**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


__________





**FORM 10-Q**





(Mark
                One)x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934





For
                the quarterly period ended:
            March
                31, 2008





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934





For
                the transition period from _______________ to ______________





Commission
                file number:
            000-52174


**


EMERALD
                DAIRY INC.(Exact
                Name of Registrant as Specified in its
                Charter)


Nevada
              
              80-0137632(State
                  or Other Jurisdiction of Incorporation or
                Organization)
              
              (I.R.S.
                  Employer Identification No.)11990
                  Market Street, Suite 205
                Reston,
                  Virginia
              
              20190(Address
                  of Principal Executive Offices)
              
              (Zip
                  Code)




(703)
                867-9247(Registrant’s
                Telephone Number, Including Area
                Code)





(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. Yes x No o




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange
      Act).   Yes o No x




As
      of May
      20, 2008, the issuer had 29,296,832 shares of Common Stock issued and
      outstanding (not including an additional 1,944,444 shares of Common Stock of
      the
      issuer currently being held in treasury)





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a small reporting
      company:





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyx










**QUARTERLY
      REPORT ON FORM 10-QSB**


**OF
      EMERALD DAIRY INC. AND SUBSIDIARIES**


**FOR
      THE PERIOD ENDED MARCH 31, 2008**





**TABLE
      OF CONTENTS**





**PAGE****PART I**
            **-**
            **FINANCIAL
                INFORMATION**Item
                1.
            
            Financial
                Statements
            
            3Condensed
                Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and
                December
                31, 2007
            
            3Condensed
                Consolidated Statements of Income for the Three Months Ended March
                31,
                2008 and 2007 (Unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                March 31,
                2008 and 2007 (Unaudited)
            
            5Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            
            6Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            22Item
                3
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            41Item
                4T.
            
            Controls
                and Procedures
            
            41**PART II**
            **-**
            **OTHER
                INFORMATION**Item
                1.
            
            Legal
                Proceedings
            
            44Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            44Item
                3.
            
            Defaults
                Upon Senior Securities
            
            44Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            44Item
                5.
            
            Other
                Information
            
            44Item
                6.
            
            Exhibits
            
            44Signatures
            
            45Exhibit
                Index


2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**Emerald
                  Dairy Inc. and Subsidiaries****Condensed
                  Consolidated Balance Sheet****March
                  31, 2008 and December 31,
                  2007**
  **ASSETS**
                
                **March
                    31,**
                
                **December
                    31,****2008**
                
                **2007****(Unaudited)**
                
                **(Audited)****Current
                    Assets**Cash
                    and cash equivalents
                
                $
                7,668,051
                
                $
                6,560,931Trade
                    accounts receivable
                
                
                5,875,125
                
                
                5,096,828Inventory
                
                
                1,595,085
                
                
                1,000,427Advance
                    to suppliers and other receivables
                
                
                477,447
                
                
                761,409Deposits
                
                
                2,652,336
                
                
                3,175,342**Total
                    current assets**
                
                
                18,268,044
                
                
                16,594,937**Property,
                    plant and equipment, net**
                
                
                3,389,455
                
                
                3,320,081**Intangible
                    assets, net**
                
                
                116,045
                
                
                115,228$
                21,773,544
                
                $
                20,030,246**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    Liabilities**Accounts
                    payable and accrued expenses
                
                $
                3,832,405
                
                $
                2,395,190Advances
                    from employees
                
                
                241,728
                
                
                301,644Taxes
                    payable
                
                
                325,582
                
                
                313,333Notes
                    payable
                
                
                -
                
                
                273,973Loan
                    from shareholder
                
                
                204,598
                
                
                196,526**Total
                    current liabilities**
                
                
                4,604,313
                
                
                3,480,666**Put/Call
                    Liability**
                
                
                3,169,444
                
                
                3,169,4447,773,757
                
                
                6,650,110**Stockholders'
                    Equity**Preferred
                    stock ($0.001 par value, 10,000,000 shares authorized,
                    noneissued
                    and outstanding at March 31, 2008 and December 31,
                    2007)
                
                
                -
                
                
                -Common
                    stock ($0.001 par value, 100,000,000 shares authorized,31,241,276
                    issued and outstanding at March 31, 2008 andDecember
                    31, 2007)
                
                
                31,241
                
                
                31,241Treasury
                    Stock (1,944,444 shares at March 31, 2008 and December 31,
                    2007)
                
                
                (1,944
                )
                
                (1,944
                )Additional
                    paid-in capital
                
                
                4,666,244
                
                
                4,666,244Retained
                    earnings
                
                
                7,794,713
                
                
                7,791,895Accumulated
                    other comprehensive income
                
                
                1,509,533
                
                
                892,700**Total
                    stockholders' equity**
                
                
                13,999,787
                
                
                13,380,136$
                21,773,544
                
                $
                20,030,246
  The
        accompanying notes are an integral part of these consolidated financial
        statements.




3


**Emerald
                  Dairy Inc. and Subsidiaries****Condensed
                  Consolidated Statements of Operations****For
                  the Three Months Ended March 31, 2008 and 2007****(Unaudited)**
  **2008**
              
              **2007****Sales**
              
              $
              10,434,459
              
              $
              5,882,614**Cost
                  of Goods Sold**
              
              
              6,011,234
              
              
              3,503,571**Gross
                  Profit**
              
              
              4,423,225
              
              
              2,379,043**Operating
                  Expenses**Selling
                  expenses
              
              
              3,731,334
              
              
              1,540,078Administrative
              
              
              598,004
              
              
              161,430Depreciation
                  and amortization
              
              
              14,861
              
              
              11,859**Total
                  operating expenses**
              
              
              4,344,199
              
              
              1,713,367**Other
                  Income (Expense)**Interest
                  income
              
              
              5,628
              
              
              830Interest
                  expense
              
              
              (1,256
              )
              
              (3,418
              )Total
                  other income (expense)
              
              
              4,372
              
              
              (2,588
              )**Net
                  Income Before Provision for Income Tax**
              
              
              83,398
              
              
              663,088**Provision
                  for Income Taxes**Current
              
              
              80,580
              
              
              24,302Deferred
              
              
              -
              
              
              -80,580
              
              
              24,302**Net
                  Income**
              
              $
              2,818
              
              $
              638,786**Basic
                  Earnings Per Share**
              
              $
              0.00
              
              $
              0.03**Basic
                  Weighted Average Shares Outstanding**
              
              
              29,296,832
              
              
              20,416,658**Diluted
                  Earnings Per Share**
              
              $
              0.00
              
              $
              0.03**Diluted
                  Weighted Average Shares Outstanding**
              
              
              29,513,646
              
              
              20,416,658**The
                  Components of Other Comprehensive Income**Net
                  Income
              
              $
              2,818
              
              $
              638,786Foreign
                  currency translation adjustment
              
              
              616,833
              
              
              284,270**Comprehensive
                  Income**
              
              $
              619,651
              
              $
              923,056




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




4


**Emerald
                  Dairy Inc. and Subsidiaries****Condensed
                  Consolidated Statements of Cash Flows****For
                  the Three Months Ended March 31, 2008 and
                  2007**
  2008
              
              2007**Cash
                  flows from operating activities****Net
                  Income**
              
              $
              2,818
              
              $
              638,786**Adjustments
                  to reconcile net cash provided by****operating
                  activities**Depreciation
                  and amortization
              
              
              91,280
              
              
              68,263**Net
                  change in assets and liabilities**Trade
                  accounts receivable
              
              
              (577,482
              )
              
              (26,013
              )Inventory
              
              
              (555,241
              )
              
              292,043Advance
                  to suppliers and other receivables
              
              
              313,962
              
              
              (184,695
              )Deposits
              
              
              648,114
              
              
              -Accounts
                  payable and accrued expenses
              
              
              1,342,845
              
              
              (161,573
              )Advances
                  from employees
              
              
              (71,801
              )
              
              (212,681
              )Taxes
                  payable
              
              
              (96
              )
              
              (16,215
              )**Net
                  cash provided by operating activities**
              
              
              1,194,399
              
              
              397,915**Cash
                  flows from investing activities**Purchases
                  of fixed assets and intangibles
              
              
              (27,469
              )
              
              -**Net
                  cash used in investing activities**
              
              
              (27,469
              )
              
              -**Cash
                  flows from financing activities**Repayments
                  of notes payable
              
              
              (284,768
              )
              
              -Advances
                  on notes payable
              
              
              -
              
              
              258,732Loans
                  from shareholders
              
              
              329
              
              
              (2,172
              )**Net
                  cash provided by (used in) financing activities**
              
              
              (284,439
              )
              
              256,560**Effect
                  of exchange rate**
              
              
              224,629
              
              
              171,293**Net
                  increase in cash**
              
              
              1,107,120
              
              
              825,768**Cash
                  and cash equivalents at beginning of year**
              
              
              6,560,931
              
              
              641,164**Cash
                  and cash equivalents at end of year**
              
              $
              7,668,051
              
              $
              1,466,932**Supplemental
                  disclosure of cash flow information****Interest
                  paid**
              
              $
              1,256
              
              $
              3,418**Enterprise
                  incomes taxes paid**
              
              $
              -
              
              $
              -




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


5




Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 March
        31,
        2008 and 2007
 
 **1.**
              **Description
                  of Business**
 
 On
        October 9, 2007, Emerald Dairy, Inc. (the Company) under its former name
        Micro-Tech Identification Systems, Inc., entered into an Agreement and Plan
        of
        Reorganization and Merger (the “Merger Agreement”) with AIDH Acquisition, Inc.,
        a newly formed, wholly owned Nevada subsidiary of the Company (“Acquisition
        Sub”), Tryant, and American International Dairy Holding Co., Inc., a privately
        held Nevada corporation (“AIDH”). Upon consummation of the merger transaction
        contemplated under the Merger Agreement (the “Merger”), among other
        things:
 
 ·
              Acquisition
                  Sub merged with and into AIDH, and AIDH, as the surviving corporation,
                  became a wholly owned subsidiary of the
                  Company;
 
 ·
              Each
                  share of AIDH’s capital stock issued and outstanding immediately prior to
                  the closing of the Merger was converted into the right to receive
                  1.020833
                  shares of the Company’s Common Stock (an aggregate of 24,305,546 shares of
                  the Company’s Common Stock, par value $0.001 per share, were issued to the
                  holders of AIDH’s capital stock);
 
 ·
              AIDH’s
                  officers and directors replaced the Company’s officers and directors as
                  officers and directors for the Company;
                  and
 
 ·
              The
                  Company succeeded to the business of AIDH as its sole line of
                  business.
 
 As
        a
        result of the transactions, there has been a change in control of the Company
        as
        the stockholders of AIDH became the majority stockholders of the
        Company.
 
 For
        accounting purposes, the transaction has been accounted for as a reverse
        acquisition under the purchase method. Accordingly, AIDH and its subsidiary
        are
        treated as the continuing entity for accounting purposes. Following the merger,
        Micro-Tech Indentification Systems, Inc. filed a Certificate of Amendment
        and
        changed its name to Emerald Dairy, Inc. For comparative purposes, the common
        shares outstanding reported in the related financial statements have been
        retroactively applied to January 1, 2006 and consistently applied throughout
        all
        periods, to present the recapitalization and the related stock
        split.
 
 On
        June
        25, 2007 the Company, with the authorization of the Board of Directors and
        majority stockholder of Micro-Tech Identification Systems, Inc., effected
        a
        reverse stock split whereby all outstanding shares of the Company's $.001
        par
        value common stock ("Common Stock") were reverse split on a 1-for-40 share
        basis, with no stockholder who holds at least 100 shares prior to the Reverse
        Stock Split receiving less than 100 shares after the Reverse Stock Split.
        This
        stock split has been retroactively applied to all periods presented. The
        Company
        also effected an amendment to the Articles of Incorporation increasing the
        authorized capital so that the Company is authorized to issue one hundred
        million (100,000,000) shares of $0.001 par value of Common Stock and ten
        million
        (10,000,000) shares of $0.001 par value of preferred stock, which preferred
        stock is issuable in such series and designations as may be authorized by
        the
        Company's Board of Directors; and added the following four new Articles to
        the
        Articles of Incorporation, Article XI- Indemnification, Article XII- Acquisition
        Of Controlling Interest and Article XIII- Combinations With Interested
        Stockholders, and Article XIV-Authority of Board of Directors to Change the
        Corporate Name.
 
 American
        International Dairy Holdings, Inc., a Nevada corporation, was formed in 2005
        for
        the purpose of acquiring the stock in Heilonjang Xing An Ling Dairy, Co.
        On May
        30, 2005, AIDH, pursuant to the Share Transfer Agreement acquired Heilonjiang
        Xing An Ling Dairy Co. Limited, (XAL) a corporation formed on September 8,
        2003
        in Heilonjiang Providence, The People’s Republic of China, (PRC). This
        transaction was treated as a recapitalization of XAL for financial reporting
        purposes. The effect of this recapitalization was rolled back to the inception
        of XAL for financial reporting purposes.
  6
  XAL
        is a
        dairy company engaged in manufacturing of milk, soybean and rice powder.
        Through
        the Company’s network of over 600 salespeople, the Company’s products are
        distributed throughout 20 provinces in the People’s Republic of China, and sold
        in over 5,600 retail outlets.
 
 Prior
        to
        September 23, 2006, XAL owned 57.69% of Heilongjiang Beian Nongken Changxing
        LvBao Dairy Limited Liability Company (“LvBao”) with the remaining balance being
        held by the Company’s sole shareholder. On September 23, 2006, the remaing
        42.31% ownership in LvBao was transferred to XAL and was treated as an
        additional capital contribution. The effect of this contribution by the sole
        shareholder was rolled back to September 8, 2003 for financial reporting
        purposes. LvBao was formed on January 20, 2000 and is engaged in manufacturing
        and sales of dairy products..
 
 **2.**
              **Basis
                  of Preparation of Financial
                  Statements**
 
 XAL
        and
        LvBao maintain their books and accounting records in Renminbi (“RMB”).
 
 The
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with generally accepted accounting principles for
        interim
        financial information and with the instructions to Form 10-Q. Accordingly,
        they do not include all of the information and footnotes required by generally
        accepted accounting principles for complete financial statements and related
        notes.The accompanying unaudited condensed consolidated financial
        statements and related notes should be read in conjunction with the audited
        consolidated financial statements of the Company and notes thereto for the
        year
        ended December 31, 2007.
 
 In
        the
        opinion of management, the accompanying unaudited condensed consolidated
        financial statements contain all adjustments (which include only normal
        recurring adjustments) necessary to present fairly the balance sheets of
        Emerald
        Dairy Inc. and subsidiaries as of March 31, 2008 and the results of their
        operations for the three months ended March 31, 2008 and 2007, and cash flows
        for the three months ended March 31, 2008 and 2007. The results of operations
        for the three months ended March 31, 2008 and 2007 are not necessarily
        indicative of the results to be expected for the entire year.
 
 The
        financial statements have been prepared in order to present the consolidated
        financial position and consolidated results of operations in accordance with
        accounting principles generally accepted in the United States of America
        (“US
        GAAP”) and are expressed in terms of US dollars (see paragraph “Foreign
        Currency” below).
  **3.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 **Principles
        of Consolidation -** The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiaries, XAL and LvBao. All inter-company transactions
        and
        balances were eliminated.
 
 **Use
        of estimates** - The
        preparation of these consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affected the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the dates of the consolidated financial statements and the
        reported amounts of net sales and expenses during the reported periods.
 
