UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM 10-Q/A


(Amendment
No. 1)





(Mark
      One)x
                                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended:
                                  March
      31, 2008OR ̈
                                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      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 filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer x
            Smaller
      reporting company x









AMENDMENT
NO. 1 TO QUARTERLY REPORT ON FORM 10-Q


OF
EMERALD DAIRY INC. AND SUBSIDIARIES


FOR
THE PERIOD ENDED MARCH 31, 2008





TABLE
OF CONTENTS





PAGEPART I
                              
                              -
                              FINANCIAL
      INFORMATIONItem
      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
                              
                              23Item
      3
                              
                              
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              
                              44Item
      4T.
                              
                              
                              Controls
      and Procedures
                              
                              44PART II
                              
                              -
                              OTHER
      INFORMATIONItem
      1.
                              
                              
                              Legal
      Proceedings
                              
                              46Item
      2.
                              
                              
                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                              
                              46Item
      3.
                              
                              
                              Defaults
      Upon Senior Securities
                              
                              46Item
      4.
                              
                              
                              Submission
      of Matters to a Vote of Security Holders
                              
                              46Item
      5.
                              
                              
                              Other
      Information
                              
                              46Item
      6.
                              
                              
                              Exhibits
                              
                              46Signatures
                              
                              47




EXPLANATORY
NOTE





This Amendment No. 1 to the Quarterly
Report on Form 10-Q (“10-Q/A”), for the fiscal quarter ended March 31, 2008, of
Emerald Dairy Inc. (as originally filed on May 20, 2008, the "Form 10-Q"), is
being filed in response to comments from the Staff of the Securities and
Exchange Commission (“Commission”).  The Form 10-Q is restated herein
in its entirety. The disclosures in this amendment continue to speak as of the
date of the Form 10-Q, and do not reflect events occurring after the filing of
the Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with
our other filings made with the Commission subsequent to the filing of the Form
10-Q, including any amendments to those filings. The filing of this Form 10-Q/A
shall not be deemed an admission that the Form 10-Q filed included any untrue
statement of material fact or omitted to state a material fact necessary to make
a statement not misleading.




The Company has attached to this 10-Q/A
updated certifications executed as of the date of this Form 10-Q/A by the
principal executive officer and principal financial and accounting officer, as
required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002. These
updated certifications are attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to
this 10-Q/A.




- 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


March
      31,
                                                      
                                                      
                                                      December
      31,2008
                                                      
                                                      
                                                      2007(Unaudited)
                                                      
                                                      
                                                      (Audited)ASSETSCurrent
      AssetsCash
      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
                                                      
                                                      
                                                      
                                                      3,175,342Total current
      assets
                                                      
                                                      
                                                      18,268,044
                                                      
                                                      
                                                      
                                                      16,594,937Property,
      plant and equipment, net
                                                      
                                                      
                                                      3,389,455
                                                      
                                                      
                                                      
                                                      3,320,081Intangible
      assets, net
                                                      
                                                      
                                                      116,045
                                                      
                                                      
                                                      
                                                      115,228$
                                                      21,773,544
                                                      
                                                      
                                                      $
                                                      20,030,246LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      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
                                                      
                                                      
                                                      
                                                      196,526Total current
      liabilities
                                                      
                                                      
                                                      4,604,313
                                                      
                                                      
                                                      
                                                      3,480,666Put/Call
      Liability
                                                      
                                                      
                                                      3,169,444
                                                      
                                                      
                                                      
                                                      3,169,4447,773,757
                                                      
                                                      
                                                      
                                                      6,650,110Stockholders'
      EquityPreferred
      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
                                                      
                                                      
                                                      
                                                      892,700Total
      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 SubsidiariesCondensed
      Consolidated Statements of OperationsFor
      the Three Months Ended March 31, 2008 and 2007(Unaudited)




2008
                                                
                                                
                                                2007Sales
                                                
                                                $
                                                10,434,459
                                                
                                                
                                                $
                                                5,882,614Cost
      of Goods Sold
                                                
                                                
                                                6,011,234
                                                
                                                
                                                
                                                3,503,571Gross
      Profit
                                                
                                                
                                                4,423,225
                                                
                                                
                                                
                                                2,379,043Operating
      ExpensesSelling
      expenses
                                                
                                                
                                                3,731,334
                                                
                                                
                                                
                                                1,540,078Administrative
                                                
                                                
                                                598,004
                                                
                                                
                                                
                                                161,430Depreciation
      and amortization
                                                
                                                
                                                14,861
                                                
                                                
                                                
                                                11,859Total
      operating expenses
                                                
                                                
                                                4,344,199
                                                
                                                
                                                
                                                1,713,367Other
      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
                                                
                                                
                                                
                                                663,088Provision
      for Income TaxesCurrent
                                                
                                                
                                                80,580
                                                
                                                
                                                
                                                24,302Deferred
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -80,580
                                                
                                                
                                                
                                                24,302Net
      Income
                                                
                                                $
                                                2,818
                                                
                                                
                                                $
                                                638,786Basic
      Earnings Per Share
                                                
                                                $
                                                0.00
                                                
                                                
                                                $
                                                0.03Basic
      Weighted Average Shares Outstanding
                                                
                                                
                                                29,296,832
                                                
                                                
                                                
                                                20,416,658Diluted
      Earnings Per Share
                                                
                                                $
                                                0.00
                                                
                                                
                                                $
                                                0.03Diluted
      Weighted Average Shares Outstanding
                                                
