, Lushan (90%), Wannian (70%), Huyun (70%), Ganzhou (60%),
Gang Feng (100%) and Yichun (55%)    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 (CNY); however
the accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).





Foreign Currency
Translation


7
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)





As of
March 31, 2008, the accounts of the Company were maintained, and their
consolidated financial statements were expressed in the Chinese Yuan Renminbi
(CNY). 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 CNY 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.  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.





Reclassification





Certain
prior period amounts have been reclassified to conform to the period ended March
31, 2008 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 debts amounted to$
222,879 and $191,497 at March 31, 2008 and December 31, 2007,
respectively.





Advances to
Suppliers





The
Company makes advances to certain vendors for purchase of its materials. The
advances to suppliers are interest free and unsecured. At March 31, 2008 and
December 31, 2007, the Company had advances to suppliers in the amount of
$151,175 and $442,851, respectively.





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


8
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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
      yearsSwine
      for reproduction
            3.5
      years





The
following are the details of the property and equipment at March 31, 2008 and
December 31, 2007:





March
      31, 2008
            
            
            December
      31, 2007Office
      equipment
            
            $
            129,095
            
            
            $
            100,072Operating
      equipment
            
            
            583,200
            
            
            
            547,560Vehicles
            
            
            304,988
            
            
            
            271,652Buildings
            
            
            2,019,002
            
            
            
            1,568,816Swines
      for reproduction
            
            
            4,199,550
            
            
            
            1,940,784Total
            
            
            7,235,835
            
            
            
            4,428,884Less
      accumulated depreciation
            
            
            (698,260
            )
            
            
            (498,169
            )$
            6,537,575
            
            
            $
            3,930,715





Depreciation
expense for the three months ended March 31, 2008 and 2007 was $185,753 and
$39,845, respectively.





Long-Lived
Assets





Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a


9
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


similar
manner, except that fair market values are reduced for the cost of disposal.
Based on its review, the Company believes that, as of March 31, 2008 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 March 31, 2008 and December 31, 2007 are as follows:





March
      31, 2008
            
            
            December
      31, 2007Right
      to use land
            
            $
            613,247
            
            
            $
            589,489Customer
      list
            
            
            285,226
            
            
            
            274,176Computer
      software
            
            
            79,309Intangible
      related to hog farm acquisitions
            
            
            3,184,877
            
            
            
            15,366Total
            
            
            4,162,659
            
            
            
            879,031Less
      Accumulated amortization
            
            
            (45,070
            )
            
            
            (39,229
            )Intangibles,
      net
            
            $
            4,117,589
            
            
            $
            839,802





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 and the computer software is
amortized over three years.





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 $41,067 and $2,635
for the three month periods ended March 31, 2008 and 2007,
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
three months ended March 31, 2008 and 2007, were $15,247 and $343,
respectively.


10
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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 67,000 options outstanding at March 31,
2008.





Income
Taxes





The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.





The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007.  As a result of the
implementation of FIN 48, the company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48.  As a result of the implementation of Interpretation 48,
the Company recognized no material adjustments to liabilities or stockholders’
equity.  When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained.  The
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if
any.  Tax positions taken are not offset or aggregated with other
positions.  Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheets
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination.  Interest associated with
unrecognized tax benefits are classified as interest expense and penalties are
classified in selling, general and administrative expenses in the statements of
income. The adoption of FIN 48 did not have a material impact on the Company’s
financial statements.





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 $1,792,608 and
$780,907 at March 31, 2008 and December 31, 2007, respectively, are classified
as an item of other comprehensive income in the stockholders’ equity section of
the consolidated balance sheet. During the three months ended March 31, 2008 and
2007, other comprehensive income in the consolidated statements of income and
other comprehensive income included translation gains of $1,011,701 and $50,906,
respectively.


11
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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
three months ended March 31, 2007 and during the three months ended March 31,
2008, there were 67,000 options outstanding and 804,287 warrants
outstanding.  For the three months ended March 31, 2008, the Company’s
average stock price was greater than some of the exercise prices which resulted
in additional common stock equivalents of 243,815.





The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three months ended
March 31, 2008 and 2007:





March
      31, 2008
            
            
            March
      31, 2007Per
      Share
            
            
            
            
            
            Per
      ShareShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBasic  earnings
      per share
            
            
            27,082,640
            
            
            $
            0.03
            
            
            
            23,344,447
            
            
            $
            0.03Effect
      of dilutive instruments
            
            
            243,815
            
            
            
            -
            
            
            
            -
            
            
            
            -Diluted
      earnings per share
            
            
            28,046,455
            
            
            $
            0.03
            
            
            
            23,344,447
            
            
            $
            0.03





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.





Minority
Interest





In
January 2008, the Company purchased interest in five hog farms ranging from 55%
to 100%.  As a result of these purchases, the Company recognized
initial minority interest on its consolidated balance sheet in the amount of
$1,158,704. The income (loss) attributed to minority interest has been
separately designated in the accompanying statement of operations.





Segment
Reporting





Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. The Company has
determined that it has four reportable segments (See Note 12).


12
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)





Fair value of financial
instruments





On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest.  The three levels are defined
as follow:





·
            Level
      1
            inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active markets.·
            Level
      2
            inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      asset or liability, either directly or indirectly, for substantially the
      full term of the financial instrument.·
            Level
      3
            inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.





As of
March 31, 2008, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.





Recent
Pronouncements





In
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 foremployers 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 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


13
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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 oncurrent 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 – Short Term Loans





Short
term loans at March 31, 2008 and December 31, 2007 are follows:





March
      31,
              2008
            
            
            December
      31,2007Short-term
      bank loan; interest rate of 7.884% and 7.02% payable monthly. The term of
      the loan is from May 28, 2007 to May 27, 2008 and May 18, 2006 to May 17,
      2007. This loan is collateralized by the Company’s office building,
      workshop, employee dorms and use right of land
            
            $
            855,678
            
            $
            822,528Short-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.
            