 Significant
        estimates and assumptions by management including, among others, values and
        lives assigned to acquired intangible assets, reserves for customer returns
        and
        allowances, uncollectible accounts receivable, slow moving, obsolete and/or
        damaged inventory and stock warrant valuation. Actual results may differ
        from
        these estimates.
  7
  **Cash
        and cash equivalents -** The **** Company
        considers all highly liquid debt instruments purchased with maturity period
        of
        three months or less to be cash equivalents. Substantially all of the Company’s
        cash is held in bank accounts in The Peoples Republic of China and is not
        protected by FDIC insurance or any other similar insurance. Accounts held
        at
        United States financial institutions are insured by the Federal Deposit
        Insurance Corporation up to $100,000. As of March 31, 2008, $180,590 of the
        U.S.
        balances are in excess of insured amounts.
 
 **Inventory
        -** Inventory
        is stated at the lower of cost or market. Cost is determined using the weighted
        average method. Market value represents the estimated selling price in the
        ordinary course of business less the estimated costs necessary to complete
        the
        sale.
 
 Raw
        materials consist of raw milk, soybeans, rice and rice powder. Work in process
        consists of materials and products in process of conversion to powder but
        not
        yet packaged.
 
 The
        cost
        of inventories comprises all costs of purchases, costs of conversion and
        other
        costs incurred in bringing the inventories to their present location and
        condition. The costs of conversion of inventories include fixed and variable
        production overheads, taking into account the stage of completion.
 
 **Accounts
        receivable -** Trade
        accounts receivable are recorded at the invoiced amount and do not bear
        interest. Amounts collected on trade accounts receivable are included in
        net
        cash provided by operating activities in the consolidated statements of cash
        flows. The Company maintains an allowance for doubtful accounts for estimated
        losses inherent in its accounts receivable portfolio. In establishing the
        required allowance, management considers historical losses, current receivables
        aging, and existing industry and PRC economic data. The Company reviews its
        allowance for doubtful accounts monthly. Past due balances over 90 days and
        over
        a specified amount are reviewed individually for collectibility. Account
        balances are charged off against the allowance after all means of collection
        have been exhausted and the potential for recovery is considered remote.
        At
        March 31, 2008 and 2007 the was no allowance for doubtful accounts based
        on the
        review of the above factors. There were no write-off’s for 2008 and 2007,
        respectively. The Company does not have any off-balance-sheet credit exposure
        related to its customers.
 
 **Property
        and equipment** -
        Property and equipment is stated at the historical cost, less accumulated
        depreciation. Depreciation on property, plant, and equipment is provided
        using
        the straight-line method over the estimated useful lives of the assets after
        taking into account any salvage value as follows:
  Buildings
              
              30
                  yearsCommunication
                  equipment, plant and machinery
              
              10
                  - 30 yearsMotor
                  vehicles
              
              10
                  yearsDiary
                  cows
              
              5
                  yearsFurniture,
                  Fixtures, and Equipment
              
              5
                  -
                  10 years
  Expenditures
        for renewals and betterments were capitalized, while repairs and maintenance
        costs are normally charged to the statement of operations in the year in
        which
        they are incurred. In situations where it can be clearly demonstrated that
        the
        expenditure has resulted in an increase in the future economic benefits expected
        to be obtained from the use of the asset, the expenditure is capitalized
        as an
        additional cost of the asset.
 
 Upon
        sale
        or disposal of an asset, the historical cost and related accumulated
        depreciation or amortization of such asset were removed from their respective
        accounts and any gain or loss is recorded in the statements of
        operations.
 
 The
        Company reviews the carrying value of property, plant, and equipment for
        impairment whenever events and circumstances indicate that the carrying value
        of
        an asset may not be recoverable from the estimated future cash flows expected
        to
        result from its use and eventual disposition. In cases where undiscounted
        expected future cash flows are less than the carrying value, an impairment
        loss
        is recognized equal to an amount by which the carrying value exceeds the
        fair
        value of assets. The factors considered by management in performing this
        assessment include current operating results, trends and prospects, the manner
        in which the property is used, and the effects of obsolescence, demand,
        competition, and other economic factors. Based on this assessment, there
        was no
        impairment at March 31, 2008. There can be no assurance, however, that market
        conditions will not change or demand for the Company’s products or services will
        continue, which could result in impairment of long-lived assets in the
        future.
  8
  **Intangible
        Assets** -
        Intangible assets consist of land use rights acquired by the Company and
        are
        amortized on a straight line basis over the lives of the rights agreements,
        which is fifty years and purchased patents which are amortized on a straight
        line basis over the remaining life of the patents which is five years. The
        Company evaluates the carrying value of intangible assets during the fourth
        quarter of each year and between annual evaluations if events occur or
        circumstances change that would more likely than not reduce the fair value
        of
        the intangible asset below its carrying amount. There were no impairments
        recorded during the year ended December 31, 2007.
 
 **Foreign
        Currency** -
        The
        Company’s principal country of operations is The People’s Republic of China. The
        financial position and results of operations of the Company are determined
        using
        the local currency (“Renminbi” or “Yuan”) as the functional currency. The
        results of operations denominated in foreign currency are translated at the
        average rate of exchange during the reporting period.
  Assets
        and liabilities denominated in foreign currencies at the balance sheet date
        are
        translated at the exchange rates prevailing at the balance sheet date. The
        registered equity capital denominated in the functional currency is translated
        at the historical rate of exchange at the time of capital contribution. All
        translation adjustments resulting from the translation of the financial
        statements into the reporting currency (“US Dollars”) are dealt with as a
        separate component within stockholders’ equity. Translation adjustments for the
        three months ended March 31, 2008 and 2007 totaled $616,833 and $284,270,
        respectively.
 
 As
        of
        March 31, 2008 and 2007, the exchange rate was 7.012 Yuan and 7.73 Yuan per
        U.S.
        Dollar.
 
 **Revenue
        recognition** -
        Revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
        Revenue Recognition, which states that revenue should be recognized when
        the
        following criteria are met: (1) persuasive evidence of an arrangement
        exists; (2) the service has been rendered; (3) the selling price is
        fixed or determinable; and (4) collection of the resulting receivable is
        reasonably assured.
 
 Interest
        income is recognized when earned, taking into account the average principal
        amounts outstanding and the interest rates applicable.
 
 As
        of
        March 31, 2008, the Company has no sales or contracts that included multiple
        deliverables and would fall under the scope of EITF 00-21, “Revenue Arrangements
        with Multiple Deliverables.”
 
 **Sales
        returns -** The
        Company does not allow return of products except for unsold products after
        expiration date and for products that were damaged during shipment. The total
        amount of returned product is less than 0.05% of total sales. The cost of
        unsold
        products and damaged products are netted against sales and cost of goods
        sold,
        respectively.
 
 **Advertising** -
        The
        Company expenses advertising costs the first time the respective advertising
        takes place. These costs were included in selling, general and administrative
        expenses. The total advertising expenses incurred for the three months ended
        March 31, 2008 and 2007 were $1,563,591 and $21,650, respectively.
 
 **Product
        display fees** -
        The
        Company has entered into a number of agreements with the resellers of its
        products, whereby the Company pays the reseller an agreed upon amount to
        display
        its products. As prescribed by the Emerging Issues Task Force Issue 01-09:
        Accounting for Consideration Given by a Vendor to a Customer, the Company
        has
        reduced sales by the amounts paid under these agreements. For the years ended
        March 31, 2008 and 2007, these totaled $94,290 and $114,066, respectively.
 
 **Shipping
        and handling costs -** The
        Company's shipping and handling costs are included in cost of sales for all
        periods presented.
  9
  **Earnings
        per share -** Basic
        net
        earnings per common share is computed by dividing net earnings applicable
        to
        common shareholders by the weighted-average number of common shares outstanding
        during the period. Diluted net earnings per common share is determined using
        the
        weighted-average number of common share shares outstanding during the period,
        adjusted for the dilutive effect of common stock equivalents, using the treasury
        stock method, consisting of shares that might be issued upon exercise of
        common
        stock warrants. In periods where losses are reported, the weighted-average
        number of common shares outstanding excludes common stock equivalents, because
        their inclusion would be anti-dilutive.
 
 **Taxation
        -** Taxation
        on profits earned in the PRC has been calculated on the estimated assessable
        profits for the year at the rates of taxation prevailing in the PRC in which
        the
        Company operates after taking into effect the benefits from any special tax
        credits or “tax holidays” allowed in the country of operations.
  The
        Company accounts for income tax under the provisions of SFAS 109 *Accounting
        for Income Taxes,* which
        requires recognition of deferred tax assets and liabilities for the expected
        future tax consequences of the events that have been included in the financials
        statements or tax returns. Deferred income taxes are recognized for all
        significant temporary differences between tax and financial statements bases
        of
        assets and liabilities. Valuation allowances are established against net
        deferred tax assets when it is more likely than not that some portion or
        all of
        the deferred tax asset will not be realized.
 
 The
        Company does not have any long-term deferred tax assets or liabilities in
        China
        that will exist once the tax holiday (See Note 11) expires. The Company does
        not
        have any significant deferred tax asset or liabilities that relate to tax
        jurisdictions not covered by the tax holiday.
 
 The
        Company does not accrue United States income tax on unremitted earnings from
        foreign operations, as it is the Company’s intention to invest these earnings in
        the foreign operations indefinitely.
 
 ***Enterprise
        income tax***
 
 Under
        the
        Provisional Regulations of The People’s Republic of China Concerning Income Tax
        on Enterprises promulgated by the State Council which came into effect on
        January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises
        at
        a rate of 15% of their taxable income. Preferential tax treatment may, however,
        be granted pursuant to any law or regulations from time to time promulgated
        by
        the State Council. XAL enjoyed a 100% exemption from enterprise income taxes
        starting on January 10, 2006 due to its classification as a “Wholly Foreign
        Owned Enterprise.” On March 16, 2007, The People’s Republic of China enacted a
        new Enterprise Income Tax Law for the purpose of unifying the tax treatment
        of
        domestic and foreign enterprises. This new law eliminates the preferential
        tax
        treatment for new Wholly Foreign Owned Enterprises but allows previously
        granted
        exemptions to stay in place through 2012, with the exception that the statutory
        tax rate will increase by 2% per year from 15% in 2006 to 25% by 2012. This
        exemption ended on January 10, 2008, at which time XAL will qualify under
        the
        current tax structure for a 50% reduction in the statutory enterprise income
        tax
        rates for an additional three years.
 
 Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax basis. Deferred
        tax
        assets, including tax loss and credit carryforwards, and liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect of deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        Deferred income tax expense represents the change during the period in the
        deferred tax assets and deferred tax liabilities. The components of the deferred
        tax assets and liabilities are individually classified as current and noncurrent
        based on their characteristics. Deferred tax assets are reduced by a valuation
        allowance when, in the opinion of management, it is more likely than not
        that
        some portion or all of the deferred tax assets will not be
        realized.
 
 A
        provision has not been made at March31, 2008 for U.S. or additional foreign
        withholding taxes on approximately $8,998,000 of undistributed earnings of
        foreign subsidiaries because it is the present intention of management to
        reinvest the undistributed earnings indefinitely in foreign operations.
        Generally, such earnings become subject to U.S. tax upon the remittance of
        dividends and under certain other circumstances. It is not practicable to
        estimate the amount of deferred tax liability on such undistributed earnings.
  10
  In
        2006,
        the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
        the application of Statement of Financial Accounting Standards (SFAS) 109
        by
        defining a criterion that an individual income tax position must meet for
        any
        part of the benefit of that position to be recognized in an enterprise’s
        financial statements and provides guidance on measurement, derecognition,
        classification, accounting for interest and penalties, accounting in interim
        periods, disclosure and transition. In accordance with the transition
        provisions, the Company adopted FIN 48 effective January 1, 2007.
  The
        Company recognizes that virtually all tax positions in the PRC are not free
        of
        some degree of uncertainty due to tax law and policy changes by the State.
        However, the Company cannot reasonably quantify political risk factors and
        thus
        must depend on guidance issued by current State officials.
 
 Based
        on
        all known facts and circumstances and current tax law, the Company believes
        that
        the total amount of unrecognized tax benefits as of March 31, 2008, is not
        material to its results of operations, financial condition or cash flows.
        The
        Company also believes that the total amount of unrecognized tax benefits
        as of
        March 31, 2008, if recognized, would not have a material effect on its effective
        tax rate. The Company further believes that there are no tax positions for
        which
        it is reasonably possible, based on current Chinese tax law and policy, that
        the
        unrecognized tax benefits will significantly increase or decrease over the
        next
        12 months producing, individually or in the aggregate, a material effect
        on the
        Company’s results of operations, financial condition or cash flows.
 
 ***Value
        added tax***
 
 The
        Provisional Regulations of The People’s Republic of China Concerning Value Added
        Tax promulgated by the State Council came into effect on January 1, 1994.
        Under
        these regulations and the Implementing Rules of the Provisional Regulations
        of
        the PRC Concerning Value Added Tax, value added tax is imposed on goods sold
        in
        or imported into the PRC and on processing, repair and replacement services
        provided within the PRC.
 
 Value
        added tax payable in The People’s Republic of China is charged on an aggregated
        basis at a rate of 13% or 17% (depending on the type of goods involved) on
        the
        full price collected for the goods sold or, in the case of taxable services
        provided, at a rate of 17% on the charges for the taxable services provided,
        but
        excluding, in respect of both goods and services, any amount paid in respect
        of
        value added tax included in the price or charges, and less any deductible
        value
        added tax already paid by the taxpayer on purchases of goods and services
        in the
        same financial year.
 
 **Warrants
        -** the
        Company evaluates its Warrants (as defined in Note 14) on an ongoing basis
        considering the provisions of SFAS No. 150, *Accounting
        for Certain Financial Instruments with Characteristics of Both Liabilities
        and
        Equity,* which
        establishes standards for issuers of financial instruments with characteristics
        of both liabilities and equity related to the classification and measurement
        of
        those instruments. The Warrants are evaluated considering the provisions
        of SFAS
        No. 133, *Accounting
        for Derivative Instruments and Hedging Activities,* which
        establishes accounting and reporting standards for derivative instruments,
        including certain derivative instruments embedded in other contracts, and
        for
        hedging activities, and considering EITF Issue No. 00-19, *Accounting
        for Derivative Financial Instruments Indexed to , and Potentially Settled
        in, a
        Company’s Own Stock.*
  **Freestanding
        Financial Instruments with Characteristics of Both Liabilities and Equity
        -** In
        accordance with SFAS 150, *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity,* the
        Company accounts for financial instruments as a liability if it embodies
        an
        obligation to repurchase the issuer’s equity shares, or is indexed to such an
        obligation, and that requires or may require the issuer to settle the obligation
        by transferring assets. Freestanding financial instruments are financial
        instruments that are entered into separately and apart from any of the entity's
        other financial instruments or equity transactions, or that is entered into
        in
        conjunction with some other transaction and is legally detachable and separately
        exercisable. The liability recorded is the per share price to be paid and
        is
        offset to equity.
  11
  **Retirement
        benefit costs** -
        According to The People’s Republic of China regulations on pensions, the Company
        contributes to a defined contribution retirement program organized by the
        municipal government in the province in which the Company was registered
        and all
        qualified employees are eligible to participate in the program. Contributions
        to
        the program are calculated at 23.5% of the employees’ salaries above a fixed
        threshold amount and the employees contribute 2% to 8% while the Company
        contributes the balance contribution of 21.5% to 15.5%. The Company has no
        other
        material obligation for the payment of retirement benefits beyond the annual
        contributions under this program.
  **Fair
        value of financial instruments -** The
        carrying amounts of certain financial instruments, including cash, accounts
        receivable, other receivables, accounts payable, commercial notes payable,
        and
        accrued expenses approximate their fair values as of March 31, 2008 because
        of
        the relatively short-term maturity of these instruments.
 
 **Recent
        accounting pronouncements**
 
 In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among
        registrants, SAB 108 expresses SEC staff views regarding the process by which
        misstatements in financial statements are evaluated for purposes of determining
        whether financial statement restatement is necessary. SAB 108 is effective
        for
        fiscal years ending after November 15, 2006, and early application is
        encouraged. The adoption of SAB 108 had no impact on the Company’s results from
        operations or financial position.
 