                                                
                                                29,513,646
                                                
                                                
                                                
                                                20,416,658The
      Components of Other Comprehensive IncomeNet
      Income
                                                
                                                $
                                                2,818
                                                
                                                
                                                $
                                                638,786Foreign
      currency translation adjustment
                                                
                                                
                                                616,833
                                                
                                                
                                                
                                                284,270Comprehensive
      Income
                                                
                                                $
                                                619,651
                                                
                                                
                                                $
                                                923,056




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




- 4
-





Emerald
      Dairy Inc. and SubsidiariesCondensed
      Consolidated Statements of Cash FlowsFor
      the Three Months Ended March 31, 2008 and
2007




2008
                                        
                                        
                                        2007Cash
      flows from operating activitiesNet
      Income
                                        
                                        $
                                        2,818
                                        
                                        
                                        $
                                        638,786Adjustments
      to reconcile net cash provided byoperating
      activitiesDepreciation and
      amortization
                                        
                                        
                                        91,280
                                        
                                        
                                        
                                        68,263Net
      change in assets and liabilitiesTrade 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
                                        
                                        
                                        
                                        397,915Cash
      flows from investing activitiesPurchases
      of fixed assets and intangibles
                                        
                                        
                                        (27,469
                                        )
                                        
                                        
                                        -Net
      cash used in investing activities
                                        
                                        
                                        (27,469
                                        )
                                        
                                        
                                        -Cash
      flows from financing activitiesRepayments
      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
                                        )
                                        
                                        
                                        256,560Effect
      of exchange rate
                                        
                                        
                                        224,629
                                        
                                        
                                        
                                        171,293Net
      increase in cash
                                        
                                        
                                        1,107,120
                                        
                                        
                                        
                                        825,768Cash
      and cash equivalents at beginning of year
                                        
                                        
                                        6,560,931
                                        
                                        
                                        
                                        641,164Cash
      and cash equivalents at end of year
                                        
                                        $
                                        7,668,051
                                        
                                        
                                        $
                                        1,466,932Supplemental
      disclosure of cash flow informationInterest
      paid
                                        
                                        $
                                        1,256
                                        
                                        
                                        $
                                        3,418Enterprise
      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 Identification 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 Heilongjiang Xing An Ling Dairy, Co. On
May 30, 2005, AIDH, pursuant to the Share Transfer Agreement acquired
Heilongjiang Xing An Ling Dairy Co. Limited, (XAL) a corporation formed on
September 8, 2003 in Heilongjiang 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.




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 remaining
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.




- 6
-


Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


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.




Cash and cash equivalents -TheCompany
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.




- 7
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


3.
            Summary
      of Significant Accounting Policies
(Continued)





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 collectability. 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.




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.





- 8
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


3.
            Summary
      of Significant Accounting Policies
(Continued)





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.




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.





- 9
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


3.
            Summary
      of Significant Accounting Policies
(Continued)





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 March 31, 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.





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.





- 10
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


3.
            Summary
      of Significant Accounting Policies
(Continued)





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.




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.





- 11
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


3.
            Summary
      of Significant Accounting Policies
(Continued)





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.




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.




- 12
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


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.




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




- 13
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


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.




9.
            Income
      Taxes





On May
30, 2005, American International Dairy Holdings, Inc. executed a Share Transfer
Agreement with Heilongjiang 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.





- 14
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


9.
            Income
      Taxes (Continued)





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




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.





The
effects of the tax exemption per share were as follows:


Three
      Months
                            Ended March 31,2008
                          
                          
                          2007Tax
      Saving
                          
                          $
                          68,400
                          
                          
                          $
                          199,700Benefit
      per share:Basic
                          
                          $
                          0.00
                          
                          
                          $
                          0.01Diluted
                          
                          $
                          0.00
                          
                          
                          $
                          0.01





- 15
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


9.
            Income
      Taxes (Continued)





Had the
tax exemption not been in place for the three months ended March 31, 2008 and
2007, the Company estimates the following pro forma 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
                        
                        
                        
                        199,700Pro
      forma 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. Since the note does not have a set repayment date, interest is not being
imputed on the principal amount under the note.





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·
            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.




- 16
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007




12.
            Put/Call
      Liability (Continued)





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).





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.





- 17
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


13.
            Equity
      (Continued)





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 all of the Registrable Securities have been sold, or may be sold
without volume restrictions, pursuant to Rule 144.




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; provided, however, that (i) the
Company shall not be liable for liquidated damages with respect to any warrants
or shares of common stock underlying the warrants, and (ii) in no event will the
Company be liable for liquidated damages in excess of 1.5% of the aggregate
purchase price of the securities purchased in the Offerings in any 30 day
period, and (iii) the maximum aggregate liquidated damages payable to any
Investor in the Offerings shall be 20% of the aggregate purchase price paid by
such Investor.




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. The Company has not yet paid out any of the accrued liquidated damages,
which are payable in cash or shares of its common stock, or a combination
thereof, at the Company’s sole discretion.  Additionally, the Company
is will accrue $4,500 per day in liquidated damages until such time as the
requirements described above have been satisfied.





- 18
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


13.
            Equity
      (Continued)





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


- 19
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


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.




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




- 20
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


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.




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.