            
            299,487
            
            
            287,885$
            1,155,165
            
            $
            1,110,413





Note
4 – Convertible Notes





On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (the “Investors”) in
connection with a private placement transaction providing for, among other
things, the issuance of senior convertible notes for aggregate gross
proceeds of $19 million (the “Notes”)and warrants to purchase up to an
aggregate of 380,000 shares (the “Warrants”) of the Company’s $0.001 par value
per share common stock.  The notes mature on the third anniversary of
the issuance date, bear interest at 7% per annum and are convertible into shares
of the Company’s common stock at an initial conversion price of $10.00 per
share.  The conversion price is subject to a “weighted average
ratchet” anti-dilution adjustment. The conversion price is also subject to
adjustment on a proportional basis, to the extent that the Company’s audited net
income for the fiscal years ending 2008 and 2009 is less than $30 million and
$40 million, respectively; subject to a per share floor price of
$5.00.





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





In
connection with the issuance of the Notes and the Warrants issued to the
Investor on February 25, 2008, the Company paid $1,716,666 in debt issuance cost
which is being amortized over the life of the
Notes.  For


14
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


the three
months ended March 31, 2008, the Company amortized 54,821 of the aforesaid
issuance costs as interest and financing costs in the accompanying consolidated
statements of operations.





The Notes
contain certain limitations on conversion. For example, they provide that no
conversion may be made if, after giving effect to the conversion, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Notes provide that no conversion may be made if the
conversion would cause the Company to be in breach of its obligations under the
rules and regulations of the Nasdaq Global Market, unless the Company obtains
stockholder approval for such issuances as required by such rules and
regulations.





The
Warrants are immediately exercisable, expire on the third anniversary of their
issuance and entitle their holders, in the aggregate, to purchase up to
$3,800,000 worth of shares of common stock at an initial exercise price of
$10.00 per share.





The
exercise price of the Warrants is subject to a “weighted average ratchet”
anti-dilution adjustment. The exercise price is also subject to adjustment, on a
proportional basis, to the extent that the Company’s audited net income for the
fiscal years ending 2008 and 2009 is less than $30 million and $40 million,
respectively; subject to a per share floor price of $5.00.





The
Warrants contain certain limitations on exercise. For example, they provide that
no exercise may be made if, after giving effect to the exercise, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Warrants provide that no exercise may be made if it
would cause the Company to be in breach of its obligations under the rules and
regulations of the Nasdaq Global Market, unless the Company obtains stockholder
approval for such issuances as required by such rules and
regulations.





The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the conversion price of the Notes
have a floor of $5.00, which means the Company can determine the maximum shares
that could be issued upon conversion. The Company determined the fair value of
the detachable warrants issued in connection with the Notes to be $1,269,442,
using the Black-Scholes option pricing model and the following
assumptions:  expected life of 1 year, a risk free interest rate
of 2.10%, a dividend yield of 0% and volatility of 70%. In addition,
the Company determined the value of the beneficial conversion feature to be
$2,770,442. The combined total discount for the Notes is $4,039,885 and is
being amortized over the term of the Notes. For the three months ended March 31,
2008, the Company amortized $129,011of the aforesaid discounts as interest and
financing costs in the accompanying consolidated statements of
operations





Note
5 – Stockholders’ Equity





In February 2008, the Company entered into a Securities Purchase
Agreement with Focus Trading Investments Limited, Advantage Consultants Limited,
and CD Capital Investments, Ltd.  In connection with a registered
direct offering of securities providing for the issuance of 2,444,448 shares of
the Company’s common stock at price of $9.00 per share for aggregate gross
proceeds of $22,000,032.  The Company paid commissions and expenses
associated with this offering of $3,432,670.





The
Common Stock for the registered offering was issued pursuant to a prospectus
supplement filed with the Commission on February 26, 2008, in connection with a
shelf takedown from the Company’s Registration Statement on Form S-3 (File No.
333-144386) which was declared effective by the Commission on January 11,
2008.


15
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)





During
the three months ended March 31, 2008 the Company issued 86,887 shares upon the
cashless exercise of 187,500 warrants.





Note
6 - Employee Welfare Plan





The
Company had its own employee welfare plan in accordance with Chinese law and
regulations before all three subsidiaries in China became Sino-foreign joint
ventures. The Company made annual contributions of 14% of all employees’
salaries to the employee welfare plan. The total expense for the above plan was
$38,028 and $4,412 for the three months ended March 31, 2008 and 2007,
respectively. In accordance with Chinese law, a Sino-foreign joint venture is
not required to accrue welfare payable in advance. All three subsidiaries have
stopped accruing such payable since each changed into a Sino-foreign company.
Instead, welfare expense is recorded as incurred.





Note
7 - Statutory Common Welfare Fund





As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:








i.
            Making
      up cumulative prior years’ losses, if any;ii.
            Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company’s registered capital;iii.
            Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company’s “Statutory common welfare fund” (“SCWF”),
      which is established for the purpose of providing employee facilities and
      other collective benefits to the Company’s employees;
  andiv.
            Allocations
      to the discretionary surplus reserve, if approved in the stockholders’
      general meeting.




Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10 percent of income
after tax, not to exceed 50 percent of registered capital.





The
Company has appropriated $59,560 and $86,991 as reserve for the statutory
surplus reserve and welfare fund for the three months ended March 31, 2008 and
2007, respectively.