 In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (SFAS
        157). SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in accordance with generally accepted accounting
        principles, and expands disclosures about fair value measurements. This
        statement does not require any new fair value measurements; rather, it applies
        under other accounting pronouncements that require or permit fair value
        measurements. The provisions of this statement are to be applied prospectively
        as of the beginning of the fiscal year in which this statement is initially
        applied, with any transition adjustment recognized as a cumulative-effect
        adjustment to the opening balance of retained earnings. The provisions of
        SFAS
        157 are effective for the fiscal years beginning after November 15, 2007.
        Therefore, we anticipate adopting this standard as of January 1, 2008.
        Management has not determined the effect, if any, the adoption of this statement
        will have on our financial condition or results of operations.
 
 In
        September 2006, the FASB issued Statement No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans* (SFAS No. 158), an amendment of FASB Statements No. 87, 88, 106
        and 132(R). SFAS No. 158 requires (a) recognition of the funded
        status (measured as the difference between the fair value of the plan assets
        and
        the benefit obligation) of a benefit plan as an asset or liability in the
        employer’s statement of financial position, (b) measurement of the funded
        status as of the employer’s fiscal year-end with limited exceptions, and
        (c) recognition of changes in the funded status in the year in which the
        changes occur through comprehensive income. The requirement to recognize
        the
        funded status of a benefit plan and the disclosure requirements are effective
        as
        of the end of the fiscal year ending after December 15, 2006. The
        requirement to measure the plan assets and benefit obligations as of the
        date of
        the employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. This Statement has no current
        applicability to the Company’s financial statements. Management plans to adopt
        this Statement on December 31, 2006 and it is anticipated the adoption of
        SFAS No. 158 will not have a material impact to the Company’s
        financial position, results of operations, or cash flows.
 
 In
        February 2007, the FASB issued Statement No. 159 *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* (SFAS
        159). This statement permits companies to choose to measure many financial
        assets and liabilities at fair value. Unrealized gains and losses on items
        for
        which the fair value option has been elected are reported in earnings. SFAS
        159
        is effective for fiscal years beginning after November 15, 2007. The Company
        does not believe that SFAS 159 will have a material impact on its consolidated
        financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
        Combinations* (SFAS
        141(R)). SFAS 141(R) will change the accounting for business combinations.
        Under
        SFAS No. 141(R), an acquiring entity will be required to recognize all the
        assets acquired and liabilities assumed in a transaction at the acquisition-date
        fair value with limited exceptions. SFAS No. 141(R) will change the
        accounting treatment and disclosure for certain specific items in a business
        combination. SFAS No. 141(R) applies prospectively to business combinations
        for which the acquisition date is on or after the beginning of the first
        annual
        reporting period beginning on or after December 15, 2008. SFAS 141(R) will
        impact the Company in the event of any future acquisition.
  12
  In
        December 2007, the FASB issued SFAS No. 160, *Non-controlling
        Interests in Consolidated Financial Statements—an amendment of Accounting
        Research Bulletin No. 51* (SFAS
        160). SFAS 160 establishes new accounting and reporting standards for the
        non-controlling interest in a subsidiary and for the deconsolidation of a
        subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
        after December 15, 2008. The Company does not believe that SFAS 160 will
        have a material impact on its consolidated financial statements.
  In
        March 2008, the FASB issued SFAS No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities—an amendment of FASB
        Statement No. 133* (FAS
        161). FAS 161 changes the disclosure requirements for derivative instruments
        and
        hedging activities. Entities are required to provide enhanced disclosures
        about
        (a) how and why an entity uses derivative instruments, (b) how
        derivative instruments and related hedged items are accounted for under
        Statement 133 and its related interpretations, and (c) how derivative
        instruments and related hedged items affect an entity’s financial position,
        financial performance, and cash flows. The guidance in FAS 161 is effective
        for
        financial statements issued for fiscal years and interim periods beginning
        after
        November 15, 2008, with early application encouraged. This Statement
        encourages, but does not require, comparative disclosures for earlier periods
        at
        initial adoption. The Company is currently assessing the impact of FAS
        161.
 
 **4.**
              **Concentrations
                  of Business and Credit
                  Risk**
 
 Substantially
        all of the Company’s bank accounts are in banks located in the PRC and are not
        covered by any type of protection similar to that provided by the FDIC on
        funds
        held in U.S banks. Accounts held at U.S. financial institutions are insured
        by
        the Federal Deposit Insurance Corporation up to $100,000. As of March 31,
        2008,
        $180,590 of U.S. cash balances are in excess of insured amounts.
 
 The
        Company operates in China, which may give rise to significant foreign currency
        risks from fluctuations and the degree of volatility of foreign exchange
        rates
        between U.S. dollars and the Chinese currency RMB.
 
 Financial
        instruments that potentially subject the Company to concentration of credit
        risk
        consist principally of cash and trade receivables, the balances of which
        are
        stated on the balance sheet. Concentration of credit risk with respect to
        trade
        receivables is limited due to the Company's large number of diverse customers
        in
        different locations in China. The Company does not require collateral or
        other
        security to support financial instruments subject to credit risk.
 
 For
        the
        three months ended March 31, 2008 and 2007, no single customer accounted
        for 10%
        or more of sales revenues.
 
 As
        of
        March 31, 2008, the Company had no insurance coverage of any kind. Accrual
        for
        losses is not recognized until such time as an uninsured loss has
        occurred.
 
 Payments
        of dividends from foreign subsidiaries may be subject to some restrictions.
 
 The
        operations of the Company are located in the PRC. Accordingly, the Company’s
        business, financial condition, and results of operations may be influenced
        by
        the political, economic, and legal environments in the PRC, as well as by
        the
        general state of the PRC economy.
  13
 
 **5.**
              **Inventory**
 
 As
        of
        March 31, 2008 and December 31, 2007 inventory consisted of the
        following:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Raw
                  materials
              
              $
              1,134,715
              
              $
              634,018Work-in-process
              
              
              410,578
              
              
              349,334Finished
                  goods
              
              
              41,137
              
              
              8,490Repair
                  parts
              
              
              8,655
              
              
              8,585$
              1,595,085
              
              $
              1,000,427
  **6.**
              **Advances
                  to suppliers and other
                  receivables**
 
 As
        of
        March 31, 2008 and December 31, 2007 advances to suppliers and other
        receivables consisted of the following:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Advances
                  to suppliers
              
              $
              328,223
              
              $
              652,398Other
                  Receivables
              
              
              50,000
              
              
              50,000Advances
                  to staff
              
              
              12,539
              
              
              18,924Prepaid
                  expenses
              
              
              86,685
              
              
              40,087$
              477,447
              
              $
              761,409
  **7.**
              **Property,
                  Plant, and Equipment**
 
 As
        of
        March 31, 2008 and December 31, 2007 property, plant, and equipment
        consisted of the following:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Building
              
              $
              1,054,881
              
              $
              1,007,475Plant
                  and Machinery
              
              
              2,641,497
              
              
              2,512,451Motor
                  vehicles
              
              
              480,304
              
              
              459,547Dairy
                  cows
              
              
              223,970
              
              
              211,220Office
                  equipment
              
              
              40,977
              
              
              52,6964,441,629
              
              
              4,243,389Less:
                  Accumulated depreciation
              
              
              (1,052,174
              )
              
              (923,308
              )$
              3,389,455
              
              $
              3,320,081
  For
        the
        three months ended March 31, 2008 and 2007 depreciation expenses totaled
        $88,906
        and $68,263, respectively, of which $74,045 and $56,404, respectively, were
        included as a component of cost of goods sold.
 
 **8.**
              **Intangible
                  Assets**
  As
        of March 31, 2008 and December 31, 2007 intangible
        assets consisted of the following:
  March
                  31,
                2008
              
              December
                  31,
                2007Land
                  use rights
              
              $
              69,584
              
              $
              66,839Patents
              
              
              51,768
              
              
              49,726121,352
              
              
              116,565Less:
                  Accumulated amortization
              
              
              (5,307
              )
              
              (1,337
              )$
              116,045
              
              $
              115,228
  For
        the
        three months ended March 31, 2008 and 2006, amortization expenses totaled
        $2,374
        and none, respectively.
  14
  **9.**
              **Income
                  Taxes**
 
 On
        May
        30, 2005, American International Dairy Holdings, Inc. executed a Share Transfer
        Agreement with Heilongjian Xing An Ling Dairy Co., Ltd., a corporation organized
        and existing under the laws of People’s Republic of China. XAL applied to be as
        a foreign invested company right after the share transfer, which business
        license has been approved as a foreign invested company on January 10, 2006.
        According to Chinese taxation policy, there is income tax exemption for 2
        years
        and half for 3 years suitable to foreign invested company, advanced Technology
        Company or software Development Company. XAL is considered an Advanced
        Technology Company. Therefore the Company receives this income tax exemption
        policy from January 10, 2006 the date approval as a foreign invested company.
        The Company received a 100% tax holiday as of January 10, 2006. On January
        10,
        2008 the Company’s tax exemption was reduced to 50% of the prevailing tax rate
        and will continue at this reduced rate for three additional years.
 
 LvBao
        is
        currently subject to the Enterprise income tax of 33%.
 
 A
        reconciliation of the provision for income taxes with amounts determined
        by the
        U.S. federal income tax rate to income before income taxes is as
        follows.
 
 The
        components of net income (loss) before provision for income tax consist of
        following:
 
 Three
                  Months
                Ended March 31,2008
              
              2007U.S.
                  Operations
              
              $
              (374,000
              )
              $
              (14,000
              )Chinese
                  Operations
              
              
              457,000
              
              
              677,000$
              83,000
              
              $
              663,000
  The
        components of the provision for income taxes are approximately as
        follows:
 
 Three Months
                Ended March 31,2008
              
              2007Federal,
                  State and Local
              
              $
              -
              
              $
              -Peoples
                  Republic of China -Federal and Local
              
              
              80,600
              
              
              24,300$
              80,600
              
              $
              24,300
  The
        table
        below approximately summarizes the reconciliation of the Company’s income tax
        provision (benefit) computed at the statutory U.S. Federal rate and the actual
        tax provision:
 
 Three
                  Months
                Ended March 31,2008
              
              2007Income
                  tax (benefit) provision at Federal statutory rate
              
              $
              28,000
              
              
              225,000State
                  income taxes, net of Federal benefit
              
              
              5,000
              
              
              40,000U.S.
                  tax rate in excess of foreign tax rate
              
              
              (32,000
              )
              
              (47,000
              )Abatement
                  of foreign income taxes
              
              
              (68,400
              )
              
              (199,700
              )Increase
                  in valuation allowance
              
              
              148,000
              
              
              6,000Tax
                  (benefit) provision
              
              $
              80,600
              
              $
              24,300
  15
  The
        Company has a U.S net operating loss carryforward of approximately $792,000
        as
        of December 31, 2007 which expires in 2027. The deferred tax asset associated
        with these net operating loss carryforwards was fully reserved as of March
        31,
        2008.
 
 The
        change in the valuation allowance as of March 31, 2008 and 2007 was $148,000
        and
        $6,000, respectively.
 
 Had
        the
        tax exemption not been in place for the three months ended March 31, 2008
        and
        2007, the Company estimates the following proforma financial statement
        impact.
  Three
                  Months
                Ended
                  March 31,2008
              
              2007Net
                  income before tax provision, as reported
              
              $
              83,400
              
              $
              663,000Less
                  Tax provision not exempted
              
              
              80,600
              
              
              24,300Less
                  Tax provision exempted
              
              
              68,400
              
              
              199,700Proforma
                  Net income
              
              $
              (65,600
              )
              $
              439,000
  **10.**
              **Employee
                  Retirement Benefits and Post Retirement
                  Benefits**
 
 According
        to the Heilongjiang Provincial regulations on state pension program, both
        employees and employers have to contribute toward pensions. The pension
        contributions range from 2% to 8% that was contributed by individuals
        (employees), and the Company is required to make contributions to the state
        retirement plan based on 20% of the employees’ monthly basic salaries. Employees
        in the PRC are entitled to retirement benefits calculated with reference
        to
        their basic salaries on retirement and their length of service in accordance
        with a government managed benefits plan. The PRC government is responsible
        for
        the benefit liability to these retired employees. During the years ended
        March
        31, 2008 and 2007, respectively, the Company contributed $26,849 and $22,150
        in
        pension contributions.
 
 **11.**
              **Related-Party
                  Transactions**
  On
        May
        28, 2006, the Company purchased machinery, facilities, housing and 100 cows
        from
        a stockholder of the Company for a note of $204,598, which approximated
        historical cost of these assets. The note does not bear interest and is due
        on
        demand.
 
 **12.**
              **Put/Call
                  Liability**
 
 On
        October 9, 2007, the Company entered into Put/Call Agreements with two (2)
        of
        its stockholders (the “Put/Call Stockholders”), pursuant to which the Put/Call
        Shareholders granted the Company an option to repurchase an aggregate of
        1,944,444 shares (the “Put/Call Shares”) from the Put/Call Stockholders (the
“Call Option”), for an exercise price of $1.63 per share (the “Call Option
        Price”), if the following conditions have been met (the “Call Option
        Conditions”):
 
 ·
              Either
                  (i) a registration statement (“Registration Statement”) covering the
                  resale of the Put/Call Shares has been declared effective by the
                  Commission, and has been kept continuously effective by the Company,
                  or
                  (B) all of the Put/Call Shares are available for sale without registration
                  pursuant to Rule 144(k); and
  16
  ·
              The
                  closing price of a share of Common Stock of the Company as traded
                  on the
                  Over-the-Counter Bulletin Board (or such other exchange or stock
                  market on
                  which the Common Stock may then be listed or quoted) equals or
                  exceeds
                  $4.08 (appropriately adjusted for any stock split, reverse stock
                  split,
                  stock dividend or other reclassification or combination of the
                  Common
                  Stock occurring after the date hereof) for at least ten (10) consecutive
                  trading days immediately preceding the date that the Call Option
                  Exercise
                  Notice is given by the Company.
 
 **Term
        of the Call Option** ,
        the
        Company may only exercise its Call Option by delivering a written notice
        (a
“Call Option Exercise Notice”) to the Put/Call Stockholders within thirty (30)
        days of such time as all of the Call Option Conditions have been met. The
        Call
        Option may be exercised for all, but not less than all, of the Put/Call Shares.
        The repurchase shall be consummated within ninety (90) days following the
        date
        of the Call Option Exercise Notice.
 
 In
        addition, the Put/Call Stockholders shall have the right to cause the Company
        to
        repurchase the Put/Call Shares from the Put/Call Stockholders (the “Put Right”),
        for a price of $1.63 per share (the “Put Purchase Price”), if:
 
 ·
              the
                  Company fails to exercise its Call Option within ten (10) days
                  of a date
                  on which all of the Call Option Conditions have been met;
                  or
 
 ·
              the
                  Company consummates a private offering of not less than $5,000,000
                  of its
                  securities (a “Qualified Offering”); or
 
 ·
              the
                  Company fails to (i) file the Registration Statement within thirty
                  (30)
                  business days of the Closing Date (the “Filing Date”), (B) have the
                  Registration Statement declared effective within ninety (90) calendar
                  days
                  from the Filing Date, or, if reviewed by the Commission, within
                  one
                  hundred eighty (180) calendar days after the Filing Date, or (C)
                  keep the
                  Registration Statement continuously effective until all of the
                  Shares are
                  available for sale without registration pursuant to Rule 144(k);
                  or
  ·
              the
                  Company fails to consummate a Qualified Offering within two (2)
                  years of
                  the date hereof (each of the aforementioned conditions, a “Put Right
                  Trigger”).
  **Term
        of the Put option** ,
        the
        Put/Call Stockholders shall exercise their Put Right by giving written notice
        (“Put Exercise Notice”) of their exercise of the Put Right to the Company within
        thirty (30) days of a Put Right Trigger. The Put/Call Stockholders may only
        exercise their Put Right as to all, but not less than all, of the Put/Call
        Shares. Upon exercise of the Put Right by the Shareholder, the repurchase
        of the
        Put/Call Shares by the Company shall be consummated within ninety (90) days
        following the date of the Put Exercise Notice.
  In
        accordance with SFAS 150 *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity* the
        Company recorded the value of the Put/Call agreement of $3,169,444 as a
        liability as of October 9, 2007. The value of the Put/Call agreement was
        based
        on the fair market value of the underlying common stock of $1.63 at October
        9,
        2007. As of March 31, 2008 there has been no change in the Put/Call liability
        as
        the fair market value of the underlying common stock has not
        changed.
 
