**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


__________





**FORM 10-Q**





(Mark
                One)x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended:June
                30, 2008ORo
            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
      August 14, 2008, the issuer had 29,299,332 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 smaller reporting
      company:





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyx









**QUARTERLY
      REPORT ON FORM 10-QSB**


**OF
      EMERALD DAIRY INC. AND SUBSIDIARIES**


**FOR
      THE PERIOD ENDED JUNE 30, 2008**





**TABLE
      OF CONTENTS**





**PAGE****PART I**
            **-**
            **FINANCIAL
                INFORMATION**
            ****Item
                1.
            
            Financial
                Statements
            1Condensed
                Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and
                December 31, 2007
            2Condensed
                Consolidated Statements of Income for the Three and Six Months Ended
                June 30, 2008 and 2007 (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30, 2008 and 2007 (Unaudited)
            4Footnotes
                to Condensed Consolidated Financial Statements (Unaudited)
            5Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                3
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            48Item
                4T.
            
            Controls
                and Procedures
            48**PART II**
            **-**
            **OTHER
                INFORMATION**Item
                1.
            
            Legal
                Proceedings
            51Item
                1A.
            
            Risk
                Factors
            51Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            51Item
                3.
            
            Defaults
                Upon Senior Securities
            52Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            52Item
                5.
            
            Other
                Information
            53Item
                6.
            
            Exhibits
            53Signatures
            54


1


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**Emerald
        Dairy Inc. and Subsidiaries**
 **Condensed
        Consolidated Balance Sheet**
 **June
        30, 2008 and December 31, 2007**
 
 **2008**
              
              **2007****(Unaudited)**
              
              **(Audited)****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              3,821,111
              
              $
              6,560,931Trade
                  accounts receivable
              
              
              6,973,861
              
              
              5,096,828Inventory
              
              
              2,274,328
              
              
              1,000,427Advances
                  to equipment suppliers
              
              
              3,695,928
              
              
              -Other
                  current assets
              
              
              3,618,880
              
              
              3,936,751**Total
                  current assets**
              
              
              20,384,108
              
              
              16,594,937**Property,
                  plant and equipment, net**
              
              
              3,715,262
              
              
              3,320,081**Intangible
                  assets, net**
              
              
              1,392,585
              
              
              115,228$
              25,491,955
              
              $
              20,030,246**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities**Accounts
                  and accrued expenses
              
              $
              3,981,539
              
              $
              2,395,190Notes
                  payable, net of debt discount of $191,834 at June 30, 2008
              
              
              2,058,166
              
              
              273,973Other
                  current liabilities
              
              
              687,466
              
              
              614,977Loan
                  from shareholder
              
              
              209,305
              
              
              196,526**Total
                  current liabilities**
              
              
              6,936,476
              
              
              3,480,666**Put/Call
                  Liability**
              
              
              3,169,444
              
              
              3,169,444**Stockholders'
                  Equity**Preferred
                  stock ($0.001 par value, 10,000,000 shares authorized, none issued
                  and
                  outstanding at June 30, 2008 and December 31, 2007)
              
              
              -
              
              
              -Common
                  stock ($0.001 par value, 100,000,000 shares authorized, 31,243,776
                  issued
                  and outstanding at June 30, 2008 and December 31, 2007)
              
              
              31,244
              
              
              31,241Treasury
                  Stock (1,944,444 shares at June 30, 2008 and December 31,
                  2007)
              
              
              (1,944
              )
              
              (1,944
              )Additional
                  paid-in capital
              
              
              4,923,348
              
              
              4,666,244Retained
                  earnings
              
              
              8,493,063
              
              
              7,791,895Accumulated
                  other comprehensive income
              
              
              1,940,324
              
              
              892,700**Total
                  stockholders' equity**
              
              
              15,386,035
              
              
              13,380,136$
              25,491,955
              
              $
              20,030,246
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  2
 
 **Emerald
        Dairy Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Income**
 **For
        the Three and Six Months Ended June 30, 2008 and 2007**
 **(Unaudited)**
 
 **Three
                  months ended**
              
              **Six
                  months ended****June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****Sales**
              
              $
              10,904,778
              
              $
              6,645,580
              
              $
              21,339,237
              
              $
              12,528,194**Cost
                  of Goods Sold**
              
              
              7,281,163
              
              
              4,926,820
              
              
              13,292,397
              
              
              8,430,391**Gross
                  Profit**
              
              
              3,623,615
              
              
              1,718,760
              
              
              8,046,840
              
              
              4,097,803**Operating
                  Expenses**Selling
                  and administrative expenses
              