Note
8 – Stock Options and Warrants





Stock
Options





Following
is a summary of the stock option activity:





Options
      outstanding
            Weighted
      Average Exercise Price
            Weighted
      average remaining contractual life
            Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2007
            42,000
            $7.00
            
            -Granted
            25,000
            $9.31Forfeited
            -
            -Exercised
            -
            -Outstanding,
      March 31, 2008
            67,000
            $7.86
            4.56
            $368,100Exercisable,
      March 31, 2007




16
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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
            2.5%Expected
      life of the options
            4
      yearsExpected
      volatility
            72%Expected
      dividend yield
            0%





Warrants





The
following is a summary of the warrant activity:





Outstanding,
      December 31, 2007
            611,787Granted
            380,000Forfeited
            -Exercised
            (187,500)Outstanding,
      March 31, 2007
            804,287








Note
9 - 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 and $77,054 for the three months ended March 31,
2008 and 2007, respectively





Purchases
from related parties amounted to $0 and $9,284 for the three months ended March
31, 2008 and 2007, respectively.





Advance
from related parties and shareholders amounted to $287,055 as of March 31,
2008.





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





Note
10 - Taxes





Local PRC
Income Tax


17
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)





Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 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 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 CNY 3,400,000
($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’s subsidiary had not been exempt from paying income taxes due to the
Sino-Foreign Joint Venture described above, income tax expense for the three
months ended March 31, 2008 would have been approximately $373,000 and earnings
per share would have been reduced by approximately $0.01 per share.





Note
11 – Acquisitions





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 $1,666,666.  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


18
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


$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
$881,633.  Under the terms of the transaction, the master lease
position for the facilities remains with the shareholders of the selling party
and the Company will lease the underlying facilities under a 10-year lease
agreement.  The lease agreement calls for semi-annual rent payments
totaling 700,000 RMB (approximately $97,000) per year in exchange for use of the
facilities.





On
January 7, 2008, the Company acquired 100% of the hogs and stock of Gang Feng
Animal Husbandry Co., Ltd., a PRC company located in
Jiangxi Province.  The 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
$1,204,761.  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.





19
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


The
following table summarizes the fair values of the assets acquired.





Wannian
            
            
            Huyun
            
            
            Ganzhou
            
            
            Gang
      Feng
            
            
            YichunInventory
            
            $
            388,887
            
            
            $
            178,239
            
            
            $
            227,799
            
            
            
            126,384
            
            
            
            354,054Fixed
      assets
            
            
            738,384
            
            
            
            449,057
            
            
            
            384,561
            
            
            
            360,569
            
            
            
            554,902Construction
      in progress
            
            
            103,384
            
            
            
            35,940
            
            
            
            5,927
            
            
            
            16,571
            
            
            
            37,607Intangible
      asset
            
            
            706,801
            
            
            
            382,235
            
            
            
            427,263
            
            
            
            152,258
            
            
            
            577,004Minority
      interest
            
            
            (270,790
            )
            
            
            (163,566
            )
            
            
            (163,917
            )
            
            
            -
            
            
            
            (318,806
            )Purchase
      price
            
            $
            1,666,666
            
            
            $
            881,905
            
            
            $
            881,633
            
            
            $
            655,782
            
            
            $
            1,204,761





The
intangible asset related to the purchase of the hog farms is a preliminary
allocation that is subject to change upon the completion of a formal
appraisal.











Net
Revenue
              $
              6,605,021Gross
    profit
              $
              1,844,651Income from
      operations
              $
              1,197,737Minority Interest in
      Subsidaries
              $
              73,925Net income
              $
              918,601Basic earnings per
      share
              $
              0.04




Note
12 – Segment Information





The
Company’s predominant businesses are the research and development,
manufacture, marketing, distribution, and sale of pre-mix fodder blended feed
and feed additives primarily for use in China’s domestic pork husbandry market
and the raising, breeding, and selling of pigs.  The Company operates
in four segments:  Shanghai, Guangxi, Nanchang, and hog
farms.





Shanghai
is located in the 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:





3/31/2008
            
            
            3/31/2007Revenues
      from unrelated entitiesShanghai
            
            $
            3,503,801
            
            
            $
            1,383,925Guangxi
            
            
            1,269,478
            
            
            
            1,543,893Nanchang
            
            
            4,239,022
            
            
            
            2,050,477Hog
      farms
            
            
            3,134,783
            
            
            
            -12,147,084
            
            
            
            4,978,295Intersegment
      revenuesShanghai
            
            
            148,891
            
            
            
            -Guangxi
            
            
            -
            
            
            
            -Nanchang
            
            
            441,565
            
            
            
            -Hog
      farms
            
            
            4,492
            
            
            
            496,987594,948
            
            
            
            496,987






20
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)






Total
      RevenuesShanghai
            
            
            3,652,692
            
            
            
            1,383,925Guangxi
            
            
            1,269,478
            
            
            
            1,543,893Nanchang
            
            
            4,680,587
            
            
            
            2,547,464Hog
      farms
            
            
            3,139,275
            
            
            
            -Less
      Intersegment revenues
            
            
            (594,948
            )
            
            
            (496,987
            )12,147,084
            
            
            
            4,978,295Income
      from operationsShanghai
            
            
            646,689
            
            
            
            234,387Guangxi
            
            
            188,032
            
            
            
            392,022Nanchang
            
            
            704,904
            
            
            
            420,483Hog
      farms
            
            
            503,648
            
            
            
            -Holding
      Company
            
            
            (318,155
            )
            
            
            (69,001
            )1,725,118
            
            
            
            977,891Interest
      incomeShanghai
            
            
            730
            
            
            
            214Guangxi
            
            
            1,038
            
            
            
            164Nanchang
            
            
            13,286
            
            
            
            938Hog
      farms
            
            
            617
            
            
            
            -Holding
      Company
            
            
            34,504
            
            
            