 On
        April
        9, 2008 the company and the Put/Call Stockholders executed a waiver and
        amendment to the Put/Call Agreement reaffirming that the Put/Call Agreement
        is
        still in full force and removing the following provision as a Put Right
        Trigger:
 
 ·
              The
                  Company fails to (i) file the Registration Statement within thirty
                  (30)
                  business days of the Closing Date (the “Filing Date”), (B) have the
                  Registration Statement declared effective within ninety (90) calendar
                  days
                  from the Filing Date, or, if reviewed by the Commission, within
                  one
                  hundred eighty (180) calendar days after the Filing Date, or (C)
                  keep the
                  Registration Statement continuously effective until all of the
                  Shares are
                  available for sale without registration pursuant to Rule
                  144(k).
  17
  **13.**
              **Equity**
 
 **Private
        Placements**
 
 On
        April
        18, 2007, the Company entered into a Equity Investment Agreement pursuant
        to
        which the Company issued 3,888,888 shares of common stock, adjusted for the
        reverse merger stock exchange, for $2,000,000.
 
 On
        October 9, 2007, the Company entered into a Securities Purchase Agreement
        with
        an accredited investor, pursuant to which the Company sold 1,333,333 units
        of
        securities of the Company, consisting of: (i) 1,333,333 shares of Common
        Stock,
        (ii) three-year warrants to purchase 266,667 additional shares of Common
        Stock,
        at an exercise price of $0.94 per share (W-1 Warrants), and (iii) two-year
        warrants to purchase 1,333,333 additional shares of Common Stock, at an exercise
        price of $1.50 per share (W-2 Warrants), for an aggregate purchase price
        of
        $1,000,000.
 
 On
        October 9, 2007, the Company sold an aggregate of 2,061,227 Units to accredited
        investors, consisting of (i) 2,061,227 shares of Common Stock, (ii) three-year
        warrants to purchase 412,245 additional shares of Common Stock, at an exercise
        price of $2.04 per share (Initial Class A Warrants), and (iii) two-year warrants
        to purchase 2,061,227 additional shares of Common Stock, at an exercise price
        of
        $3.26 per share (Initial Class B Warrants), for an aggregate purchase price
        of
        $3,359,800.
 
 On
        October 19, 2007, the Company entered into purchase agreements with accredited
        investors, pursuant to which it sold 2,846,746 Units, consisting of (i)
        2,846,746 shares of Common Stock, (ii) three year warrants to purchase 569,346
        additional shares of Common Stock, at an exercise price of $2.04 per share
        (Additional Class A Warrants), and (iii) two-year warrants to purchase 2,846,746
        additional shares of Common Stock, at an exercise price of $3.26 per share
        (Additional Class B Warrants), for an aggregate purchase price of
        $4,640,200.
 
 Offering
        costs of $985,452 related to the above offerings were recorded as a reduction
        in
        the net proceeds of the offerings and reduced additional paid-in capital.
        Approximately $285,000 of the costs were legal fees and expense with the
        balance
        being placement fees as discussed below.
 
 **Registration
        Rights Agreement**
 
 On
        October 9, 2007 and October 19, 2007, the Company entered into Registration
        Rights Agreements (each, a “Registration Rights Agreement,” and collectively the
“Registration Rights Agreements”) with the accredited investors,( the
“Investors”), pursuant to which it agreed that within thirty (30) business days
        of the Closing Date (the Filing Date), the Company will file a registration
        statement (the Registration Statement) with the Securities and Exchange
        Commission (the “Commission”) covering the resale of (i) the shares of Common
        Stock purchased in the above placements (collectively, the “Offerings”) (the
“Purchased Shares”), (ii) the Common Stock issuable upon exercise of the
        warrants issued in the Offerings (the “Registrable Securities”). Further, the
        Company agreed to use its best efforts to (i) cause the Registration Statement
        to be declared effective within ninety (90) calendar days from the Filing
        Date,
        or, if reviewed by the Commission, within one hundred eighty (180) calendar
        days
        after the Filing Date, and (ii) keep the Registration Statement continuously
        effective until two (2) years after the Closing Date, subject to normal and
        customary blackout periods. After two years the Company’s obligation to keep the
        Registration Statement ends.
  Pursuant
        to the Registration Rights Agreements, the Company will be required to pay
        liquidated damages (payable in cash in arrears at the end of each month during
        which a registration default occurs and is continuing) to the holders of
        the
        Purchased Shares, the First Investor Warrants, the Class A Warrants, the
        Class B
        Warrants, or the Common Stock issued upon exercise of the First Investor
        Warrants, Class A Warrants and Class B Warrant (collectively, the “Securities”)
        if (i) the Company fails to file the Registration Statement within thirty
        (30)
        business days from the Closing Date, (ii) the Commission does not declare
        the
        Registration Statement effective within ninety (90) days of the Filing Date
        (or
        one hundred eighty (180) days in the event of a review by the Commission)
        (the
“Effectiveness Date”), (iii) the Company fails to request acceleration of
        effectiveness within five (5) business days of a notice of no further review
        from the Commission, (iv) the Company fails to respond to the Commission
        within
        ten (10) business days of receipt by the Company of any comments on the
        Registration Statement, or (v) after it has been declared effective, the
        Registration Statement ceases to be effective or available or if the Company
        suspends the use of the prospectus forming a part of the Registration Statement
        (A) for more than thirty (30) days in any period of 365 consecutive days
        if the
        Company suspends in reliance on its ability to do so due to the existence
        of a
        development that, in the good faith discretion of its board of directors,
        makes
        it appropriate to so suspend or which renders the Company unable to comply
        with
        SEC requirements, or (B) for more than sixty (60) days in any period of 365
        consecutive days for any reason. The liquidated damages will accumulate at
        the
        rate of one and one-half percent (1.5%) of the purchase price paid by the
        Investors for the Securities offered for each thirty (30) day period during
        which a registration default is continuing.
  18
 
 Notwithstanding
        anything to the contrary stated in the Registration Rights Agreements, the
        Company shall be entitled to limit the Registrable Securities to the extent
        necessary to avoid any issues arising from the recent interpretations by
        the SEC
        of Rule 415 of the Securities Act of 1933, as amended.
 
 As
        of
        March 31, 2008 there were accrued liquidated damages of $343,199. Additional
        liquidated damages of $127,900 were accrued in the three months ended March
        31,
        2008. Additionally the Company is accruing $4,500 per day in liquidated damages
        with maximum additional damages possible of $1,456,801.
 **Warrant
          Tender Offer**
 
 As
          of
          April 24, 2008, the Company commenced an offer (the “Offer”) to the holders of
          its outstanding warrants, pursuant to which the warrant holders may tender
          their
          warrants for shares of the Company’s Common Stock at a reduced exercise price as
          follows:
 
 ·
                With
                    respect to warrants having an exercise price of $0.94 per share,
                    a holder
                    accepting the Offer may exercise some or all of such warrants
                    at $0.75 per
                    share of Common Stock;
  ·
                With
                    respect to warrants having an exercise price of $1.50 per share,
                    a holder
                    accepting the Offer may exercise some or all of such warrants
                    at $1.20 per
                    share of Common Stock;
  ·
                With
                    respect to warrants having an exercise price of $2.04 per share,
                    a holder
                    accepting the Offer may exercise some or all of such warrants
                    at $1.63 per
                    share of Common Stock; and
  ·
                With
                    respect to warrants having an exercise price of $3.26 per share,
                    a holder
                    accepting the Offer may exercise some or all of such warrants
                    at $2.61 per
                    share of Common Stock.
  A
          warrant
          holder may tender less than the full number of its warrants. If a warrant
          holder
          tenders less than all of its warrants, the remaining warrants not tendered
          will
          remain outstanding until they expire by their current terms or are
          exercised.  In
          addition, a warrant holder may change its election and withdraw from the
          Offer. If
          a
          warrant holder accepts the Offer, the exercise price for the tendered warrants
          must be paid in cash. If all of the Company’s warrant holders exercise their
          warrants, the Company will raise $16,929,805.
 
 The
          Offer
          will expire on May 28, 2008, unless the Company sooner extends or
          terminates the period of time during which the offer is open, by giving
          oral or
          written notice of such extension or termination.
 **Treasury
        Stock**
 
 On
        October 9, 2007, the Company entered into a Share Repurchase Agreement with
        a
        shareholder (the “Share Repurchase Agreement”), pursuant to which the Company
        repurchased 1,944,444 shares of its issued and outstanding Common Stock at
        from
        such shareholder at $1.63 per share for an aggregate purchase price of
        $3,169,444. The $1.63 per share represented the current per unit offering
        price
        of the private placements above. The repurchased shares have been returned
        to
        treasury stock.
 
 **Warrants**
 
 Information
        with respect to stock warrants outstanding as of March 31, 2008 are as
        follows:
  Exercise
                  Price
              
              Outstanding
                December
                  31, 2007
              
              Granted
              
              Expired
                  or Exercised
              
              Outstanding
                  March 31, 2008
              
              Expiration
                  Date$0.94
              
              
              373,334
              
              
              -0-
              
              
              -0-
              
              
              373,334
              
              
              10/09/2010$1.50
              
              
              1,333,333
              
              
              -0-
              
              
              -0-
              
              
              1,333,333
              
              
              10/09/2009$2.04
              
              
              804,884
              
              
              -0-
              
              
              -0-
              
              
              804,874
              
              
              10/09/2010$2.04
              
              
              569,346
              
              
              -0-
              
              
              -0-
              
              
              569,346
              
              
              10/19/2010$3.26
              
              
              2,061,227
              
              
              -0-
              
              
              -0-
              
              
              2,061,227
              
              
              10/09/2009$3.26
              
              
              2,846,746
              
              
              -0-
              
              
              -0-
              
              
              2,846,746
              
              
              10/19/2009
 
  **14.**
              **Common
                  Welfare Reserves**
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with PRC accounting rules and regulations, to the general reserve.
        The Company voluntarily contributed an additional 5% in the three months
        ended
        March 31, 2008. The balance of these reserves at March 31, 2008 and 2007,
        was
        $1,340,713 and $639,331, respectively. These amounts are restricted and are
        included in retained earnings.
 
 This
        fund
        can only be utilized on capital items for the collective benefit of the
        Company’s employees, such as construction of dormitories, cafeteria facilities,
        and other staff welfare facilities. The fund is non-distributable other than
        upon liquidation.
  19
  **15.**
              **Other
                  Comprehensive Income**
 
 SFAS
        No.
        130, *Reporting
        Comprehensive Income* ,
        requires the reporting of comprehensive income in addition to net income
        from
        operations. Comprehensive income is a more inclusive financial reporting
        methodology that includes disclosure of certain financial information that
        historically has not been recognized in the calculation of net
        income.
 
 The
        Company reports comprehensive income (loss) in its consolidated statements
        of
        stockholders’ equity. Comprehensive income (loss) represents changes in
        stockholders’ equity from non-owner sources. The components of other
        comprehensive income included adjustments from foreign currency
        translation.
 
 **16.**
              **Earnings
                  Per Share**
 
 SFAS
        128
        requires a reconciliation of the numerator and denominator of the basic and
        diluted earnings per share (EPS) computations.
 
 For
        the
        three months ended March 31, 2008, dilutive shares include outstanding warrants
        to purchase 373,334 shares of common stock at an exercise price of $0.94
        and
        warrants to purchase 1,333,333 shares at an exercise price of $2.04. Warrants
        to
        purchase 6,282,193 share of common stock were not included in dilutive shares
        as
        the effect would have been anti-dilutive.
 
 There
        were no dilutive shares for the three months ended March 31, 2007.
 
 The
        following reconciles the components of the EPS computation:
 
 Income
              
              Shares
              
              Per
                  Share(Numerator)
              
              (Denominator)
              
              AmountFor
                  the three months ended March 31, 2008:Net
                  income
              
              $
              2,818Basic
                  EPS income available to common shareholders
              
              $
              2,818
              
              
              29,296,832
              
              $
              0.00Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              219,223Diluted
                  EPS income available to common shareholders
              
              $
              2,818
              
              
              29,513,646
              
              $
              0.00For
                  the three months ended March 31, 2007:Net
                  income
              
              $
              638,786Basic
                  EPS income available to common shareholders
              
              $
              638,786
              
              
              20,416,658
              
              $
              0.03Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              —Diluted
                  EPS income available to common shareholders
              
              $
              638,786
              
              
              20,416,658
              
              $
              0.03
  **17.**
              **Commitments
                  and Contingencies**
 
 The
        Company has various purchase commitments for materials, supplies and services
        incident to the ordinary conduct of business, generally for quantities required
        for the Company’s business and at prevailing market prices. No material annual
        loss is expected from these commitments. At March 31, 2008 the Company has
        commitments for advertising contracts in the next year of $943,837.
  20
  The
        Company has placed a deposit of $561,894 with a governmental agency allowing
        the
        Company to negotiate a possible purchase of an additional processing facility.
        No agreement as to the purchase of the facility has been reached.
 
 The
        Company has contracted to purchase an office building for $1,911,010 of which
        a
        deposit of $1,146,606 has been made. The balance of $764,404 will be due
        on
        expected completion of the building in June 2008.
  No
        government approvals are required to conduct the Company’s principal operations,
        and the Company is not aware of any probable governmental regulation of our
        business sectors in the near future. Although management believes that the
        Company is in material compliance with the statutes, laws, rules and
        regulations of every jurisdiction in which it operates, no assurance can
        be
        given that the Company’s compliance with the applicable statutes, laws,
        rules and regulations will not be challenged by governing authorities or
        private parties, or that such challenges will not lead to a material adverse
        effect on the Company’s financial position, results of operations, or cash
        flows.
 
 The
        Company and its subsidiaries are self-insured, and they do not carry any
        property insurance, general liability insurance, or any other insurance that
        covers the risks of their business operations. As a result any material loss
        or
        damage to its properties or other assets, or personal injuries arising from
        its
        business operations would have a material adverse effect on the Company’s
        financial condition and operations.
 
 The
        Company is not involved in any legal matters arising in the normal course
        of
        business. While incapable of estimation, in the opinion of the management,
        the
        individual regulatory and legal matters in which it might involve in the
        future
        are not expected to have a material adverse effect on the Company’s financial
        position, results of operations, or cash flows.
 
 **18.**
              **Operating
                  Leases**
 
 The
        Company leases various distribution facilities. All leases are on an annual
        basis and commence on January 1, of each year. For the three months ended
        March
        31, 2008 and 2007, the Company incurred rental expense of $31,520 and $19,584,
        respectively. As of March 31, 2008, the Company had outstanding lease
        commitments totaling $96,597, all of which were due within the next
        year.
 
 **19.**
              **Segment
                  reporting**
 
 The
        Company operates in one operating segment in accordance with the provisions
        of
        SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
        Information”. Although the Company has key product lines of milk, soybean milk,
        and rice powder, the Company’s chief operating decision maker reviews and
        evaluates one set of combined financial information deciding how to allocate
        resources and in assessing performance.
 