In order
for the Company to conduct its current operations, a milk powder production
license is required from the State General Administration of Quality Supervision
and Inspection and Quarantine of the People’s Republic of China (the
“Administration”). The Company’s current license will expire in December 2008.
The Administration will inspect the quality of the Company’s production process
in 2009. Depending on the results of this inspection, the State General
Administration will either (i) grant the Company a license renewal, or (ii)
advise the Company of material deficiencies it has discovered and schedule
another inspection for 2010. The Company expects that it will pass the
inspection. If it does not, it will have an opportunity to cure any deficiencies
prior to the follow up inspection that would have been scheduled for 2010. Other
than the foregoing, 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.





The
Company’s employees are required to pay an employee deposit upon commencement of
employment, which is standard in the PRC. The deposits are protection against
potential loss in the event of a dishonest act by an employee, such as theft,
forgery, larceny, or embezzlement. The Company considers this obligation as
short term liability for the following two reasons:





·
            The
      purpose of the advance by employee is for potential loss as a result of
      dishonest act by such employee. Since the Company does not know when it
      may happen, the Company believes it makes sense to consider it a short
      term liability; and




·
            The
      Company needs to return the fund to the employee who leaves the Company
      without any wrongdoing. Since the Company does not know the precise timing
      of refund, the Company believes it makes sense to consider it a short term
      liability.




- 21
-




Emerald
Dairy Inc. and Subsidiaries
 Footnotes
to Condensed Consolidated Financial Statements
 March 31,
2008 and 2007


17.
            Commitments
      and Contingencies (Continued)





The basic
terms of advances from employees are:





·
            All
      Company employees must to pay an employee
  deposit.




·
            The
      deposit amount depends on employee position, as
  follows:




Position
                                                
                                                Deposit
      AmountGeneral
      Manager
                                                
                                                $
                                                4,000Assistant
      General Manager
                                                
                                                $
                                                2,667Senior
      Manager
                                                
                                                $
                                                2,533Assistant
      Senior Manager
                                                
                                                $
                                                2,400Manager
                                                
                                                $
                                                2,000Administrative
      Staff
                                                
                                                $
                                                1,600Other
      Employee
                                                
                                                $
                                                1,333





·
            All
      new employees must pay the deposit before they start
  work.




·
            The
      deposit must be paid in cash to the Company’s accounting department and
      receipt will be issued for the deposit
amount.




·
            If
      an employee leaves the Company for any reason (except in the event of a
      dishonest act by an employee, such as theft, forgery, larceny, or
      embezzlement), the accounting department will refund the
      deposit.




·
            No
      interest accrues on these advances.




As of
March 31, 2008, the Company held employee deposits in the aggregate amount of
$241,728.





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




- 22
-





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 PRC, 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 $13.0
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 17% through
2010.  Currently, it is estimated that demand for infant formula in
China outstrips supply by at least 2-to-1.





We have received an Infant & Baby
Formula Milk Powder Production Permit from the State General Administration of
Quality Supervision and Inspection and Quarantine of the PRC. Only current
license holders are permitted to produce formula milk powder in
China.  In addition, we have received a Product Exemption from Quality
Surveillance Inspection waiver from the State General
Administration.  Only companies that have passed their product quality
inspections for five consecutive years are awarded this certificate of
waiver.





Because of our close proximity to its
sources of fresh milk, we are able to complete the production process in
approximately 30 hours, which is faster than competitors of ours that are not
similarly situated.  We produced approximately 7,000 tons of milk
powder at our facility in Be’ian City, Heilongjiang Province, PRC 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 approximately 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 3% and 2% of our overall sales,
respectively.




- 23
-




All of our business is conducted
through our wholly-owned Chinese subsidiaries:





·
            Heilongjiang
      Xing An Ling Dairy Co. Limited (“XAL”), which handles our promotion, sales
      and administrative functions; and




·
            Heilongjiang
      Be’ian Nongken Changxing Lvbao Dairy Limited Liability Company (“Lvbao”),
      which handles production of our products in Be’ian City, Heilongjiang
      Province, PRC




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 “Reverse 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 Reverse 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 Reverse Merger,
we sold 1,333,333 units of our securities to John V. Winfield, consisting of:
(i) 1,333,333 shares of our common stock, $.001 par value per share (“Common
Stock”), (ii) warrants to purchase 266,667 shares of our Common Stock, at an
exercise price of $0.94 per share (“Warrant W-1”), and (iii) warrants to
purchase 1,333,333 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, we sold 2,061,227 units of our securities to
certain additional “accredited investors” (the “Initial Purchasers”), consisting
of (i) 2,061,227 shares of our Common Stock, (ii) warrants to purchase
412,245 of our Common Stock at an exercise price of $2.04 per share (the “Class
A Warrants”), and (iii) warrants to purchase 2,061,227 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 of the Second
Offering”).  The rights and obligations under Warrant W-1, Warrant
W-2, the Class A Warrants, and the Class B Warrants are further described in “—
Liquidity and Capital Resources — Warrants” below.





Upon the consummation of the Reverse
Merger, and the closing of the First Offering and 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 “Repurchased
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 currently being held in
treasury.





Immediately following the closing of
the Repurchase Transaction, we entered into Put/Call Agreements with each of
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.





On October 19, 2007, we sold 2,846,746
units of our securities to additional “accredited investors” (the “Additional
Purchasers”), 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”).