            8,85150,175
            
            
            
            10,167Interest
      and financing costsShanghai
            
            
            -
            
            
            
            -Guangxi
            
            
            4,835
            
            
            
            1,885Nanchang
            
            
            12,566
            
            
            
            10,184Hog
      farms
            
            
            -
            
            
            
            -Holding
      Company
            
            
            309,241
            
            
            
            30,580326,642
            
            
            
            42,649Income
      tax expenseShanghai
            
            
            -
            
            
            
            78,736Guangxi
            
            
            52,925
            
            
            
            96,562Nanchang
            
            
            43,338
            
            
            
            -Hog
      farms
            
            
            -
            
            
            
            -96,263
            
            
            
            175,298






21
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)






Net
      IncomeShanghai
            
            
            650,968
            
            
            
            159,856Guangxi
            
            
            130,929
            
            
            
            293,739Nanchang
            
            
            436,818
            
            
            
            416,316Hog
      farms
            
            
            294,703
            
            
            
            -Holding
      Company
            
            
            (594,121
            )
            
            
            (90,730
            )919,297
            
            
            
            779,181Provision
      for depreciationShanghai
            
            
            21,373
            
            
            
            8,696Guangxi
            
            
            12,991
            
            
            
            8,660Nanchang
            
            
            6,216
            
            
            
            22,489Hog
      farms
            
            
            145,173
            
            
            
            -185,753
            
            
            
            39,845Total
      AssetsShanghai
            
            
            4,234,297Guangxi
            
            
            17,953,310Nanchang
            
            
            24,603,149Hog
      farms
            
            
            17,494,108Holding
      Company
            
            
            2,067,25966,352,123








Note
13 - Subsequent Event





Sale of Common
Stock





On April
16, 2008, the Company entered into a Securities Purchase Agreement (“Securities
Purchase Agreement”) with two institutional investors (collectively, the
“Investors”) in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of the Company’s Common Stock at
price of $16.00 per share for aggregate gross proceeds of
$10,000,000.





The
Common Stock for the registered offering was issued pursuant to a prospectus
supplement filed with the Commission on April 21, 2008, in connection with a
shelf takedown from the Company’s Registration Statement on Form S-3 (File No.
333-144386) which was declared effective by the Commission on January 11,
2008.





The
closing under the Securities Purchase Agreement took place on April 21, 2008.
The placement agent for this transaction was Rodman & Renshaw, LLC, which
received a fee of six percent (6%) of the gross proceeds, or
$600,000.





The
Securities Purchase Agreement contains representations, warranties, and
covenants of the Company and the Investors which are typical for transactions of
this type.





On April
22, 2008, the Company entered into Securities Purchase Agreements (collectively,
the “Securities Purchase Agreements”) with a group of 14 institutional investors
(collectively, the “Investors”) in connection with a registered direct offering
of securities providing for the issuance of 1,322,836 shares of the
Company’s Common Stock at price of $19.05 per share for aggregate gross proceeds
of $25,200,026.


22
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


The
Common Stock for the registered offering was issued pursuant to a prospectus
supplement filed with the Commission on April 24, 2008, in connection with a
shelf takedown from the Company’s Registration Statement on Form S-3 (File No.
333-148386) which was declared effective by the Commission on January 11,
2008.





The
closing under the Securities Purchase Agreements took place on April 24, 2008.
The placement agent for the sale of 797,901 shares of Common Stock at an
aggregate purchase price of $15,200,014.05 was Rodman & Renshaw, LLC, which
received a fee of $638,400.59 (4.2% of the gross proceeds). Additionally, the
Company paid a finders fee of $350,000 to Advantage Consultants Limited in
connection with the offering.





The
Securities Purchase Agreements contain representations, warranties, and
covenants of the Company and the Investors which are typical for transactions of
this type.





Purchase of Hog
Farms





On April
30, 2008, the Company, through its operating subsidiaries Nanchang Best, Guangxi
Huijie and Best Swine, completed the acquisition of 16 commercial producing hog
farms in several southern provinces of the PRC. Fujian Jianhua Hog Farm and
Fujian Fengxiang Agribusiness Co., Ltd. were acquired by Jiangxi Best, each of
the hog farms located in Guangxi and Hainan Provinces were acquired by Guangxi
Huijie, and the remaining hog farms were acquired by Nanchang Best.




The
negotiated purchase price paid for these hog farms ranged from approximately
US$1.0 million to US$6.1 million, depending on the annual hog production
capability and the equity ownership of the acquired hog farms. The United States
dollar amounts are based on the exchange rate on April 30, 2008 (USD$1.00 =
RMB6.993).




The
following is a summary of each individual hog farm acquisition.




Guangxi
Nanning Wanghua Hog Farm




Guangxi
Huijie acquired all of the equity interest, as well as the inventory of hogs,
feed and veterinary drugs, in the Guangxi Nanning Wanghua Hog Farm, located at
Jinhu Road, Nanning City, Guangxi Province, PRC, from Fan Xianfang and Wu Yuhua
for a purchase price of RMB26,030,000 (USD$3,722,300). Guangxi Nanning Wanghua
Hog Farm has annual hog production capability of 36,000 hogs and has estimated
sales of approximately 26,000 hogs through the remainder of 2008.




Guangxi
Guigang Gangda Hog Farm




Guangxi
Huijie acquired all of the equity interest, together with all of their assets,
including existing rights for land use, pig houses, office buildings, power and
water supply facilities, existing inventory of hogs, feed and veterinary drugs,
in the Guangxi Guigang Gangda Hog Farm, located at No.9 Xijiang Hog Farm,
Guigang City, Guangxi Province, PRC, from Su Zhenxue for a purchase price of
RMB14,520,000 (USD$2,076,400). Guangxi Guigang Gangda Hog Farm has annual hog
production capability of approximately 12,000 hogs and has estimated sales of
approximately 8,400 hogs through the remainder of 2008.