 For
        the
        three months ended March 31, 2008, the Company’s sales revenue from various
        products are as follows:
  2008
              
              2007Milk
                  powder
              
              $
              9,984,497
              
              $
              5,511,173Soybean
                  milk powder
              
              
              252,416
              
              
              224,319Rice
                  powder
              
              
              197,546
              
              
              147,122$
              10,434,459
              
              
              5,882,614
  21


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**Forward
      Looking Statements**





This
      Quarterly Report on Form 10-Q contains “forward-looking statements” that involve
      substantial risks and uncertainties. You can identify such statements by forward
      looking words such as “may,” “expect,” “plans,” “intends,” “anticipate,”
“believe,” “estimate,” and “continue” or similar words. Such statements involve
      known and unknown risks, uncertainties and other factors that may cause our
      actual results, performance or achievements to be materially different from
      any
      future results, performance or achievements expressed or implied by such
      forward-looking statements. The forward-looking statements included herein
      are
      based on current expectations that involve numerous risks and uncertainties.
      Our
      plans and objectives are based, in part, on assumptions involving the continued
      growth and expansion of our business. Assumptions relating to the foregoing
      involve judgments with respect to, among other things, future economic,
      competitive and market conditions and future business decisions, all of which
      are difficult or impossible to predict accurately and many of which are beyond
      our control. Although we believe the assumptions underlying the forward-looking
      statements are reasonable, any of the assumptions could prove inaccurate and,
      therefore, there can be no assurance the forward-looking statements included
      in
      this Report will prove to be accurate. In light of the significant uncertainties
      inherent in the forward-looking statements included herein, the inclusion of
      such information should not be regarded as a representation by us or any other
      person that our objectives and plans will be achieved.





**Overview**





We
      are a
      producer of milk powder, rice powder and soybean milk powder, which currently
      comprise approximately 96%, 2% and 2% of our sales, respectively. Through our
      network of over 600 salespeople, our products are distributed throughout 20
      provinces in the People’s Republic of China, and sold in over 5,600 retail
      outlets.





Our
      products are marketed under two brand names:





·
            “Xing
                An Ling,” which is designed for low-end customers; and




·
            “Yi
                Bai,” which is designed for middle and high-end
                customers.




The
      Chinese government has initiated programs to promote milk consumption and is
      providing incentives to increase dairy production. The dairy market today in
      China is over $13 billion and is expected to grow at a rate of 15% per year
      for
      the foreseeable future. We focus on the infant formula segment of the market,
      which is expected to grow even faster, at a rate of approximately 23% through
      2011. Currently, it is estimated that demand for infant formula in China
      outstrips supply by at least 2-to-1.





We
      are
      one of a select few dairy producers in China to have received an Infant &
Baby Formula Milk Powder Production Permit from the State General Administration
      of Quality Supervision and Inspection and Quarantine of the People’s Republic of
      China. Only current license holders are permitted to produce formula milk powder
      in China.





Because
      of our close proximity to its sources of fresh milk, we are able to complete
      the
      production process in approximately 30 hours. We produced approximately 7,000
      tons of milk powder in fiscal 2007, up from approximately 5,000 tons in fiscal
      2006. In 2008, by adding a third shift to the existing two shifts working
      schedule, we plan on producing 9,000 tons of milk powder. In addition, we are
      about to begin construction of a new production facility, which will enable
      us
      to produce an additional 9,000 tons of milk powder in fiscal 2009. As a result,
      we believe we will have the capacity to produce over 20,000 tons of milk powder
      per year by fiscal 2010. It is expected that our production of rice powder
      and
      soymilk powder will also increase in volume, while continuing to comprise
      approximately 2% and 2% of our overall sales, respectively.




22




All
      of
      our business is conducted through our wholly-owned Chinese subsidiaries
      Heilonjiang Xing An Ling Dairy Co. Limited, which handles our promotion, sales
      and administrative functions, and Heilongjiang Beian Nongken Changxing Lvbao
      Dairy Limited Liability Company, which handles production of our
      products.





**Recent
      Developments**




***Reverse
      Merger, Private Placements and Related Transactions***





Prior
      to
      October 9, 2007, we were a public shell company, as defined by Securities Act
      Rule 405 and Exchange Act Rule 12b-2, without material assets or activities.
      On
      October 9, 2007, we completed a reverse merger (the “Merger”), pursuant to which
      our wholly-owned subsidiary merged with and into a private company, American
      International Dairy Holding Co., Inc. (“AIDH”), with such private company being
      the surviving company. In connection with this Merger, we discontinued our
      former business and succeeded to the business of AIDH as our sole line of
      business. For financial reporting purposes, AIDH is considered to be the
      accounting acquirer. Accordingly, the historical financial statements presented
      and the discussion of financial condition and results of operations herein
      are
      those of AIDH and do not include our historical financial results.





Simultaneously
      with the Merger, we closed two private offering of units of our securities.
      In
      the first, we sold to John V. Winfield 1,333,333 units of our securities,
      consisting of: (i) 1,333,333 shares of our Common Stock, (ii) three-year
      warrants to purchase 266,667 shares of our Common Stock, at an exercise price
      of
      $0.94 per share, and (iii) two-year warrants to purchase 1,333,333 shares of
      our
      Common Stock, at an exercise price of $1.50 per share, for an aggregate purchase
      price of $1,000,000 (the “First Offering”). In the second, we sold to certain
“accredited investors” 2,061,227 units of our securities, consisting of
      (i) 2,061,227 shares of our Common Stock, (ii) 412,245 Class A
      Warrants, and (iii) 2,061,227 Class B Warrants, for an aggregate purchase
      price of $3,359,800 (the “Initial Placement of the Second Offering”). The rights
      and obligations under the Warrants are further described in “Liquidity and
      Capital Resources - Warrants” below.





Upon
      the
      consummation of the Merger, and the closing of the Initial Placement of the
      Second Offering, we entered into a Share Repurchase Agreement with Grand Orient
      Fortune Investment, Ltd. (“Grand Orient”), a PRC company controlled by Mingwen
      Song, pursuant to which we repurchased 1,944,444 shares (the “Repurchase
      Shares”) of our issued and outstanding Common Stock from Grand Orient for an
      aggregate purchase price of $3,169,444 (the “Repurchase Transaction”). We
      determined to repurchase these shares, to reduce the overall dilution created
      by
      the First Offering and Second Offering. The repurchased shares are being held
      in
      treasury.





Immediately
      following the closing of the Repurchase Transaction, we entered into Put/Call
      Agreements with Grand Orient and Fortune Land Holding, Ltd., a PRC company
      controlled by Dexuan Yu (jointly, the “Put/Call Shareholders). Pursuant to the
      Put/Call Agreements we have the right to repurchase an aggregate of 1,944,444
      shares of our Common Stock from the Put/Call Shareholders under certain
      circumstances. In addition, the Put/Call Shareholders have the right to cause
      us
      to repurchase such shares at $1.63 per share if certain events occur. The
      Put/Call Agreements are further described in “Liquidity and Capital Resources -
      Put/Call Agreements” below.




23




On
      October 19, 2007, we conducted an additional closing of the Second Offering
      in
      which we sold 2,846,746 units of our securities to additional “accredited
      investors,” consisting of (i) 2,846,746 shares of our Common Stock, (ii)
      569,346 Class A Warrants, and (iii) 2,846,746 Class B Warrants, for an
      aggregate purchase price of $4,640,200 (the “Additional Placement of the Second
      Offering,” and together with the Initial Placement of the Second Offering, the
“Second Offering”).





We
      received aggregate net proceeds of $4,395,103.90 from the First Offering and
      Second Offering. We plan to use the net proceeds for general working capital
      purposes.





Following
      the Merger, the First Offering, the Second Offering and the Repurchase
      Transaction, we had 29,296,832 shares of Common Stock issued and outstanding,
      not including the 1,944,444 Repurchase Shares described above, which are being
      held in treasury.





***Warrant
      Tender Offer***





As
      of
      April 24, 2008, we commenced an offer (“Offer”) to the holders
      (“Warrantholders”) of our outstanding warrants (the “Warrants”), pursuant to
      which the Warrantholders may tender their Warrants for shares of our Common
      Stock at a reduced exercise price as follows:





·
            With
                respect to Warrants having an exercise price of $0.94 per share,
                a holder
                accepting the Offer may exercise some or all of such Warrants at
                $0.75 per
                share of Common Stock;




·
            With
                respect to Warrants having an exercise price of $1.50 per share,
                a holder
                accepting the Offer may exercise some or all of such Warrants at
                $1.20 per
                share of Common Stock;




·
            With
                respect to Warrants having an exercise price of $2.04 per share,
                a holder
                accepting the Offer may exercise some or all of such Warrants at
                $1.63 per
                share of Common Stock; and




·
            With
                respect to Warrants having an exercise price of $3.26 per share,
                a holder
                accepting the Offer may exercise some or all of such Warrants at
                $2.61 per
                share of Common Stock.




A
      Warrantholder may tender less than the full number of its Warrants. If a
      Warrantholder tenders less than all of its Warrants, the remaining Warrants
      not
      tendered will remain outstanding until they expire by their current terms or
      are
      exercised.  In
      addition, a Warrantholder may change its election and withdraw from the Offer. If
      a
      Warrantholder accepts our Offer, the exercise price for the tendered Warrants
      must be paid in cash. If all of our Warrantholders exercise their Warrants,
      we
      will raise $16,929,805.





The
      Offer
      will expire on May 28, 2008, unless we sooner extend or terminate the
      period of time during which the offer is open, by giving oral or written notice
      of such extension or termination.





The
      purpose of this Offer is to encourage the exercise of the outstanding Warrants
      in order to raise additional capital. We intend to apply the proceeds toward
      the
      cost of constructing a new production facility, which we believe will enable
      us
      to produce an additional 9,000 tons of milk powder in fiscal 2009. In addition,
      by reducing the number of outstanding Warrants, we can provide greater certainty
      to investors and potential investors regarding the number of shares of Common
      Stock which are, and may become, outstanding.




24




**Trends
      and Uncertainties**





***Narrowing
      of Gap in Milk Consumption***





The
      Chinese government has initiated programs to promote milk consumption and is
      providing incentives to increase dairy production. In addition to improving
      the
      overall health the populous, the government views increased dairy production
      as
      a solution to improve employment in rural areas thus improving social stability.
      It is expected that there will be a steady narrowing of the significant gap
      between China’s per capita milk consumption of 15kg per person and the global
      average of 100 kg per person.





***Industry
      Growth***





The
      dairy
      market today in China is over $13 billion. According to China National Bureau
      of
      Statistics, between 2000 to 2005 the dairy industry in China experienced an
      average growth of 16% per year. The dairy industry in China is projected to
      grow
      at rate of 15% per year from 2006 to 2012, to reach $32 billion by 2012.




The
      Dairy
      Association of China estimates that the infant formula market segment, which
      is
      the market segment we target, has grown even faster in recent years, at a rate
      of 20%-30% per year. We believe the following three factors are the main drivers
      of the infant formula market:





·
            Increased
                household income made infant formula more affordable in
                China;





·
            Increased
                number of working mothers or busy mothers created more demands for
                infant
                formula products; and





·
            Increased
                popularity and acceptance of infant formula
                products.





***Supply
      of Infant Formula***





It
      is
      estimated that the demand for infant formula in China outstrips supply by at
      least 2-to-1. Production capacity has been the bottle neck for our growth in
      recent years because production has not been able to keep up with demand.
      Management has determined to build a new production facility with annual
      production capacity of 9,000 tons of milk powder, which is expected to start
      production in 2009. Management will need to raise $10 million - $15 million
      to
      fund the expansion of new production facility **.** We
      expect
      that this increase in production capacity of approximately 130% will result
      in
      the doubling of our sales revenues, with a corresponding increase in cost of
      goods sold and sales and administrative expenses.





***Product
      Pricing and Raw Material Supply***





Historically
      we have been able to obtain raw milk and other raw materials to meet our
      production needs. The price of raw milk is affected by regional market in
      Heilongjiang China while other raw materials are affected by global markets.
      We
      expect that the raw materials we require to produce our products will continue
      to be available to us we grow. We will increase products’ prices to pass on
      higher raw material costs to consumers, however, there is no guarantee that
      we
      will be able to raise prices to the full extent necessary to cover rises in
      costs for raw materials.





25




***Brand
      Name and Product Quality***





There
      are
      more than 30 brand names of infant formula products are sold in China. Most
      of
      the International and larger players have been concentrating in the first tier
      cities, or well-known urban centers such as Beijing and Shanghai. The rest
      of
      the Chinese domestic companies have been focusing on less developed second
      and
      third cities where competition is less severe than the top ties cities. As
      consumers have many options for infant formula products, infant formula
      producers with better quality and safety images have the advantages to sell
      their product at higher price. Brand image and recognition are increasing
      important in gaining customer loyalty.





***Organic
      Label Milk Products***





Currently,
      there are no organic label milk powder products in the mainland China market.
      In
      February 2008, we obtained organic label certification from Guangdong Zhongjian
      Certification Co., Ltd. We plan to create an organic label product line
      beginning in fiscal 2008. We will need to test the market to determine demand
      for organic milk products. Initially, we expect sales of organic milk powder
      to
      be minor. However, over the long term, we believe that, similar to the growth
      of
      the organic milk market in the U.S., organic milk products will be very popular
      in China. Over time, this will help increase our revenues.





***Factors
      Affecting Raw Milk Production***





Raw milk
        production is influenced by a number of factors that are beyond our control
        including, but not limited to, the following:





·
            *seasonal
                factors*:
                dairy cows generally produce more milk in temperate weather than
                in cold
                or hot weather and extended unseasonably cold or hot weather could
                lead to
                lower than expected production;




·
            *environmental
                factors*:
                the volume and quality of milk produced by dairy cows is closely
                linked to
                the quality of the nourishment provided by the environment around
                them, if
                environmental factors cause the quality of nourishment to decline,
                milk
                production could decline and we may have difficulty finding sufficient
                raw
                milk; and




·
            *governmental
                agricultural and environmental policy*:
                declines in government grants, subsidies, provision of land, technical
                assistance and other changes in agricultural and environmental policies
                may have a negative effect on the viability of individual dairy farms,
                and
                the numbers of dairy cows and quantities of milk they are able to
                produce.




**Results
      of Operations**





***Three-Month
      Period Ended March 31, 2008 Compared to Three-Month Period Ended March 31,
      2007***





The
      following summarizes changes in our operations for the fiscal quarters ended
      March 31, 2008 and 2007. Net income decreased by $635,968, or approximately
      99.6%, from $638,786 in the three-month period ended March 31, 2007 to $2,818
      for the three-month period ended March 31, 2008. This decrease in net income
      is
      attributable to increases in our cost of goods sold of $2,507,663 and total
      operating expenses of $2,630,832, partially offset by an increase in our sales
      of $4,551,845.





26


**Sales
      and Cost of Goods Sold**





**For
                the Fiscal Quarters Ended March 31,****2008**
            
            **2007****Sales**
            
            $
            10,434,459
            
            $
            5,882,614**Cost
                of Goods Sold**
            
            
            6,011,234
            
            
            3,503,571**Gross
                Profit**
            
            $
            4,423,225
            
            $
            2,379,043





**Sales.** Sales
      increased by $4,551,845, or approximately 77.4%, from $5,882,614 in the fiscal
      quarter ended March 31, 2007 to $10,434,459 for the fiscal quarter ended March
      31, 2008. This increase was due to the following factors:





·
              We
                  started selling a new series of products, called the “XA Series,” during
                  the fiscal quarter ended March 31, 2008, which contributed $572,000
                  in
                  additional sales;




·
            Our
                products became increasing popular in mainland China due to our new
                television advertising campaign;
                and




·
            Sales
                of our milk powder products increased by 81% in the three-month period
                ended March 31, 2008, as compared to the same period in the prior
                year.