In connection with the First Offering
and Second Offering (collectively, the “October Offerings”), we engaged finders
and placement agents to whom we paid fees in the aggregate of $700,452, and
granted (i) warrants to purchase an aggregate of 106,667 shares of our Common
Stock, at an exercise price of $0.94 per share, the terms and conditions of
which are identical to the those of Warrant W-1, and (ii) warrants to purchase
392,639 shares of our Common Stock, at an exercise price of $2.04, the terms and
conditions of which are identical to the those of the Class A
Warrants.




- 24
-




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.




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
$13.0 billion.  According to the website of China National Bureau of
Statistics, between 2000 to 2005 the dairy industry in China experienced an
average growth of 16% per year.  English-language copies of the
reports of the China National Bureau of Statistics are available on its website,
free of charge, at www.stats.gov.cn/english.  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.





- 25
-





On its website, 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. 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.  Management will need to
raise $10 million - $15 million to fund the construction of new production
facility.  We have no commitments for financing we may need to
complete the construction of our new processing facility.  There can
be no assurance that that any additional financing will become available to us,
and if available, on terms acceptable to us.





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.  However, we believe the recent worldwide increases in the cost
and availability of commodities, such as rice and oil, will lead to increases in
prices for such commodities.  To some extent, we will be able to
increase the prices for our products 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, which could have a negative material impact on our financial
condition and results of operations.





Brand Name and Product
Quality





There are more than 30 brand names of
infant formula products 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 tier 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 increasingly 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.





- 26
-





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.





Sales and Cost of Goods
Sold





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





Sales. Sales volume increased
by 404 metric tons or 21.9%, period on period to 2,250 metric tons for the three
months ended March 31, 2008 from 1,846 metric tons for the three months ended
March 31, 2007.  As a result, sales revenues increased by $4,551,845,
or 77.4%, from $5,882,614 in the three months ended March 31, 2007 to
$10,434,459 for the three months 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.




- 27
-





Sales by product
line.A break-down of our sales by product line for the three
months ended March 31, 2008 and 2007 is as follows:





Three
      Months Ended March 31,2008
                  
                  2007
                  
                  
                  Period-on-
                    periodProduct category
                  
                  Quantity
                    (tons)
                  
                  
                  $ Amount
                  
                  
                  % of sales
                  
                  
                  Quantity
                    (tons)
                  
                  
                  $
       Amount
                  
                  
                  % of
                    sales
                  
                  
                  Qty.
                    VarianceMilk
      powder
                  
                  
                  1,496
                  
                  
                  
                  8,093,235
                  
                  
                  
                  77.6
                  
                  
                  
                  1,254
                  
                  
                  
                  4,489,905
                  
                  
                  
                  76.3
                  
                  
                  
                  242Rice
      powder
                  
                  
                  49
                  
                  
                  
                  258,070
                  
                  
                  
                  2.5
                  
                  
                  
                  45
                  
                  
                  
                  218,968
                  
                  
                  
                  3.7
                  
                  
                  
                  4Soybean
      powder
                  
                  
                  117
                  
                  
                  
                  201,970
                  
                  
                  
                  1.9
                  
                  
                  
                  96
                  
                  
                  
                  143,612
                  
                  
                  
                  2.5
                  
                  
                  
                  21Subcontracting
                  
                  
                  588
                  
                  
                  
                  1,881,184
                  
                  
                  
                  18.0
                  
                  
                  
                  451
                  
                  
                  
                  1,030,129
                  
                  
                  
                  17.5
                  
                  
                  
                  137Total
                  
                  
                  2,250
                  
                  
                  
                  10,434,459
                  
                  
                  
                  100.0
                  
                  
                  
                  1,846
                  
                  
                  
                  5,882,614
                  
                  
                  
                  100.0
                  
                  
                  
                  404


There was very few changes to the
break-down of sales among our products over the three months ended March 31,
2008 as compared to the three months ended March 31, 2007.  Soybean
powder only accounted for 1.9% of our sales mix for the three months ended March
31, 2008 at an average selling price of $1,727 per metric ton as compared to
2.5% of our sales mix in the three months ended March 31, 2007 at an average
selling price of $1,496 per metric ton.  Milk powder accounted for
77.6% of the quarter ended March 31, 2008 sales mix at an average selling price
of $5,410 per metric ton as compared to 76.3% of the quarter ended March 31,
2007 at an average selling price of $3,580 per metric ton. We increased our
subcontract production during the quarter ended March 31, 2008 to 18.0% of the
sales mix at an average selling price of $3,199 per metric ton as compared to
17.5% of the sales mix in the 2007 quarter at an average sales price of $2,284
per metric ton.





A breakdown of our average selling
price by product line for the three months ended March 31, 2008 and 2007 is as
follows:





Three
      Months  Ended
                  June 30,Average selling prices
                
                2008
                
                2007
                
                Variance$
                
                $
                
                $
                
                %Milk
      powder
                
                5,410
                
                3,580
                
                1,830
                
                51.1Rice
      powder
                
                5,267
                
                4,866
                
                401
                
                8.2Soybean
      powder
                
                1,727
                
                1,496
                
                231
                
                15.4Subcontracting
                
                3,199
                
                2,284
                
                915
                
                40.1Total
                
                4,638
                
                3,187
                
                1,451
                
                45.5





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.  Overall our cost per
metric ton increased by $774, or 40.8% to $2,672 per metric ton in the quarter
ended March 31, 2008 as compared to $1,898 per metric ton in quarter ended March
31, 2007.