23
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


Guangxi
Xingye Guihong Hog Farm
  Guangxi
Huijie acquired all of the equity interest, together with all of their assets,
including existing rights for land use, pig houses, office buildings, power and
water supply facilities, existing inventory of hogs, feed and veterinary drugs,
in the Guangxi Xingye Guihong Hog Farm, located at Xicun Village, Kuiyang Town,
Xingye County, Yulin City, Guangxi Province, PRC, from Lin Weicai for a purchase
price of RMB42,500,000 (USD$6,077,500). Guangxi Xinye Guihong Hog Farm has
annual hog production capability of approximately 50,000 hogs and has estimated
sales of approximately 35,000 hogs through the remainder of 2008.




Hainan
Haikou Meilan Hog Farm




Guangxi
Huijie acquired all of the equity interest, together with all of their assets,
including existing rights for land use, pig houses, office buildings, power and
water supply facilities, existing inventory of hogs, feed and veterinary drugs,
in the Hainan Haikou Meilan Hog Farm, located at Xianlai Village, Dazhipo Town,
Haikou City, Hainan Province, PRC, from Zeng Niangou for a purchase price of
RMB14,700,000 (USD$2,102,100). Hainan Haikou Meilan Hog Farm has annual hog
production capability of approximately 21,500 hogs and has estimated sales of
approximately 15,000 hogs through the remainder of 2008.




Hainan
Haikou Wohao Hog Farm




Guangxi
Huijie acquired all of the equity interest, together with all of their assets,
including existing rights for land use, pig houses, office buildings, power and
water supply facilities, existing inventory of hogs, feed and veterinary drugs,
in the Hainan Haikou Wohao Hog Farm, located at Fuan Village, Shishan Town,
Xiuying District, Haikou City, Hainan Province, PRC, from Wang Ruiying and Xu
Dongqiong for a purchase price of RMB15,200,000 (USD$2,173,600). Hainan Haikou
Wohao Hog Farm has annual hog production capability of approximately 20,000 hogs
and has estimated sales of approximately 14,000 hogs through the remainder of
2008.




Guangxi
Guilin Fuzhi Hog Farm




Guangxi
Huijie acquired sixty percent (60%) of the equity interest, as well as the
inventory of hogs, feed and veterinary drugs, in the Guangxi Guilin Fuzhi Hog
Farm, located at Sujia Village, Zhalin Town, Yanshan District, Guilin City,
Guangxi Province, PRC, from Liu Fuzhi for a purchase price of RMB12,000,000
(USD$1,716,000). Guangxi Guilin Fuzhi Hog Farm has annual hog production
capability of approximately 20,000 hogs and has estimated sales of approximately
14,000 hogs through the remainder of 2008.




Guangdong
Lianjiang Xinfa Hog Farm




Nanchang
Best acquired eighty percent (80%) of the equity interest, as well as the
inventory of hogs, feed and veterinary drugs, in the Guangdong Lianjiang Xinfa
Hog Farm, located at Lianjiang City, Guangdong Province, PRC, from Chen Shou for
a purchase price of RMB11,000,000 (USD$1,573,000). Guangdong Lianjiang Xinfa Hog
Farm has annual hog production capability of approximately 22,000 hogs and has
estimated sales of approximately 16,000 hogs through the remainder of
2008.




Zhejiang
Pinghu Yongxin Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Zhejiang Pinghu Yongxin Hog Farm, located at Pinghu
City, Zhejiang Province, PRC, from


24
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




Nie
Yongqing for a purchase price of RMB10,480,000 (USD$1,498,600). Zhejiang Pinghu
Yongxin Hog Farm has annual hog production capability of approximately 11,000
hogs and has estimated hog sales of approximately 7,500 hogs through the
remainder of 2008.




Shanghai
Fengxian Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Shanghai Fengxian Hog Farm, located at Yuantong
Village, Qianqiao Town, Fengxian District, Shanghai City, PRC, from Tu Yaoliang
andYang Yongan for a purchase price of RMB35,000,000 (USD$5,005,000). Shanghai
Fengxian Hog Farm has annual hog production capability of approximately 32,000
hogs and has estimated sales of approximately 21,500 hogs through the remainder
of 2008.




Shanghai
Tuanxi Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Shanghai Tuanxi Hog Farm, located at Tuanxi
Village, Datuan Town, Nanjiang District, Shanghai, PRC, from Cheng Longde for a
purchase price of RMB7,000,000 (USD$1,001,000). Shanghai Tuanxi Hog Farm has
annual hog production capability of approximately 8,500 hogs and has estimated
sales of approximately 5,600 hogs through the remainder of 2008.




Shanghai
Senrong Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Shanghai Senrong Hog Farm, located at Wanglong
Village, Xinnong Town, Jinshan District,


Shanghai,
PRC, from Jin Shunyun, Shen Peitao, Shen Yazhen, Jin Zhigang and Jin Zhixian for
a purchase price of RMB30,000,000 (USD$4,290,000). Shanghai Senrong Hog Farm has
annual hog production capability of approximately 30,000 hogs and has estimated
sales of approximately 20,500 hogs through the remainder of 2008.




Fujian
Xiamen Muxin Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Fujian Xiamen Muxin Hog Farm, located at Tongan
District, Xiamen City, PRC, from Li Mingxing, Chen Shuilu, Zhang Guohua and Wu
Xiaoyan for a purchase price of RMB29,320,000 (USD$4,192,800). Fujian Xiamen
Muxin Hog Farm has annual hog production capability of approximately 50,000 hogs
and has estimated sales of approximately 35,000 hogs through the remainder of
2008.