**Cost
      of Goods Sold.** Cost of
      goods sold increased by $2,507,663, or approximately 71.6%, from $3,503,571
      in
      the three-month period ended March 31, 2007 to $6,011,234 for the three-month
      period ended March 31, 2008. This increase was directly related to an increase
      in the amount of raw materials we purchased to satisfy the rising demand for
      our
      products and our related increase in sales.





**Gross
      Profit.** Gross
      profit was $4,423,225, or approximately 42.4% of our sales for the fiscal
      quarter ended March 31, 2008, compared to gross profit of $2,379,043, or
      approximately 40.4% of our sales for the fiscal quarter ended March 31, 2007.
      The reason for this slight increase in our gross profit margin was an increase
      in the prices of our products, partially offset by increase in the prices of
      the
      raw materials we use to produce our products.





**Operating
      Expenses**





**For
                the Fiscal Quarters Ended March 31,****2008**
            
            **2007****Operating
                Expenses**Selling
                expenses
            
            $
            3,731,334
            
            $
            1,540,078Administrative
            
            
            598,004
            
            
            161,430Depreciation
                and amortization
            
            
            14,861
            
            
            11,859Total
                operating expenses
            
            $
            4,344,199
            
            $
            1,713,367





**Selling
      Expenses** .
      Selling
      expenses increased by $2,191,256, or approximately 142.3%, from $1,540,078
      in
      the three-month period ended March 31, 2007 to $3,731,334 for the three-month
      period ended March 31, 2008. The primary reason for this increase, was an
      increase in our advertising costs of $1,541,941 in the three-month period ended
      March 31, 2008, as compared to the same period in the prior year, due to an
      aggressive advertising campaign we initiated during the first quarter of
      2008.




27




**Administrative
      Expenses** .
      Administrative expenses increased by $436,574, or approximately 270.4%, from
      $161,430 in fiscal quarter ended March 31, 2007 to $598,004 for the fiscal
      quarter ended March 31, 2008. The principal reasons for this increase were
      increases in office expenses and in staff salaries directly related to our
      growth, increases in professional fees related to our public company regulatory
      filings, and our accrual of liquidated damages in the amount of $127,900 in
      connection with our inability to satisfy certain registration requirements
      on a
      timely basis.





**Provision
      for Income Taxes**





**For
                the Fiscal Quarters Ended March 31,****2008**
            
            **2007****Provision
                for Income Taxes**Current
            
            $
            80,580
            
            $
            24,302Deferred
            
            
            --
            
            
            --$
            80,580
            
            $
            24,302





**Provision
      for Income Taxes** .
      Income
      taxes increased by $56,278, or approximately 231.6%, from $24,302 in the
      three-month period ended March 31, 2007 to $80,580 for the three-month period
      ended March 31, 2008. This increase was due primarily to the expiration of
      the
      full income tax exemption our subsidiary Heilonjiang Xing An Ling Dairy Co.
      Limited had received through January 10, 2008. On that date, the tax exemption
      reduced from 100% to 50% of the prevailing tax rate. The 50% tax exemption
      will
      continue through 2010.





**Liquidity
      and Capital Resources**





***Uses
      of Capital***





**For
                the Fiscal Quarters Ended March 31,****2008**
            
            **2007****Net
                cash provided by operating activities**
            
            $
            1,194,399
            
            $
            397,915**Net
                cash used in investing activities**
            
            
            (27,469
            )
            
            --**Net
                cash provided by (used in) financing activities**
            
            $
            (284,439
            )
            $
            256,560





*Net
      Cash Provided By Operating Activities*





For
      the
      three-month period ended March 31, 2008, $1,194,399 was provided by operating
      activities, compared with $397,915 provided by operating activities for the
      three-month period ended March 31, 2007. Our net cash flows provided from
      operating activities increased primarily because of increases in payables and
      accrued expenses of $1,504,418 (including liquidated damages we incurred in
      the
      amount of $127,900, due to our inability to satisfy certain registration
      requirement on a timely basis), partially offset by an increase in our inventory
      of $847,284 and a decrease in our net income of $635,968.





28


*Net
      Cash Used In Investing Activities*





For
      the
      fiscal quarter ended March 31, 2008, we used $27,469 in investing activities.
      We
      did not use any cash in investing activities for the fiscal quarter ended March
      31, 2007. This increase of $27,469 used in investing activities was due
      primarily to our purchase of new equipment necessary to keep up with our
      growth.




*Net
      Cash Provided By (Used In) Financing Activities*





For
      the
      three-month period ended March 31, 2008, $284,439 was used in financing
      activities, compared with $256,560 provided by financing activities for the
      fiscal year ended March 31, 2007. This increase in net cash used in financing
      activities was due our repayment of notes payable.




Our
      cash
      and cash equivalents at March 31, 2008 was $7,668,051. Based upon our short
      term
      liabilities, we believe our cash and cash equivalents are adequate to satisfy
      our working capital needs and sustain our ongoing operations for the next twelve
      months. We are expecting the cash flows to fluctuate in the future as we try
      to
      raise funds from the capital markets to build new production facilities.





***General***




Historically
      we relied on investments by our Chief Executive Officer and shareholders and
      bank loans to meet our cash and capital expenditures. However, as the amount
      of
      capital expenditures increases, we will depend more on the capital markets
      to
      raise funds through private and public offerings of equity and/or debt. One
      way
      we expect to raise funds over the short term, is through the Offer we have
      made
      to our Warrantholders, as further described in “Recent Developments - Warrant
      Tender Offer” above.





We
      have
      experienced tremendous growth well above the industry average during recent
      years. Sales increased from approximately $7.9 million in 2005 to approximately
      $29.6 million in 2007, a 275% increase over two years, or a compound annual
      growth rate of 66%. Net income increased from approximately $0.8 million in
      2005
      to approximately $4.2 million in 2007, a 425% increase over two years, or a
      compound annual growth rate of 100%. Following the same trend, working capital
      increased from approximately $1.4 million in 2005 to approximately $13.1 million
      in 2007, including cash generated from operations as well as fund raise from
      private offering we consummated in October 2007.





Our
      cash
      and cash equivalents at March 31, 2008 was $7,668,051. We are expecting the
      cash
      flows to fluctuate in the future as we try to raise funds from the capital
      markets to build new production facilities.





Our
      growth strategy for the next three years will be primarily focused on expanding
      production capacity and strengthening sales efforts. To help implement this
      strategy, management decided to build a new facility that will have annual
      production capacity of 9,000 tons of milk powder, which is expected to commence
      production in the first quarter of 2009. If our sales for fiscal 2009 meet
      management's expectations, management plans to build another new facility with
      annual production capacity of 18,000 tons of milk powder. If management
      successfully executes its three-year plan, our total production capacity is
      expected to reach between 25,000 and 35,000 tons of milk powder by 2010.
      Management will also consider making strategic acquisitions if there are good
      opportunities in the marketplace. However, revenue from acquisitions has not
      been included in the planned growth. Our plans to raise $10 million to $15
      million needed for the new facilities from the capital market through private
      or
      public equity and/or debt offerings. One way we expect to raise funds over
      the
      short term, is through the Offer we have made to our Warrantholders, as further
      described in “Recent Developments - Warrant Tender Offer” above. There can be no
      assurance that that any additional financing will become available to us, and
      if
      available, on terms acceptable to us.




29




In
      addition, we have contracted to purchase an office building for approximately
      $1.8 million of which a deposit of approximately $1.1 million has been made.
      This office building, which is located in Heilongjiang province, will serve
      as
      our corporate headquarters. The balance of approximately $0.7 million will
      be
      due on expected completion of the building expected in June 2008. These funds
      will be paid out of our retained earnings.





Currently,
      we spend about 8% - 12% of total revenues on advertising and promotional plans
      through out the year. We spent approximately $3.0 million, $1.9 million and
      $0.8
      million on advertising and promotion in fiscal 2007, 2006 and 2005,
      respectively. We plan to increase spending on advertising and promotion to
      an
      aggregate of between $4.0 million and $5.0 million in fiscal 2008. This will
      still fall within our standard budget for advertising and promotion of 8% -
      12%
      of total revenues. The funds for advertising and promotion will generally come
      out of our earnings.





***Private
      Offerings of Common Stock and Warrants***




On
      October 9, 2007 (the “Closing Date”), we entered into a Securities Purchase
      Agreement with John V. Winfield (the “First Investor”), pursuant to which we
      sold the First Investor 1,333,333 units of our securities, consisting of: (i)
      1,333,333 shares of Common Stock, (ii) three-year warrants to purchase 266,667
      additional shares of our Common Stock, at an exercise price of $0.94 per share
      (“Warrant W-1”), and (iii) two-year warrants to purchase 1,333,333 additional
      shares of our Common Stock, at an exercise price of $1.50 per share (“Warrant
      W-2”), for an aggregate purchase price of $1,000,000 (the “First
      Offering”).





In
      addition, on the Closing Date, we entered into a Securities Purchase Agreement
      with certain additional accredited investors (the “Initial Purchasers”), for the
      purchase and sale, in one or more closings to occur on or prior to October
      31,
      2007 (each, a “Closing”), of units of our securities of aggregating a minimum of
      $3,000,000 and a maximum of $8,000,000 (the “Units”), each Unit to consist of:
      (i) one (1) share of our Common Stock; (ii) a warrant to purchase that number
      of
      shares of our Common Stock equal to twenty (20%) percent of the principal dollar
      amount of the Units purchased, divided by the Unit Purchase Price (rounded
      to
      the nearest whole share); and (iii) a warrant to purchase that number of shares
      of our Common Stock equal to one hundred (100%) percent of the principal dollar
      amount of the Units purchased, divided by the Unit Purchase Price (rounded
      to
      the nearest whole share), for a purchase price of $1.63 per Unit.





As
      of the
      Closing Date, we sold an aggregate of 2,061,227 Units to the Initial Purchasers,
      consisting of (i) 2,061,227 shares of our Common Stock, (ii) three-year warrants
      to purchase 412,245 additional shares of our Common Stock, at an exercise price
      of $2.04 per share (the “Class A Warrants”), and (iii) two-year warrants to
      purchase 2,061,227 additional shares of our Common Stock, at an exercise price
      of $3.26 per share (the “Class B Warrants”), for an aggregate purchase price of
      $3,359,800 (the “Initial Placement”).





On
      October 19, 2007 (the “Additional Closing Date”), we entered into Purchase
      Agreements with certain additional accredited investors (the “Additional
      Purchasers”), pursuant to which we sold to the Additional Purchasers 2,846,746
      Units, consisting of (i) 2,846,746 shares of our Common Stock, (ii) 569,346
      additional Class A Warrants, and (iii) 2,846,746 additional Class B Warrants,
      for an aggregate purchase price of $4,640,200 (the “Additional Placement,” and
      together with the Initial Placement, the “Second Offering”).




30




As
      of
      September 24, 2007, we entered into a Placement Agent Agreement with Legend
      Merchant Group, Inc. (“Legend”), pursuant to which, in connection with the
      Second Offering, (i) Legend was paid a fee of $384,000, and (ii) Legend and
      its
      designees were granted three-year warrants (the “Legend Warrants”) to purchase
      an aggregate of 235,583 shares of our Common Stock at an exercise price of
      $2.04
      per share. The terms and conditions of the Legend Warrants are identical to
      the
      those of the Class A Warrants.





As
      of
      September 27, 2007 and October 9, 2007, we entered into a Placement Agent
      Agreement and Finder’s Fee Agreement, respectively, with WestPark Capital, Inc.
      (“WestPark”), pursuant to which, in connection with the Second Offering, (i)
      WestPark was paid a fee of $124,452.10, in the aggregate, and (ii) WestPark
      and
      its designees were granted three-year warrants (the “WestPark Warrants”) to
      purchase an aggregate of 88,344 shares of our Common Stock at an exercise price
      of $2.04 per share. The terms and conditions of the WestPark Warrants are
      identical to the those of the Class A Warrants.





As
      of
      October 9, 2007, we entered into an oral agreement with John V. Winfield,
      pursuant to which (i) Mr. Winfield was paid a finder’s fee of $192,000, and (ii)
      Mr. Winfield was granted three-year warrants to purchase (a) 106,667 shares
      of
      our Common Stock at an exercise price of $0.94 per share (the “$0.94 Winfield
      Finder Warrants”), and (b) 68,712 shares of our Common Stock at an exercise
      price of $2.04 per share (the “$2.04 Winfield Finder Warrants”). The terms and
      conditions of the $0.94 Winfield Finder Warrants are identical to the those
      of
      Warrant No. W-1. The terms and conditions of the $2.04 Winfield Finder Warrants
      are identical to the those of the Class A Warrants.





In
      connection with the First Offering and Second Offering, we issued an aggregate
      of 6,241,306 shares of our Common Stock and warrants to purchase an additional
      7,988,870 shares of our Common Stock. We received aggregate net proceeds of
      $4,395,103.90, which we plan to use for general working capital purposes. If
      all
      of the warrants discussed above were exercised for cash, we would receive gross
      proceeds of $16,929,805 and $21,154,354 (see “Recent Developments - Warrant
      Tender Offer” above).





***Registration
      Rights and Liquidated Damages***





As
      of the
      Closing Date and the Additional Closing Date, we entered into Registration
      Rights Agreements (each, a “Registration Rights Agreement,” and collectively the
“Registration Rights Agreements”) with the Investor, the Initial Purchasers and
      the Additional Purchasers (collectively, the “Investors”), pursuant to which we
      agreed that within thirty (30) business days of the Closing Date (the “Filing
      Date”), we would file a registration statement with the Securities and Exchange
      Commission (the “Commission”) (the “Registration Statement”) covering the resale
      of (i) the shares of Common Stock purchased in the First Offering and Second
      Offering (collectively, the “Offerings”) (the “Purchased Shares”), (ii) the
      Common Stock issuable upon exercise of Warrant W-1 and Warrant W-2, (iii) the
      Common Stock issuable upon exercise of the Class A Warrants, and (iv) the Common
      Stock issuable upon the exercise of the Class B Warrants (collectively (i),
      (ii), (iii) and (iv), the “Registrable Securities”). Further, we agreed to use
      its best efforts to (i) cause the Registration Statement to be declared
      effective within ninety (90) calendar days from the Filing Date, or, if reviewed
      by the Commission, within one hundred eighty (180) calendar days after the
      Filing Date, and (ii) keep the Registration Statement continuously effective
      until two (2) years after the Closing Date, subject to normal and customary
      blackout periods.




31




Pursuant
      to the Registration Rights Agreements, we will be required to pay liquidated
      damages (payable in cash in arrears at the end of each month during which a
      registration default occurs and is continuing) to the holders of the Purchased
      Shares if (i) we fail to file the Registration Statement within thirty (30)
      business days from the Closing Date, (ii) the Commission does not declare the
      Registration Statement effective within ninety (90) days of the Filing Date
      (or
      one hundred eighty (180) days in the event of a review by the Commission) (the
      “Effectiveness Date”), (iii) we fail to request acceleration of effectiveness
      within five (5) business days of a notice of no further review from the
      Commission, (iv) we fail to respond to the Commission within ten (10) business
      days of receipt by us of any comments on the Registration Statement, or (v)
      after it has been declared effective, the Registration Statement ceases to
      be
      effective or available or if we suspend the use of the prospectus forming a
      part
      of the Registration Statement (A) for more than thirty (30) days in any period
      of 365 consecutive days if we suspend in reliance on its ability to do so due
      to
      the existence of a development that, in the good faith discretion of its board
      of directors, makes it appropriate to so suspend or which renders us unable
      to
      comply with SEC requirements, or (B) for more than sixty (60) days in any period
      of 365 consecutive days for any reason. The liquidated damages will accumulate
      at the rate of one and one-half percent (1.5%) of the purchase price paid by
      the
      Investors for the Securities offered for each thirty (30) day period during
      which a registration default is continuing.