- 28
-





A breakdown of cost of sales by product
line for the three months ended March 31, 2008 and 2007 is as
follows:





Three
      Months Ended March 31,2008
              
              2007
              
              Variance$
              
              $
              
              $
              
              %Cost
      of sales-
      Milk powder
              
              4,161,982
              
              2,413,874
              
              1,748,108
              
              72.4-
      Rice powder
              
              101,204
              
              99,699
              
              1,505
              
              1.5-
      Soybean powder
              
              126,232
              
              99,731
              
              26,501
              
              26.6-
      Subcontracting
              
              1,621,816
              
              890,267
              
              731,549
              
              82.16,011,234
              
              3,503,571
              
              2,507,663
              
              71.6Cost
      per units sold(per ton)Milk
      powder
              
              2,782
              
              1,925
              
              857
              
              44.5Rice
      powder
              
              2,065
              
              2,216
              
              (151
              )
              (6.8
              )Soybean
      powder
              
              1,079
              
              1,039
              
              40
              
              3.8Subcontracting
              
              2,758
              
              1,974
              
              784
              
              39.7Average
      cost per unit sold
              
              2,672
              
              1,898
              
              774
              
              40.8





Gross Profit. Gross profit was
$4,423,225, or 42.4% of our sales for the three months ended March 31, 2008,
compared to gross profit of $2,379,043, or 40.4% for the three months ended
March 31, 2007. During the quarter ended March 31, 2008 our gross margin on milk
powder increased 2.4% due to an increase in the average sales price of 51.1%
from quarter ended March 31, 2007 offset by a 44.5% increase in the cost per
metric ton from the quarter ended March 31, 2007.  The gross margin
for soybean powder increased 6.9% to 37.5% in quarter ended March 31, 2008 as
compared to 30.6% in quarter ended March 31, 2007 due to increase in the average
sales price of 15.4% in quarter ended March 31, 2008 as compared to 2007 offset
by an increase of 3.8% in the cost per metric ton from the quarter ended March
31, 2007 to the quarter ended March 31, 2008.





A breakdown of gross margin by product
line for the three months ended March 31, 2008 and 2007 is as
follows:





Three
      Months Ended March 31,2008
                                                                                
                                                                                
                                                                                2007
                                                                                
                                                                                
                                                                                Period-on-
                                                                                  periodProduct category
                                                                                
                                                                                $ Amount
                                                                                
                                                                                
                                                                                Gross
                                                                                  Margin
                                                                                  %
                                                                                
                                                                                
                                                                                $Amount
                                                                                
                                                                                
                                                                                Gross
                                                                                  Margin
                                                                                  %
                                                                                
                                                                                
                                                                                Margin
                                                                                  VarianceMilk
      powder
                                                                                
                                                                                
                                                                                3,931,253
                                                                                
                                                                                
                                                                                
                                                                                48.6
                                                                                
                                                                                
                                                                                
                                                                                2,076,031
                                                                                
                                                                                
                                                                                
                                                                                46.2
                                                                                
                                                                                
                                                                                
                                                                                2.4Rice
      powder
                                                                                
                                                                                
                                                                                156,866
                                                                                
                                                                                
                                                                                
                                                                                60.8
                                                                                
                                                                                
                                                                                
                                                                                119,269
                                                                                
                                                                                
                                                                                
                                                                                54.5
                                                                                
                                                                                
                                                                                
                                                                                6.3Soybean
      powder
                                                                                
                                                                                
                                                                                75,738
                                                                                
                                                                                
                                                                                
                                                                                37.5
                                                                                
                                                                                
                                                                                
                                                                                43,881
                                                                                
                                                                                
                                                                                
                                                                                30.6
                                                                                
                                                                                
                                                                                
                                                                                6.9Subcontracting
                                                                                
                                                                                
                                                                                259,368
                                                                                
                                                                                
                                                                                
                                                                                13.8
                                                                                
                                                                                
                                                                                
                                                                                139,862
      1
                                                                                
                                                                                
                                                                                
                                                                                13.6
                                                                                
                                                                                
                                                                                
                                                                                0.2Total
                                                                                
                                                                                
                                                                                4,423,225
                                                                                
                                                                                
                                                                                
                                                                                42.4
                                                                                
                                                                                
                                                                                
                                                                                2,379,043
                                                                                
                                                                                
                                                                                
                                                                                40.4
                                                                                
                                                                                
                                                                                
                                                                                2.0




- 29
-




Operating Expenses





For
      the Fiscal Quarters Ended March
                      31,2008
                    
                    
                    2007Operating
      ExpensesSelling
      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 overall increased by $2,191,256, or 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 major factors in the increase in selling expenses are
as follows:





·
            Advertising
      increased by $1,541,941 or 7,122.1% to $1,563,591 in 2008 from $21,650 in
      2007 due to the marketing campaign to increase brand awareness and
      sales.





·
            Selling
      salaries increased by $147,002 or 48.8% to $448,016 in 2008 from 301,014
      in 2007 as we expanded our sales staff and
  network.





·
            Travelling
      expenses incurred by the sales staff increased by $123,651 or 97.0% to
      $251,088 in 2008 from $127,437 in 2007, this increase was also from the
      expansion of the sales network.





·
            Transportation
      expenses increased by $57,775 or 30.2% to $249,042 in 2008 from $191,267
      in 2007 as a result of shipping more product in 2008 as compared to
      2007.