Xiamen
Yuanshengtai Food Co., Ltd.




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Xiamen Yuanshengtai Food Co.,Ltd., a hog farm
located at No.55 Binlang Road, Xiamen, Fujian Province, PRC, from Li Mingxing,
Wu Xiaoyan and Hong Xiaoling for a purchase price of RMB26,200,000
(USD$3,746,600). Xiamen Yuanshengtai Food Co. has annual hog production
capability of approximately 38,000 hogs and has estimated sales of approximately
25,000 hogs through the remainder of 2008.




25
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


Fujian
Jianhua Hog Farm
  Jiangxi
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Fujian Jianhua Hog Farm, located at Xudun Town,
Jian’ou City, Fujian Province, PRC, from Fan Dehe and Pan Shengliang for a
purchase price of RMB32,000,000 (USD$4,576,000). Fujian Jianhua Hog Farm has
annual hog production capability of approximately 34,000 hogs and has estimated
sales of approximately 23,000 hogs through the remainder of 2008.




Fujian
Fengxiang Agribusiness Co., Ltd.




Jiangxi
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in Fujian Fengxiang Agribusiness Co., Ltd., a hog farm
located at Mawei District, Fuzhou City, Fujian Province, PRC, from Zhu Zuzhong
for a purchase price of RMB8,100,000 (USD$1,158,300). Fujian Fengxiang
Agribusiness has annual hog production capability of approximately 10,000 hogs
and has estimated sales of approximately 7,000 hogs through the remainder of
2008.




Jiangxi
Zhiliang Hog Farm




Nanchang
Best acquired all of the equity interest, as well as the inventory of hogs, feed
and veterinary drugs, in the Jiangxi Zhiliang Hog Farm, located at Gancaoqian
Village, Dayangzhou, Xingan County, Jiangxi Province, PRC, from Xie Zhiliang,
Yang Guoqiang and Zeng Xiaohui for a purchase price of RMB8,000,000
(USD$1,144,000). Jiangxi Zhiliang Hog Farm has annual hog production capability
of approximately 10,000 hogs and has estimated sales of approximately of 6,500
hogs through the remainder of 2008.




There
were no material relationships between any of the sellers in these transactions
and the Company or any of the Company's affiliates, the Company's directors and
officers, or any associates of the Company's directors and officers. The hog
farms acquired by the Company on April 30, 2008 are not deemed to be "related
businesses" as that term is defined in Rule 3-05(a)(3) of Regulation S-X
promulgated by the Securities and Exchange Commission.








26


CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS




This
Quarterly Report on Form 10-QSB includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.  We have based
these forward-looking statements on our current expectations and projections
about future events.  These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about us that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements.  In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “could,” “would,”
“expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative
of such terms or other similar expressions.  Factors that might cause
or contribute to such a discrepancy include, but are not limited to, those
listed under the heading “Risk Factors” and those listed  in our other
Securities and Exchange Commission filings.  The following discussion
should be read in conjunction with our Financial Statements and related Notes
thereto included elsewhere in this report.





Item
2.  Management’s Discussion and Analysis or Plan of
Operations





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 ten 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 Lushan until early 2008.  In January 2008, 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.  In addition, in April 2008, the Company purchased an
additional 16 hog farms located in several southern provinces of the
PRC.





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.


27


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 $12.1 million for the three months ended March 31, 2008, an
increase of 144% over revenues of $5.0 million for the three months ended March
31, 2007.  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, Lushan in
late 2007 and the hog farms in early 2008.  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 relationships with approximately 630 independently
owned feed production distribution 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 three months ended
March 31, 2008 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 continue to aggressively search for acquisition targets in our industry
throughout the PRC.





Critical
Accounting Policies





In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States, we are required to make 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 in 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


28


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. The Company continually monitors customer payments and
maintains a reserve for estimated losses resulting from its customers’ inability
to make required payments. In determining the reserve, the Company evaluates the
collectibility of its accounts receivable based upon a variety of factors. In
cases where the Company becomes aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations, the Company
records a specific allowance against amounts due. For all other customers, the
Company recognizes allowances for doubtful accounts based on its 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
the Company’s estimates.





Inventories. Inventories are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. The Company evaluates its ending inventories for estimated
excess quantities and obsolescence. The Company’s 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, the Company assesses 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. The
Company periodically assesses potential impairments to its 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 considered by the Company 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 the Company’s overall business; and significant
negative industry or economic trends. When the Company determines 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, the Company
estimates 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, the Company recognizes an impairment loss. An impairment
loss is reflected as the amount by which the carrying amount of the asset
exceeds the fair market value of the asset, based on the fair market value if
available, or discounted cash flows. To date, there has been no impairment of
long-lived assets.





Property and equipment:
Useful lives of property and equipment is based on historical experience and
industry norms.  Changes in useful lives due to changes in technology
or other factors can affect future depreciation estimates.





Revenue Recognition. Our
revenue recognition policies are in compliance with Staff accounting bulletin
(SAB) 104. Revenue is recognized when services are rendered to customers when a
formal arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations 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


29


give
volume rebates to certain customers based on volume achieved. We accrue sales
rebates based on actual sales volume.





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 the Company's arrangements with its different types of
customers.  Accordingly, the Company does not have different revenue
recognition policies for different types of customers.





Recent
Accounting 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 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
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.


30


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 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.