Notwithstanding
      anything to the contrary stated in the Registration Rights Agreements, we are
      entitled to limit the Registrable Securities to the extent necessary to avoid
      any issues arising from the recent interpretations by the SEC of Rule 415 of
      the
      Securities Act of 1933, as amended.





As
      of
      March 31, 2007, there were accrued liquidated damages of $343,199. We are
      accruing $4,500 per day in liquidated damages with a maximum liability of
      $1,456,801.





***Share
      Repurchase and Put/Call Agreements***





On
      October 9, 2007, we entered into a Share Repurchase Agreement with Grand Orient
      Fortune Investment, Ltd. (“Grand Orient”), a PRC company controlled by Mingwen
      Song, pursuant to which we repurchased 1,944,444 shares (the “Repurchase
      Shares”) of our issued and outstanding Common Stock from Grand Orient for an
      aggregate purchase price of $3,169,444 (the “Repurchase Transaction”). We
      determined to repurchase these shares, to reduce the overall dilution created
      by
      the First Offering and Second Offering. The repurchased shares were initially
      held in treasury, but have now been returned to our number of authorized but
      unissued shares.





Immediately
      following the closing of the Repurchase Transaction, we entered into Put/Call
      Agreements with Grand Orient and Fortune Land Holding, Ltd., a PRC company
      controlled by Dexuan Yu (jointly, the “Put/Call Shareholders). Pursuant to the
      Put/Call Agreements the Put/Call Shareholders granted us an option to repurchase
      an aggregate of 1,944,444 shares (the “Put/Call Shares”) from the Put/Call
      Shareholders (the “Call Option”), for a price of $1.63 per share (the “Call
      Option Price”), if the following conditions have been met (the “Call Option
      Conditions”):





·
            Either
                (i) a registration statement (“Registration Statement”) covering the
                resale of the Put/Call Shares has been declared effective by the
                Commission, and has been kept continuously effective by us, or (ii)
                all of
                the Put/Call Shares are available for sale without registration pursuant
                to Rule 144(k); and




·
            The
                closing price of a share of our Common Stock as traded on the
                Over-the-Counter Bulletin Board (or such other exchange or stock
                market on
                which the Common Stock may then be listed or quoted) equals or exceeds
                $4.08 (appropriately adjusted for any stock split, reverse stock
                split,
                stock dividend or other reclassification or combination of the Common
                Stock occurring after the date hereof) for at least ten (10) consecutive
                trading days immediately preceding the date that the Call Option
                Exercise
                Notice is given by us.




32




We
      may
      only exercise its Call Option by delivering a written notice (a “Call Option
      Exercise Notice”) to the Put/Call Shareholders within thirty (30) days of such
      time as all of the Call Option Conditions have been met. The Call Option may
      be
      exercised for all, but not less than all, of the Put/Call Shares. The repurchase
      shall be consummated within ninety (90) days following the date of the Call
      Option Exercise Notice.




In
      addition, the Put/Call Shareholders shall have the right to cause us to
      repurchase the Put/Call Shares from the Put/Call Shareholders (the “Put Right”),
      for a price shall be $1.63 per share (the “Put Purchase Price”),
      if:





·
            We
                fail to exercise its Call Option within ten (10) days of a date on
                which
                all of the Call Option Conditions have been met;
                or




·
            We
                consummate a private offering of not less than $5,000,000 of its
                securities (a “Qualified Offering”);
                or




·
            We
                fail to consummate a Qualified Offering on or before October 9, 2009
                (each
                of the aforementioned conditions, a “Put Right
                Trigger”).




Initially,
      our failure to (i) file the Registration Statement within thirty (30) business
      days of the Closing Date (the “Filing Date”), (B) have the Registration
      Statement declared effective within ninety (90) calendar days from the Filing
      Date, or, if reviewed by the Commission, within one hundred eighty (180)
      calendar days after the Filing Date, or (C) keep the Registration Statement
      continuously effective until all of the Shares are available for sale without
      registration pursuant to Rule 144(k), would have serves as a Put Right Trigger
      as well. However, as of April 9, 2008, the Put/Call Shareholders agreed to
      amend
      the Put/Call Agreements to delete this clause.





The
      Put/Call Shareholders shall exercise their Put Right by giving written notice
      (“Put Exercise Notice”) of their exercise of the Put Right to us within thirty
      (30) days of a Put Right Trigger. The Put/Call Shareholders may only exercise
      their Put Right as to all, but not less than all, of the Put/Call Shares. Upon
      exercise of the Put Right by the Put/Call Shareholders, our repurchase of the
      Put/Call Shares shall be consummated within ninety (90) days following the
      date
      of the Put Exercise Notice.





If
      the
      Put/Call Shareholders exercised their Put Rights we would be forced to
      repurchase the Put/Call Shares for an aggregate of $3,169,444.





**Transactions
      with Related Parties**





***Issuance,
      Rescission and Reissuance of Tryant Shares***





As
      of
      June 25, 2007, Tryant, LLC (“Tryant”) loaned our predecessor filer
      (“Micro-Tech”) an aggregate of $38,434 in order to pay ongoing expenses to keep
      Micro-Tech current with its SEC filings. The loan was payable upon demand.
      Jeff
      Jenson was the managing member of Tryant, which, at the time, was Micro-Tech’s
      majority shareholder. On August 30, 2007, Tryant agreed to convert $12,971.40
      of
      the loan into 518,856 “restricted’ shares (the “Tryant Shares”) of Micro-Tech’s
      common stock. Given that there was no trading in Micro-Tech’s common stock and
      no bid price, Micro-Tech’s board of directors determined that, at that time, the
      fair value of a share of it’s common stock was $0.025. Following the issuance of
      the above shares, Tryant owned 643,856 shares of Common Stock of Micro-Tech,
      representing 92.72%
      of the total issued and outstanding shares.




33




Tryant
      acquired control of Micro-Tech in August 2005. At such time, Micro-Tech agreed
      to issue shares to certain of its existing shareholders. Just prior to its
      reverse merger with American International Dairy Holding Co., Inc., it was
      determined that those shares had never been issued. In addition, it was
      determined that shares owed to a former director of Micro-Tech in consideration
      for his services, had also not been issued. Further, certain individuals were
      now due to be issued shares as payment of expenses and fees related to the
      reverse merger. It was decided by Tryant and Micro-Tech that the best way to
      address this situation was to have Tryant return to Micro-Tech a number of
      the
      shares it had received in August 2007, and then have Micro-Tech reissue these
      shares in satisfaction of the above obligations. Effective as of October 9,
      2007, Tryant “rescinded” the issuance of 230,645 of the 518,856 Tryant Shares it
      received on August 30, 2007, by returning them to Micro-Tech for
      cancellation.





These
      shares were then reissued as follows:





**Name**
            
            **Number
                of Shares**Leonard
                W. Burningham
            
            
            103,308John
                V. Winfield
            
            
            64,388Rick
                Krietemeier
            
            
            57,949Andrew
                Chudd
            
            
            5,000**Total:**
            
            
            230,645





Leonard
      Burningham received 103,308 shares as payment for legal fees incurred by the
      Micro-Tech. John V. Winfield received 64,388 of the shares as payment of a
      finder’s fee in connection with the reverse merger. Micro-Tech issued 57,949
      shares to Rick Krietmeier to provide him with shares he was due to receive
      in
      August 2005, when Tryant took control of Micro-Tech. Andrew Chudd received
      5,000
      of the shares in consideration for his prior services as a director of
      Micro-Tech.





We
      granted “piggyback registration rights” to the holders of the Tryant
      Shares.





***Loan
      from Chief Executive Officer***





On
      May
      28, 2006, American International Dairy Holding Co., Inc. (“AIDH”), our
      wholly-owned subsidiary, purchased machinery, facilities, housing and 100 cows
      from Yang Yong Shan, our President, Chief Executive Officer and director, in
      exchange for a promissory note in the amount of $204,598. The note does not
      bear
      interest and is due on demand. We believe this was an arms-length transaction,
      since the price paid for this property and equipment was approximately the
      same
      as the seller’s cost in these assets, and was approximately the same amount we
      would have had to pay to purchase similar assets from a third
      party.





**Dividends**





We
      have
      not paid any dividends. In all likelihood, we will use our earnings to develop
      our business and do not intend to declare dividends for the foreseeable future.
      Any decision to pay dividends on our Common Stock in the future will be made
      by
      our board of directors on the basis of earnings, financial requirements and
      other such conditions that may exist at that time.





34


**Contractual
      Obligations and Commercial Commitments**





Our
      contractual obligations, as of March 31, 2008, were as follows:





**Payments
                Due By Period****Contractual
                obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **After**
              **3-5
                years**
            
            **More
                than**
              **5
                years**Building
                purchase
            
            $
            734,246
            
            $
            734,246
            
            
            --
            
            
            --
            
            
            --Operating
                leases
            
            $
            123,715
            
            $
            123,715
            
            
            --
            
            
            --
            
            
            --**Total:**
            
            $
            857,961
            
            $
            857,961
            
            
            --
            
            
            --
            
            
            --





**Critical
      Accounting Policies and Estimates**





Our
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America which require
      use
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities at the date of our financial statements and the reported amounts
      of
      revenues and expenses during the reporting periods. The consolidated financial
      statements include the our accounts and those of our wholly owned subsidiaries.
      All significant intercompany balances and transactions have been eliminated
      in
      consolidation. In our opinion, the condensed consolidated financial statements
      contain all the adjustments necessary (consisting only of normal recurring
      accruals) to make our financial position and the results of operations and
      cash
      flows not misleading. Critical accounting policies are those that require the
      application of management’s most difficult, subjective, or complex judgments,
      often because of the need to make estimates about the effect of matters that
      are
      inherently uncertain and that may change in subsequent periods. In preparing
      the
      financial statements, we utilized available information, including our past
      history, industry standards and the current economic environment, among other
      factors, in forming our estimates and judgments, giving due consideration to
      materiality. Actual results may differ from these estimates. In addition, other
      companies may utilize different estimates, which may impact the comparability
      of
      our results of operations to those of companies in similar businesses. We
      believe that of our significant accounting policies, the following may involve
      a
      higher degree of judgment and estimation.





***Inventory***





Inventory
      is stated at the lower of cost or market. Cost is determined using the weighted
      average method. Market value represents the estimated selling price in the
      ordinary course of business less the estimated costs necessary to complete
      the
      sale.





Raw
      materials consist of raw milk, soybeans, and rice and rice powder. Work in
      process consists of materials and products in process of conversion to powder
      but not yet packaged.





The
      cost
      of inventories comprises all costs of purchases, costs of conversion and other
      costs incurred in bringing the inventories to their present location and
      condition. The costs of conversion of inventories include fixed and variable
      production overheads, taking into account the stage of completion.





35


***Property
      and equipment***





Property
      and equipment is stated at the historical cost, less accumulated depreciation.
      Depreciation on property, plant, and equipment is provided using the
      straight-line method over the estimated useful lives of the assets after taking
      into account any salvage value as follows:




Buildings
            
            30
                yearsCommunication
                equipment, plant and machinery
            
            10
                - 30 yearsMotor
                vehicles
            
            10
                yearsDiary
                cows
            
            5
                yearsFurniture,
                Fixtures, and Equipment
            
            5
                -
                10 years




Expenditures
      for renewals and betterments were capitalized, while repairs and maintenance
      costs are normally charged to the statement of operations in the year in which
      they are incurred. In situations where it can be clearly demonstrated that
      the
      expenditure has resulted in an increase in the future economic benefits expected
      to be obtained from the use of the asset, the expenditure is capitalized as
      an
      additional cost of the asset.





Upon
      sale
      or disposal of an asset, the historical cost and related accumulated
      depreciation or amortization of such asset were removed from their respective
      accounts and any gain or loss is recorded in the statements of
      operations.





We
      review
      the carrying value of property, plant, and equipment for impairment whenever
      events and circumstances indicate that the carrying value of an asset may not
      be
      recoverable from the estimated future cash flows expected to result from its
      use
      and eventual disposition. In cases where undiscounted expected future cash
      flows
      are less than the carrying value, an impairment loss is recognized equal to
      an
      amount by which the carrying value exceeds the fair value of assets. The factors
      considered by management in performing this assessment include current operating
      results, trends and prospects, the manner in which the property is used, and
      the
      effects of obsolescence, demand, competition, and other economic factors. Based
      on this assessment, there was no impairment at December 31, 2007. There can
      be
      no assurance, however, that market conditions will not change or demand for
      the
      Company’s products or services will continue, which could result in impairment
      of long-lived assets in the future.





***Intangible
      Assets***





Intangible
      assets consist of land use rights we acquired and are amortized on a straight
      line basis over the lives of the rights agreements, which is fifty years and
      patents which are amortized on a straight line basis over the remaining life
      of
      the patents which is five years. We evaluate the carrying value of intangible
      assets during the fourth quarter of each year and between annual evaluations
      if
      events occur or circumstances change that would more likely than not reduce
      the
      fair value of the intangible asset below its carrying amount. There were no
      impairments recorded during the year ended December 31, 2007, or the three-month
      period ended March 31, 2008.





***Revenue
      recognition***





Revenue
      is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
      Recognition, which states that revenue should be recognized when the following
      criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
      service has been rendered; (3) the selling price is fixed or determinable;
      and
      (4) collection of the resulting receivable is reasonably assured.




36




Interest
      income is recognized when earned, taking into account the average principal
      amounts outstanding and the interest rates applicable.





As
      of
      March 31, 2008, we have no sales or contracts that included multiple
      deliverables and would fall under the scope of EITF 00-21, “Revenue Arrangements
      with Multiple Deliverables.”





***Earnings
      per share***





Basic
      net
      earnings per common share is computed by dividing net earnings applicable to
      common shareholders by the weighted-average number of common shares outstanding
      during the period. Diluted net earnings per common share is determined using
      the
      weighted-average number of common share shares outstanding during the period,
      adjusted for the dilutive effect of common stock equivalents, consisting of
      shares that might be issued upon exercise of common stock warrants. In periods
      where losses are reported, the weighted-average number of common shares
      outstanding excludes common stock equivalents, because their inclusion would
      be
      anti-dilutive.





***Taxation***





Taxation
      on profits earned in the PRC has been calculated on the estimated assessable
      profits for the year at the rates of taxation prevailing in the PRC in the
      industry in which we operate, after taking into effect the benefits from any
      special tax credits or “tax holidays” allowed in the country of
      operations.





We
      account for income tax under the provisions of SFAS 109, “Accounting for Income
      Taxes,” which requires recognition of deferred tax assets and liabilities for
      the expected future tax consequences of the events that have been included
      in
      the financials statements or tax returns. Deferred income taxes are recognized
      for all significant temporary differences between tax and financial statements
      bases of assets and liabilities. Valuation allowances are established against
      net deferred tax assets when it is more likely than not that some portion or
      all
      of the deferred tax asset will not be realized.





We
      do not
      have any long-term deferred tax assets or liabilities in China that will exist
      once the tax holiday we have been granted expires. We do not have any
      significant deferred tax asset or liabilities that relate to tax jurisdictions
      not covered by the tax holiday.





We
      do not
      accrue United States income tax on unremitted earnings from foreign operations
      as it is our intention to invest these earnings in the foreign operations
      indefinitely.





*Enterprise
      income tax*





Under
      the
      Provisional Regulations of The People’s Republic of China Concerning Income Tax
      on Enterprises promulgated by the State Council which came into effect on
      January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises
      at
      a rate of 15% of their taxable income. Preferential tax treatment may, however,
      be granted pursuant to any law or regulations from time to time promulgated
      by
      the State Council. XAL enjoyed a 100% exemption from enterprise income taxes
      starting on January 10, 2006 do it is classification as a “Wholly Foreign Owned
      Enterprise.” On March 16, 2007, The People’s Republic of China enacted a new
      Enterprise Income Tax Law, for the purpose of unifying the tax treatment of
      domestic and foreign enterprises. This new law eliminates the preferential
      tax
      treatment for new Wholly Foreign Owned Enterprises but allows previously granted
      exemptions to say in place through 2012 with the exception that the statutory
      tax rate will increase by 2% per year from 15% in 2006 to 25% by 2012. This
      exemption will end on January 10, 2008, at which time XAL will qualify under
      the
      current tax structure for a 50% reductions in the statutory enterprise income
      tax rates for an additional three years.