·
            Promotion
      expenses increased by $269,315 or 54.2% to $766,327 in 2008 from $497,012
      in 2007 as we expanded our sales
network.




Rather than using a wholesaler, our
sales people deal directly with the retail outlets.  This business
model has higher sales expenses compared to the traditional business model, but
creates better profit margins for us.





Administrative Expenses.
Administrative expenses increased by $436,574, or 270.4%, from $161,430 in
quarter ended March 31, 2007 to $598,004 for the quarter ended March 31, 2008.
The major factors in the increase in administrative expenses are as
follows:





·
            Liquidated
      damages incurred in 2008 of $127,900 from registration rights agreements
      not incurred in 2007.





·
            Increase
      in legal and accounting fees in 2008 of $82,384 due to costs associated
      with audits and filings not required prior to the reverse merger in
      2007.





·
            Increase
      of administrative salaries of $97,832 or 291.4% to $131,400 in 2008 from
      $33,568 in 2007.  Increase related to additional administrative
      personnel hired during 2008.





·
            Increase
      in entertainment expenses of $22,875 or 92.1% to $47,718 in 2008 from
      $24,843 in 2007 due to increased travel and entertainment by
      administrative personnel to develop financing and funding for the
      Company’s growth.





·
            Increase
      of travel expenses of $23,805 or 92.8% to $49,466 in 2008 from $25,661 in
      2007 due to the increase in travel by administrative personnel to develop
      financing and funding for the Company’s
growth.





- 30
-





Provision for Income Taxes





For
      the Fiscal Quarters Ended March
                    31,2008
                  
                  
                  2007Provision
      for Income TaxesCurrent
                  
                  $
                  80,580
                  
                  
                  $
                  24,302Deferred
                  
                  
                  —
                  
                  
                  
                  —$
                  80,580
                  
                  
                  $
                  24,302





Provision for Income Taxes.
Income taxes increased by $56,278, or 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 to the increase in our pre-tax income and the
reduction in the tax exemption for XAL to 50% of the statutory enterprise income
tax rate from 100% as of January 1, 2008.





Liquidity
and Capital Resources





Uses of Capital





For
      the Fiscal Quarters Ended March
                                              31,2008
                                            
                                            
                                            2007Net
      cash provided by operating activities
                                            
                                            $
                                            1,194,399
                                            
                                            
                                            $
                                            397,915Net
      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 used in operating activities during 2008 were due
to the following factors:





·
            Trade
      accounts receivable increased by $577,482 from December 31, 2007, due to
      the increase level of sales during the
year.





·
            We
      increased inventory at March 31, 2008 by $555,241, due to sales network
      increases during the quarter.





·
            Deposits
      on advertising contracts decreased by $648,114 during the
      quarter.





·
            Accounts
      payable and accrued expenses increased by $1,342,845 at March 31, 2008 as
      compared to December 31, 2007, due increases in production of products and
      expenses.





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.




- 31
-





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





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 funds raised from private
offering we consummated in October 2007.





Cash and cash equivalents at March 31,
2008 increased by 413%, to approximately $7.7 million, from approximately $1.5
million at March 31, 2007. 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 implement our growth strategy.





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.





In connection with the October
Offerings, we received aggregate net proceeds of $4,395,104.  The net
proceeds from the October Offerings have been used to repurchase 1,944,444
shares of our common stock from two existing stockholders and for expenses
related to our Reverse Merger and October Offerings, and for general working
capital to fund continuing operations.  The Reverse Merger and October
Offerings are further described in “— Recent Developments — Reverse Merger,
Private Placements and Related Transactions” above.





Our growth strategy for the next three
years will be primarily focused on expanding production capacity and
strengthening sales efforts.  Management plans to achieve this
strategy by increasing our production capacity, sales staff and advertising
expenditures.





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. 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.  Management will need to
raise $10 million - $15 million to fund the construction of new production
facility.  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 no additional commitments for
additional financing we may need to complete the construction of our new
processing facility.  There can be no assurance that that any
additional financing will become available to us, and if available, on terms
acceptable to us.





- 32
-





In addition to constructing our new
production facility, 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, PRC,
will serve as our corporate headquarters. The balance of approximately $0.7
million will be due on expected completion of the building expected by the end
of the third quarter of 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.





Management will also consider making
strategic acquisitions if there are good opportunities in the marketplace.
However, revenue from acquisitions has not been included in our planned
growth.





Another way we plan to grow our
business in the future is through the introduction of a new organic product
line.  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 and introduce an organic label product line beginning in the
fourth quarter of fiscal 2008. Initially, we will need to test the market to
determine demand for organic milk products.  Therefore, we do not
expect to make any significant expenditures on our organic product line for the
foreseeable future.





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”).




- 33
-




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





In connection with the October
Offerings, as further described in “— Recent Developments — Reverse Merger,
Private Placements and Related Transactions” above, we entered into Registration
Rights Agreements (each, a “Registration Rights Agreement,” and collectively the
“Registration Rights Agreements”) with Mr. Winfield, the Initial Purchasers and
the Additional Purchasers (collectively, the “Investors”), pursuant to which we
agreed that within thirty (30) business days of the respective 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 October Offerings
(the “Purchased Shares”), and (ii) the Common Stock issuable upon exercise of
Warrant W-1, Warrant W-2, the Class A Warrants, and the Class B Warrants
(collectively (i), (ii), (iii) and (iv), the “Registrable Securities”). Further,
we agreed to use our 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 all of the Registrable Securities have been sold, or may be sold without
volume restrictions, pursuant to Rule 144.