Results
of Operations





Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007





Three
      Months ended March 31, 2008
            
            
            Three
      Months ended March 31, 2007
            
            
            $ Change
            
            
            % ChangeRevenues
            
            $
            12,147,084
            
            
            $
            4,978,295
            
            
            $
            7,168,789
            
            
            
            144.0Cost
      of Sales
            
            
            8,714,
      123
            
            
            
            3,435,089
            
            
            
            5,279,034
            
            
            
            153.7Gross
      Profits
            
            
            3,432,961
            
            
            
            1,543,206
            
            
            
            1,889,755
            
            
            
            122.5Selling,
      General and Administrative Expenses
            
            
            1,707,843
            
            
            
            565,315
            
            
            
            1,142,528
            
            
            
            202.1Net
      Income
            
            
            919,297
            
            
            
            779,181
            
            
            
            140,116
            
            
            
            18.0





Revenues.  The
increase in revenues was due to an increase in the volume of feed products that
we sold and the acquisition of the five hog farms.  The increase in
feed product sales was a result of expanding our distribution channels by the
opening of additional chain stores.  We experienced favorable market
conditions which increased the demand for our feed products.  Due to
anticipated raising hog prices we have kept our hogs longer than normal which
has increased the weight of the hogs that bring a higher sales
price.





While the
increase in the average sales price of our blended products also contributed to
our increase in revenues, this effect was offset by the decrease in the average
sales price of our other products category.  Also, we strategically
did not seek to maximize our sales prices in order to remain competitive in our
markets.  We believe that this competitive pricing strategy has and
will contribute to our increased sales volumes and ultimately lead to long-term
revenues growth.





Feed
      Type
            
            
            Metric
      Tons Sold
              3
      months ended March 31, 2008
            
            
            Metric
      Tons Sold
              3
      months ended March 31, 2007
            
            
            Difference
            
            
            %
      changePremix
            
            
            8,070
            
            
            
            4,410
            
            
            
            3,660
            
            
            
            82
            %Additive
      pre-mix
            
            
            710
            
            
            
            650
            
            
            
            60
            
            
            
            9.2
            %Piglet
      blending
            
            
            4,210
            
            
            
            3,390
            
            
            
            820
            
            
            
            24.2
            %Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            12,990
            
            
            
            8,450
            
            
            
            4,540
            
            
            
            53.7
            %





31





The
average sale price/MT during the three months ended March 31, 2008 and March 31,
2007 of each of our product classes is set forth below.





Feed
      Type
            
            
            Average
      Price/MT
              3
      Months Ended
              March
      31, 2008
            
            
            Average
      Price/MT
              3
      Months Ended
              March
      31, 2007
            
            
            Difference
            
            
            %
      changePremix
            
            
            799
            
            
            
            662
            
            
            
            138
            
            
            
            21Piglet
      blending
            
            
            820
            
            
            
            747
            
            
            
            74
            
            
            
            10Additive
      pre-mix
            
            
            808
            
            
            
            712
            
            
            
            96
            
            
            
            14





The
average sale price/MT was calculated in U.S. Dollars using a conversion factor
of 7.18 RMBto
$1.00 USD.  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.





Cost of
Goods Sold. We experienced approximately 6.4% and 37.8% increases in the unit
cost of goods sold for blended feed and premix products, respectively, during
the three month period ended March 31, 2008 compared to the same period in
2007.  In order to provide excellent customer service and
differentiate ourselves from our competition, at our customer’s request, we
supply customized formulations of our products.  In any given period,
the cost of the various additives used as raw materials in our products
fluctuates, which can result in increases in unit cost of goods
sold.  During the three month period ended March 31, 2008, the costs
of corn and soybean meal increased approximately 15% and 10%,
respectively.  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 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.





Gross
Profit.  Gross margins decreased to 28.3% from 31.0% during the three
months ended March 31, 2008 as compared to the same period last
year.  The decrease in gross margin can be attributed to several
factors: (i) the cost of introducing the Airubao Series; (ii) we experienced an
approximate 6.4% increase in the unit cost of goods sold of blended feed during
the three months ended March 31, 2008 compared to the same period in 2007; and
(iii) the unit cost of goods sold for premix products increased approximately
37.8% during the three months ended March 31, 2008 compared to the same period
in 2007.





Selling,
General and Administrative Expenses.  We incurred legal and audit
expense in the three month period ended March 31, 2008 of approximately $302,047
associated with being a publicly traded United States reporting company that we
did not incur during the same period in 2007.  The increase in our
selling, general and administrative expense also reflects the addition of our
new subsidiaries, which had approximately $442,450 general and administrative
expenses during the three months ended March 31, 2008.  General and
administrative expense includes overhead expenses such as rent, management and
staff salaries, general insurance, marketing, accounting, legal and offices
expenses.  Selling expenses for the period increased by 6.20% due to
the 22% increase in revenues and the costs associated with entering markets in
neighboring provinces, as well as the addition of our new subsidiaries, which
had approximately $209,409 of selling expenses during the three months ended
March 31, 2008.  We attempted to control our selling expenses through
the use of strict cost controls and efficient use of our distribution
channels.





Net
Income.  The
increase in our net income was due to higher sales as described above, offset by
higher costs related to the increase in sales and expansion of our operations
and interest expense associated with the $19 million of convertible notes issued
during the quarter ended March 31, 2008.


32


Due to
continual appreciation in RMB against the US dollar, we incurred a loss on
foreign translation of $224,473 during the first quarter in 2008, as we could
not timely convert USD deposits into RMB as a result of bank
policies.





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 and
then will pay a reduced rate of 15% for the next three years.





Off-Balance
Sheet Arrangements





There
were no off-balance sheet arrangements during the three months ended March 31,
2008 that have, or are reasonably likely to have, a current or future affect 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




Recent
financing





On April
16, 2008, we entered into a Securities Purchase Agreement with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of our common stock at price
of $16.00 per share for aggregate gross proceeds of $10,000,000.





On April
22, 2008, we entered into Securities Purchase Agreements with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 1,322,836 shares of the Company’s Common
Stock at price of $19.05 per share for aggregate gross proceeds of
$25,200,026.