37




Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax basis. Deferred tax
      assets, including tax loss and credit carry forwards, and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. The effect of deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      Deferred income tax expense represents the change during the period in the
      deferred tax assets and deferred tax liabilities. The components of the deferred
      tax assets and liabilities are individually classified as current and
      non-current based on their characteristics. Deferred tax assets are reduced
      by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be
      realized.




A
      provision has not been made at March 31, 2008 for U.S. or additional foreign
      withholding taxes on approximately $8,898,000 of undistributed earnings of
      foreign subsidiaries because it is the present intention of management to
      reinvest the undistributed earnings indefinitely in foreign operations.
      Generally, such earnings become subject to U.S. tax upon the remittance of
      dividends and under certain other circumstances. It is not practicable to
      estimate the amount of deferred tax liability on such undistributed
      earnings.





In
      2006,
      the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
      the application of SFAS 109 by defining a criterion that an individual income
      tax position must meet for any part of the benefit of that position to be
      recognized in an enterprise’s financial statements and provides guidance on
      measurement, derecognition, classification, accounting for interest and
      penalties, accounting in interim periods, disclosure and transition. In
      accordance with the transition provisions, we adopted FIN 48 effective January
      1, 2007.





We
      recognize that virtually all tax positions in the PRC are not free of some
      degree of uncertainty due to tax law and policy changes by the state. However,
      we cannot reasonably quantify political risk factors and thus must depend on
      guidance issued by current state officials.





Based
      on
      all known facts and circumstances and current tax law, we believe that the
      total
      amount of unrecognized tax benefits as of March 31, 2008, is not material to
      its
      results of operations, financial condition or cash flows. We also believe that
      the total amount of unrecognized tax benefits as of March 31, 2008, if
      recognized, would not have a material effect on its effective tax rate. We
      further believe that there are no tax positions for which it is reasonably
      possible, based on current Chinese tax law and policy, that the unrecognized
      tax
      benefits will significantly increase or decrease over the next 12 months
      producing, individually or in the aggregate, a material effect on our results
      of
      operations, financial condition or cash flows.





*Value
      added tax*





The
      Provisional Regulations of The People’s Republic of China Concerning Value Added
      Tax promulgated by the State Council came into effect on January 1, 1994. Under
      these regulations and the Implementing Rules of the Provisional Regulations
      of
      the PRC Concerning Value Added Tax, value added tax is imposed on goods sold
      in
      or imported into the PRC and on processing, repair and replacement services
      provided within the PRC.





Value
      added tax payable in The People’s Republic of China is charged on an aggregated
      basis at a rate of 13% or 17% (depending on the type of goods involved) on
      the
      full price collected for the goods sold or, in the case of taxable services
      provided, at a rate of 17% on the charges for the taxable services provided,
      but
      excluding, in respect of both goods and services, any amount paid in respect
      of
      value added tax included in the price or charges, and less any deductible value
      added tax already paid by the taxpayer on purchases of goods and services in
      the
      same financial year.




38




***Freestanding
      Financial Instruments with Characteristics of Both Liabilities and
      Equity***





In
      accordance with SFAS 150, Accounting for Certain Financial Instruments with
      Characteristics of both Liabilities and Equity, we account for financial
      instruments as a liability if it embodies an obligation to repurchase the our
      equity shares, or is indexed to such an obligation, and that requires or may
      require the issuer to settle the obligation by transferring assets. Freestanding
      financial instruments are financial instruments that are entered into separately
      and apart from any of the entity's other financial instruments or equity
      transactions, or that is entered into in conjunction with some other transaction
      and is legally detachable and separately exercisable. The liability recorded
      is
      the per share price to be paid and is offset to equity.





***Fair
      value of financial instruments***





The
      carrying amounts of certain financial instruments, including cash, accounts
      receivable, other receivables, accounts payable, commercial notes payable,
      and
      accrued expenses approximate their fair values as of March 31, 2008 because
      of
      the relatively short-term maturity of these instruments.




**Recently
      Issued Accounting Pronouncements**





The
      following pronouncements have been issued by the Financial Accounting Standards
      Board (“FASB”):





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among
      registrants, SAB 108 expresses SEC staff views regarding the process by which
      misstatements in financial statements are evaluated for purposes of determining
      whether financial statement restatement is necessary. SAB 108 is effective
      for
      fiscal years ending after November 15, 2006, and early application is
      encouraged. The adoption of SAB 108 had no impact on our results from operations
      or financial position.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
      157”). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value in accordance with generally accepted accounting principles, and
      expands disclosures about fair value measurements. This statement does not
      require any new fair value measurements; rather, it applies under other
      accounting pronouncements that require or permit fair value measurements. The
      provisions of this statement are to be applied prospectively as of the beginning
      of the fiscal year in which this statement is initially applied, with any
      transition adjustment recognized as a cumulative-effect adjustment to the
      opening balance of retained earnings. The provisions of SFAS 157 are effective
      for the fiscal years beginning after November 15, 2007. Therefore, we anticipate
      adopting this standard as of January 1, 2008. Management has not determined
      the
      effect, if any, the adoption of this statement will have on our financial
      condition or results of operations.





In
      September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), an
      amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires
      (a) recognition of the funded status (measured as the difference between the
      fair value of the plan assets and the benefit obligation) of a benefit plan
      as
      an asset or liability in the employer’s statement of financial position, (b)
      measurement of the funded status as of the employer’s fiscal year-end with
      limited exceptions, and (c) recognition of changes in the funded status in
      the
      year in which the changes occur through comprehensive income. The requirement
      to
      recognize the funded status of a benefit plan and the disclosure requirements
      are effective as of the end of the fiscal year ending after December 15, 2006.
      The requirement to measure the plan assets and benefit obligations as of the
      date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008. This Statement has
      no
      current applicability to our financial statements. Management plans to adopt
      this Statement on December 31, 2006 and it is anticipated the adoption of SFAS
      No. 158 will not have a material impact to our financial position, results
      of
      operations, or cash flows.




39




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





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
      business combinations. Under SFAS No. 141(R), an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      No.
      141(R) will change the accounting treatment and disclosure for certain specific
      items in a business combination. SFAS No. 141(R) applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008. SFAS 141(R) will impact us in the event of any future
      acquisition.




In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements—an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting
      standards for the non-controlling interest in a subsidiary and for the
      deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
      beginning on or after December 15, 2008. We do not believe that SFAS 160 will
      have a material impact on its consolidated financial statements.




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”). FAS
      161 changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about (a)
      how
      and why an entity uses derivative instruments, (b) how derivative instruments
      and related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash flows.
      The guidance in FAS 161 is effective for financial statements issued for fiscal
      years and interim periods beginning after November 15, 2008, with early
      application encouraged. This Statement encourages, but does not require,
      comparative disclosures for earlier periods at initial adoption. We are
      currently assessing the impact of FAS 161.





**Off-Balance
      Sheet Arrangements**





We
      are
      not a party to any off-balance sheet arrangements.





40


**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





We
      are a
      smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
      Act of 1934 and are not required to provide the information under this
      item.





**Item
      4T. Controls and Procedures.**





**Management’s
      Report on Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports filed under the Securities
      Exchange Act of 1934, as amended, is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission's rules and forms, and that such information is accumulated and
      communicated to our management, including our president (also our principal
      executive officer) and our chief financial officer (also our principal financial
      and accounting officer) to allow for timely decisions regarding required
      disclosure.





On
      October 9, 2007, American International Dairy Holding Co. Inc. (“AIDH”) entered
      into an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”)
      with our predecessor filer, Micro-Tech Identification Systems, Inc.
      (“Micro-Tech”), AIDH Acquisition, Inc., Micro-Tech’s newly formed, wholly owned
      Nevada subsidiary (“Acquisition Sub”), and Tryant, LLC, Micro-Tech’s majority
      shareholder, pursuant to which:





·
            Acquisition
                Sub merged with and into AIDH, and AIDH, as the surviving corporation,
                became a wholly owned subsidiary of Micro-Tech (the
                “Merger”);




·
            Each
                share of AIDH’s capital stock issued and outstanding immediately prior to
                the closing of the Merger was converted into the right to receive
                1.020833
                shares of Micro-Tech’s Common Stock (an aggregate of 24,305,546 shares of
                Micro-Tech’s Common Stock, par value $0.001 per share, were issued to the
                holders of AIDH’s capital stock);




·
            AIDH’s
                officers and directors replaced Micro-Tech’s officers and directors as
                officers and directors of the filing company;
                and




·
            The
                filing company succeeded to the business of AIDH as its sole line
                of
                business.




As
      a
      result of the transactions, there was a change in control of the filing company,
      as the stockholders of AIDH became the majority stockholders the filing company.
      For accounting purposes, the transaction was accounted for as a reverse
      acquisition under the purchase method. Accordingly, AIDH and its subsidiary
      are
      treated as the continuing entity for accounting purposes.





Therefore,
      we have only recently become subject to the laws related to reporting companies,
      including the Sarbanes-Oxley Act of 2002, as amended. Our management is
      currently carrying out an evaluation, under the supervision and with the
      participation of our president (also our principal executive officer) and chief
      financial officer (also our principal financial and accounting officer), of
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures, in order to conclude if our disclosure controls and procedures
      are
      effective.





41




**Management’s
      Report on Internal Control over Financial Reporting**





Section
      404(a) of the Sarbanes-Oxley Act of 2002 required that management document
      and
      test our internal control over financial reporting and include in our annual
      report on Form 10-KSB, for the fiscal year ended December 31, 2007, a report
      on
      management’s assessment of the effectiveness of our internal control over
      financial reporting.





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Securities Exchange Act, as amended). In fulfilling this responsibility,
      estimates and judgments by management are required to assess the expected
      benefits and related costs of control procedures. The objectives of internal
      control include providing management with reasonable, but not absolute,
      assurance that assets are safeguarded against loss from unauthorized use or
      disposition, and that transactions are executed in accordance with management’s
      authorization and recorded properly to permit the preparation of consolidated
      financial statements in conformity with accounting principles generally accepted
      in the USA. For the reasons described in “Management’s Report on Disclosure
      Controls and Procedures” above, our management is still in the process of
      assessing the effectiveness of our internal control over financial reporting.
      In
      making this assessment, our management is using the criteria set forth by the
      Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
      Internal Control-Integrated Framework. Our management will shortly conclude
      whether our internal control over financial reporting is effective in providing
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      US
      generally accepted accounting principles. Upon such conclusion, our management
      will review the results of their assessment with our Board of
      Directors.





In
      connection with the audit for the fiscal year ended December 31, 2007, Windes
      & McClaughry Accountancy Corporation (“Windes”), our independent registered
      public accounting firm, noted matters involving our internal controls that
      it
      considered to be significant deficiencies, and taken together constitute a
      material weakness, under the standards of the Public Company Accounting
      Oversight Board, or PCAOB. Under the PCAOB standards, a significant deficiency
      is a control deficiency, or combination of control deficiencies, that, in
      Windes’s judgment, would adversely affect the ability to initiate, authorize,
      record, process, or report external financial data reliably in accordance with
      generally accepted accounting principles such that there is more than a remote
      likelihood that a misstatement of the annual or interim financial statements
      that is more than inconsequential will not be prevented or detected. A material
      weakness is a significant deficiency, or combination of significant
      deficiencies, that, in Windes’s judgment, results in more than a remote
      likelihood that a material misstatement of the annual or interim financial
      statements will not be prevented or detected.





The
      material weaknesses identified by Windes were as follows:





·
            Improper
                treatment of the effects of exchange rate changes on cash balances
                held in
                foreign currencies in the 2006 statements of cash flows;
                and




·
            Inadequate
                or incomplete review and analysis of certain contractual and other
                liabilities.




Our
      management has discussed these material weaknesses with our board of directors
      and will engage in remediation efforts to ensure that the significant
      deficiencies do not reoccur, including:





·
            Hire
                of outside consultants to assist with the preparation of our financial
                statements; and




·
            Implement
                review and analysis processes for all significant contractual and
                other
                liabilities.




42




These
      remediation efforts are designed to address the material weakness identified
      by
      Windes and to improve and strengthen our overall control environment. We believe
      these actions will prevent the significant deficiencies from reoccurring. Our
      management, including our principal executive officer and principal financial
      officer, does not expect that disclosure controls or internal controls over
      financial reporting will prevent all errors, even as the aforementioned
      remediation measures are implemented and further improved to address all
      deficiencies. The design of any system of controls is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions.





**Inherent
      limitations on effectiveness of controls**





Internal
      control over financial reporting has inherent limitations which include but
      are
      not limited to the use of independent professionals for advice and guidance,
      interpretation of existing and/or changing rules and principles, segregation
      of
      management duties, scale of organization, and personnel factors. Internal
      control over financial reporting is a process which involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting also can be
      circumvented by collusion or improper management override. Because of its
      inherent limitations, internal control over financial reporting may not prevent
      or detect misstatements on a timely basis, however these inherent limitations
      are known features of the financial reporting process and it is possible to
      design into the process safeguards to reduce, though not eliminate, this risk.
      Therefore, even those systems determined to be effective can provide only
      reasonable assurance with respect to financial statement preparation and
      presentation. Projections of any evaluation of effectiveness to future periods
      are subject to the risk that controls may become inadequate because of changes
      in conditions, or that the degree of compliance with the policies or procedures
      may deteriorate.





**Changes
      in Internal Control over Financial Report**





Except
      as
      described above, there were no changes in our internal **** control
      over financial reporting in connection with our evaluation that
      occurred **** during
      our last fiscal year that materially affected, or is reasonable likely
      to **** materially
      affect, our internal control over financial reporting.





43


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





We
      are
      not a party to any pending legal proceedings.





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





In
      the
      three-month period ended March 31, 2008, and subsequent period through the
      date
      hereof, we did not consummate any unregistered sales of equity
      securities.





**Item
      3. Defaults Upon Senior Securities.**





In
      the
      three-month period ended March 31, 2008, and subsequent period through the
      date
      hereof, we did not default upon any senior securities.





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





In
      the
      three-month period ended March 31, 2008, and subsequent period through the
      date
      hereof, the we did not submit any matters to a vote of our
      stockholders.





**Item
      5. Other Information.**





There
      was
      no information we were required to disclose in a report on Form 8-K during
      the
      three-month period ended March 31, 2008, or subsequent period through the date
      hereof, which was not so reported.





**Item
      6.**  **Exhibits**





**Exhibit No.**
            
            
            **Description
                of Exhibit**31.1
            
            Certification
                of principal executive officer pursuant to Section 13a-14(a) -- filed
                herewith31.2
            
            Certification
                of principal financial and accounting officer pursuant to Section
                13a-14(a) -- filed herewith32.1
            
            Certification
                of principal executive officer pursuant to Section 1350 -- filed
                herewith32.2
            
            Certification
                of principal financial and accounting officer pursuant to Section
                1350 --
                filed herewith




44


**SIGNATURES**






Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange
      Act of 1934, the registrant has duly caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized.




**EMERALD
                DAIRY INC.**Dated:
              May 20, 2008
            By:
            /s/
                Yang Yong ShanYang
                Yong Shan
              Chairman,
                Chief Executive Officer andPresident


Dated:
                May 20, 2008
              By:
              /s/
                  Shu KanekoShu
                  Kaneko
                Chief
                  Financial Officer and Secretary
  45