Pursuant to the Registration Rights
Agreements, we are required to pay liquidated damages 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 units of our securities purchase in the October
Offerings for each thirty (30) day period during which a registration default is
continuing; provided, however, that (i) we shall not be liable for liquidated
damages with respect to any warrants or shares of common stock underlying the
warrants, and (ii) in no event will we be liable for liquidated damages in
excess of 1.5% of the aggregate purchase price of the securities purchased in
the October Offerings in any 30 day period, and (iii) the maximum aggregate
liquidated damages payable to any purchaser in the October Offerings shall be
20% of the aggregate purchase price paid by such purchaser.





- 34
-





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, 2008, there were accrued liquidated damages of $343,199.  We
have not yet paid out any of the accrued liquidated damages, which are payable
in cash or shares of our common stock, or a combination thereof, at our sole
discretion.  Additionally, we will accrue $4,500 per day in liquidated
damages until such time as the requirements described above have been
satisfied.





Share Repurchase and Put/Call
Agreements





On October 9, 2007, we consummated the
Repurchase Transaction with a shareholder, as further described in “— Recent
Developments — Reverse Merger, Private Placements and Related Transactions”
above.  We repurchased the Repurchased Shares, to reduce the overall
dilution created by the October Offerings. The Repurchased Shares are currently
being held in treasury.





Immediately following the closing of
the Repurchase Transaction, we entered into Put/Call Agreements with 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 freely tradable without registration pursuant to
      Rule 144; 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.




We may only exercise our 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




- 35
-




·
            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”), (ii) 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 (iii) keep the Registration Statement continuously effective until all of the
Registrable Securities are available for sale without registration pursuant to
Rule 144, would have served 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.  We did not pay any consideration to the Put/Call
Shareholders in connection with their waiver of this provision.





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.





Warrants





In connection with the October
Offerings, as further described in “— Recent Developments — Reverse Merger,
Private Placements and Related Transactions” above, we issued warrants to
purchase an aggregate of 7,988,870 shares of Common Stock, of which (i) 373,334
are exercisable at a price of $0.94 per share; (ii) 1,333,333 are exercisable at
a price of $1.50 per share; (iii) 1,374,230 are exercisable at a price of $2.04
per share; and (iv) 4,907,973 are exercisable at a price of $3.26 per
share.





Warrant W-1 represents the right to
purchase 266,667 shares of our Common Stock, at an exercise price of $0.94 per
share. Warrant No. W-1 will expire on October 9, 2010. Warrant W-1 is
exercisable for cash only, provided a registration statement covering the shares
of Common Stock underlying Warrant W-1 is effective. The number of shares of our
Common Stock to be deliverable upon exercise of Warrant W-1 will be subject to
adjustment for, among other things, subdivision or consolidation of shares,
rights or warrants issues, dividend distributions, stock dividends, bonus
issues, asset distributions, and other standard dilutive
events.  Warrants to purchase an aggregate of 106,667 shares of our
Common Stock issued to a finder, have terms and conditions identical to the
those of Warrant W-1.





Warrant W-2 represents the right to
purchase 1,333,333 shares of our Common Stock, at an exercise price of $1.50 per
share. Warrant W-2 will expire on October 9, 2009. Warrant W-2 is exercisable
for cash only, provided a registration statement covering the shares of Common
Stock underlying the Warrant W-2 is effective. The number of shares of our
Common Stock to be deliverable upon exercise of Warrant W-2 will be subject to
adjustment for, among other things, subdivision or consolidation of shares,
rights or warrants issues, dividend distributions, stock dividends, bonus
issues, asset distributions, and other standard dilutive events. At anytime one
year following the date a registration statement covering the shares of Common
Stock underlying the Warrant W-2 is declared effective, we will have the ability
to call the Warrant W-2 at a price of $0.01 per warrant, upon thirty (30) days
prior written notice to the holders of the warrants, if the closing price of the
Common Stock exceeded $1.88 for each of the ten (10) consecutive trading days
immediately preceding the date that the call notice is given by us.





Our Class A Warrants represent the
right to purchase an aggregate of 981,591 shares of our Common Stock, at an
exercise price of $2.04 per share. The Class A Warrants will expire on the
three-year anniversary of their date of issuance. The Class A Warrants will be
exercisable for cash only, provided a registration statement covering the shares
of Common Stock underlying the Class A Warrants is effective. The number of
shares of Common Stock to be deliverable upon exercise of the Class A Warrants
will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events.  Warrants to purchase 392,639 shares of our Common Stock
issued to finders and placement agents, have terms and conditions identical to
the those of the Class A Warrants.





- 36
-





The Class B Warrants represent the
right to purchase an aggregate of 4,907,973 shares of our Common Stock, at an
exercise price of $3.26 per share. The Class B Warrants will expire on the
two-year anniversary of their date of issuance. The Class B Warrants will be
exercisable for cash only, provided a registration statement covering the shares
of Common Stock underlying the Class B Warrants is effective. The number of
shares of Common Stock to be deliverable upon exercise of the Class B Warrants
will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events. At anytime one year following the date a registration statement covering
the shares of Common Stock underlying the Class B Warrants is declared
effective, we will have the ability to call the Class B Warrants at a price of
$0.01 per Class B Warrant, upon thirty (30) days prior written notice to the
holders of the Class B Warrants, if the closing price of the Common Stock
exceeded $4.08 for each of the ten (10) consecutive trading days immediately
preceding the date that the call notice is given by us.