At March
31, 2008, we had $36,924,135 cash and cash equivalents on hand.





During
the three month period ending March 31, 2008, we completed our $41,000,000
financing.  We received aggregate gross proceeds of $22,000,032
through the sale of 2,444,448 shares of common stock at $10 per
share.  We received aggregate proceeds of $19,000,000 through the
issuance of three year convertible notes bearing interest at 7% per annum and
convertible into common stock at $10 per share.  In connection with
the convertible notes, we issued 380,000 warrants which are exercisable
immediately and have a $10 strike price.  We paid $3,432,670 related
to the sell of shares and $1,716,666 related to the issuance of the convertible
notes.





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.


33


GuangxiGuangxiOn
June 22, 2007, we completed a second private placement offering pursuant to
which we sold 750,000 units at an offering price of $4.00 per unit for gross
proceeds of $3,000,000.  Each unit sold consisted of one share of
common stock and one warrant to purchase 25 percent of one share of common
stock.  Accordingly, we issued 750,000 shares of our common stock and
warrants to purchase 187,500 shares of our common stock to the one accredited
investor that participated in this offering.  In connection with this
private placement offering, a fee of eight percent of the securities placed was
paid in cash and a number of common stock purchase warrants equal to eight
percent of the units placed were paid to a finder.  Accordingly, we
paid $240,000 in cash and issued warrants to purchase 60,000 shares of our
common stock to the finder.  All stock purchase warrants are
exercisable for a period of three years at an exercise price of $5.60 per
share.  We received net proceeds from the private placement of
$2,760,000, after deduction of costs associated with the financing.





As of
March 31, 2008, we had total notes payable of $1,155,165, comprised of two
loans. There was one short term bank loan to Nanchang Best of $855,678, with an
interest rate of 7.884% per annum payable monthly.  This loan matures
on May 27, 2008, and is collateralized by our office building, workshop,
employee dorms, and use right of land. There was one short term bank loan to
Guangxi Huijie totaling $299,487, with an interest rate of 6.57% per annum
payable monthly.  This loan matures on May 24, 2008 and is
collateralized by the Company’s right to use land, machinery and
equipment.





During
the three months ended March 31, 2008, we used $868,393 in our operating
activities. This use of cash was primarily due to net income of $919,297, an
increase of $641,521 in other receivables, an increase in accounts payable of
$1,482,467, and an increase in other payables of $539,211, offset by increases
in accounts receivable of $2,082,250 and an increase in inventory of
$3,077,865.





We used
$5,997,353 in investing activities during the three month period ended March 31,
2008; of which $635,952 was for the acquisition of property and equipment, and
$5,290,747 for the acquisition of the five hog farms.





We
received $35,850,696 in cash from financing activities.  During the
three months ended March 31, 2008, we received $22,000,032 from the sale of our
securities and paid $3,432,670. We also received $19,000,000 from the issuance
of convertible notes and warrants, of which the Company paid $1,716,666 for the
cost of issuing the convertible notes and warrants.





At March
31, 2008, our accounts receivable balance was approximately $8.07 million, which
was approximately 66.5% of our net revenues for the three months ended March 31,
2008.  The reason for the large increase in our accounts receivable at
March 31, 2008 is that our sales increased due to the expansion of our marketing
channels and the introduction of our Airubao product line in the
quarter.





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 anticipate that the amount of cash
we have on hand as of the date of this report as well as the cash that we will
generate from operations will satisfy these requirements.  We may seek
additional funds from the capital markets as we identify additional acquisition
candidates.





We intend
to meet our liquidity requirements, including capital expenditures related to
the purchase of equipment, purchase of raw materials, and the expansion of our
business, through cash flow provided by operations and funds raised through cash
investments.




The
majority of the Company’s 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. The Company does
not engage in currency hedging. Inflation has not had a material impact on the
Company’s business.


34




Item
3.   Quantitative and Qualitative Disclosures About Market
Risk





Not
required





Item
4. Controls and Procedures





Evaluation of Disclosure
Controls and Procedures




As of
March 31, 2008, we carried out an evaluation of the effectiveness of the design
and operation of our “disclosure controls and procedures” (as defined in the
Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision and with the
participation of our management, including Junhong Xiong, our Chief Executive
Officer and Liangfan Yan, our Chief Financial Officer.  Based upon
that evaluation, Mr. Xiong and Mr. Yan concluded that our disclosure controls
and procedures are effective.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.




During
the quarter ended March 31, 2008, there were no changes in our internal control
over financial reporting that have materially affected our internal control over
financial reporting.




Part
II.  OTHER INFORMATION





Item
1.   Legal Proceedings





We know
of no pending legal proceedings to which we are a party which are material or
potentially material, either individually or in the aggregate. We are from time
to time, during the normal course of our business operations, subject to various
litigation claims and legal disputes. We do not believe that the ultimate
disposition of any of these matters will have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.




Item
1A.   Risk Factors





There
have been no material changes from the disclosure provided in Part 1, Item 1A of
our Annual Report on Form 10-K for the year ended December 31,
2007.





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





None.





Item
3.  Defaults Upon Senior Securities





None.


35


Item
4.   Submission of Matters to a Vote of Security
Holders





None.





Item
5.  Other Information





None.





Item
6.  Exhibits








Exhibit
      Number
            Description
      of Exhibit31.1
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).32.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).







36





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.














AgFeed
      Industries, Inc.May
      22, 2008
            By:
            /s/ Xiong JunhongXiong
      Junhong
              Chief
      Executive Officer (Principal Executive Officer)May
      22, 2008
            By:
            /s/ Liangfan
      YanLiangfan
      Yan
              Chief
      Financial Officer
              (Principal
      Financial and Accounting Officer)