Warrant W-1, Warrant W-2, the Class A
Warrants and the Class B Warrants (collectively, the “October Warrants”) provide
that in no event shall the holder be entitled to exercise a number of October
Warrants (or portions thereof) in excess of the number of October Warrants (or
portions thereof) upon exercise of which the sum of (i) the number of shares of
Common Stock beneficially owned by the holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unexercised October Warrants and the unexercised or unconverted
portion of any of our other securities (subject to a limitation on conversion or
exercise analogous to the limitation contained herein) and (ii) the number of
shares of Common Stock issuable upon exercise of the October Warrants (or
portions thereof) with respect to which the determination described herein is
being made, would result in beneficial ownership by the holder and its
affiliates of more than 9.9% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (i) of the preceding sentence. Notwithstanding anything to the
contrary contained herein, the limitation on exercise of the October Warrants
may be waived by written agreement between us and the holder; provided, however,
such waiver may not be effective less than sixty-one (61) days from the date
thereof.





If all of the October Warrants were
exercised for cash pursuant to their terms, we would receive $21,154,354 in
proceeds.





Changes in foreign exchange regulations
in the PRC and ability to pay dividends in foreign currency or conduct other
foreign exchange business





The Renminbi is currently not a freely
convertible currency, and the restrictions on currency exchange may limit our
ability to use revenues generated in RMB to fund our business activities outside
the PRC, or to make dividends or other payments in United States dollars. The
PRC government strictly regulates conversion of RMB into foreign currencies.
Over the years, foreign exchange regulations in the PRC have significantly
reduced the government’s control over routine foreign exchange transactions
under current accounts. In the PRC, SAFE, regulates the conversion of the RMB
into foreign currencies. Pursuant to applicable PRC laws and regulations,
foreign invested enterprises incorporated in the PRC are required to apply for
“Foreign Exchange Registration Certificates.” Currently, conversion within the
scope of the “current account” (e.g. remittance of foreign currencies for
payment of dividends, etc.) can be effected without requiring the approval of
SAFE. However, conversion of currency in the “capital account” (e.g. for capital
items such as direct investments, loans, securities, etc.) still requires the
approval of SAFE.  See the discussion in “Risk Factors” appearing in
our Annual Report on Form 10-KSB, for the fiscal year ended December 31,
2007.




- 37
-




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.




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 SharesLeonard
      W. Burningham
                          
                          
                          103,308John
      V. Winfield
                          
                          
                          64,388Rick
      Krietemeier
                          
                          
                          57,949Andrew
      Chudd
                          
                          
                          5,000Total:
                          
                          
                          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.





Purchase of Assets from Chief Executive
Officer





On May 28, 2006, American International
Dairy Holding Co., Inc. (“AIDH”), our wholly-owned subsidiary, purchased and
received title to 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, which was still outstanding as of the
date hereof. The note does not bear interest and is due on demand. Since the
note does not have a set repayment date, interest is not being imputed on the
principal amount under the note.  We believe this was an arms-length
transaction, since the price paid for this property and equipment was
approximately the same amount we would have had to pay to purchase similar
assets from a third party.




- 38
-




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.





Contractual
Obligations and Commercial Commitments





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





Payments
      Due By PeriodContractual
      obligations
                  
                  Total
                  
                  
                  Less
      than
                    1
      year
                  
                  1-3
      years
                  
                  After
                    3-5
      years
                  
                  More
      than
                    5
      yearsBuilding
      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.




- 39
-




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.




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.”





- 40
-


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.




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.


- 41
-





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.




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.


- 42
-


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.





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.


- 43
-





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





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.





Disclosure
Controls and Procedures





We are required to 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 of 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.


- 44
-





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




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




·
            Purchase
      and employ a new revenue accounting
system.




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.





The implementation of our remediation
plan will require substantial expenditures, could take a significant period of
time to complete, and could distract our officers and employees from the
operation of our business.  However, our management believes that
these remediation efforts will be complete by the end of fiscal
2008.





Our management has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the date of this report, 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), in
order to conclude if our disclosure controls and procedures are
effective.  Based on the information set forth above, our management
has determined that, as of the date of this report, we do not have effective
disclosure controls and procedures.





Changes
in Internal Control Over Financial Report





In its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2007 (the “Annual Report”), our management
reported that, as of the date of such report, our internal control over
financial reporting was not effective.  We have not yet implemented
any of the remediation efforts outlined in the Annual
Report.  Therefore, our management has determined that there was no
change in our internalcontrol over financial
reporting, identified in connection with the evaluation that occurredduring our last fiscal
quarter, 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), that materially affected, or is reasonable
likely tomaterially affect, our
internal control over financial reporting.


- 45
-


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 Exhibit31.1
                  
                  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




- 46
-


SIGNATURES




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




EMERALD
      DAIRY INC.Dated:
      January 30, 2009
                        By:
                        /s/
      Yang Yong ShanYang
      Yong ShanChairman,
      Chief Executive Officer and
                          PresidentDated:
      January 30, 2009
                        By:
                        /s/
      Shu KanekoShu
      KanekoChief
      Financial Officer and
Secretary




- 47
-