              
              2,634,812
              
              
              722,224
              
              
              6,964,150
              
              
              2,423,732Depreciation
                  and amortization
              
              
              15,570
              
              
              11,986
              
              
              30,431
              
              
              23,845**Total
                  operating expenses**
              
              
              2,650,382
              
              
              734,210
              
              
              6,994,581
              
              
              2,447,577**Other
                  Income (Expense)**Interest
                  income
              
              
              3,978
              
              
              1,802
              
              
              9,606
              
              
              2,632Interest
                  expense
              
              
              (42,150
              )
              
              (5,172
              )
              
              (43,406
              )
              
              (8,590
              )Total
                  other income (expense)
              
              
              (38,172
              )
              
              (3,370
              )
              
              (33,800
              )
              
              (5,958
              )**Net
                  Income Before Provision for Income Tax**
              
              
              935,061
              
              
              981,180
              
              
              1,018,459
              
              
              1,644,268**Provision
                  for Income Taxes**Current
              
              
              236,711
              
              
              58,350
              
              
              317,291
              
              
              82,652Deferred
              
              
              -
              
              
              -
              
              
              -
              
              
              -236,711
              
              
              58,350
              
              
              317,291
              
              
              82,652**Net
                  Income**
              
              $
              698,350
              
              $
              922,830
              
              $
              701,168
              
              $
              1,561,616**Basic
                  Earnings Per Share**
              
              $
              0.02
              
              $
              0.04
              
              $
              0.02
              
              $
              0.07**Basic
                  Weighted Average Shares Outstanding**
              
              
              29,299,332
              
              
              23,536,315
              
              
              29,299,332
              
              
              21,674,862**Diluted
                  Earnings Per Share**
              
              $
              0.02
              
              $
              0.04
              
              $
              0.02
              
              $
              0.07**Diluted
                  Weighted Average Shares Outstanding**
              
              
              29,563,708
              
              
              23,536,315
              
              
              29,563,708
              
              
              21,674,862**The
                  Components of Other Comprehensive Income**Net
                  Income
              
              $
              698,350
              
              $
              922,830
              
              $
              701,168
              
              $
              1,561,616Foreign
                  currency translation adjustment
              
              
              440,717
              
              
              (274,045
              )
              
              1,375,312
              
              $
              156,667Income
                  tax related to other comprehensive income
              
              
              (149,844
              )
              
              93,175
              
              
              (467,606
              )
              
              (53,267
              )**Comprehensive
                  Income**
              
              $
              989,223
              
              $
              741,960
              
              $
              1,608,874
              
              $
              1,665,016
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  3
 
 **Emerald
        Dairy Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows**
 **For
        the Six Months Ended June 30, 2008 and 2007**
 
 2008
              
              2007
 **Cash
                    flows from operating activities****Net
                    Income**
                
                $
                701,168
                
                $
                1,561,616**Adjustments
                    to reconcile net cash provided by****operating
                    activities**Depreciation
                    and amortization
                
                
                193,559
                
                
                68,263Amortization
                    of loan discount
                
                
                18,766
                
                
                -**Net
                    change in assets and liabilities**Trade
                    accounts receivable
                
                
                (1,565,617
                )
                
                (26,013
                )Inventory
                
                
                (1,212,775
                )
                
                292,043Advance
                    to suppliers and other receivables
                
                
                -
                
                
                (184,695
                )Deposits
                
                
                (3,091,015
                )
                
                -Accounts
                    payable and accrued expenses
                
                
                1,440,003
                
                
                (161,573
                )Advances
                    from employees
                
                
                34,914
                
                
                (212,681
                )Taxes
                    payable
                
                
                -
                
                
                (16,215
                )**Net
                    cash used in operating activities**
                
                
                (3,480,997
                )
                
                (114,644
                )
  **Cash
                  flows from investing activities**Purchases
                  of fixed assets and intangibles
              
              
              (1,656,200
              )
              
              (521,169
              )**Net
                  cash used in investing activities**
              
              
              (1,656,200
              )
              
              (521,169
              )**Cash
                  flows from financing activities**Sale
                  of stock for cash
              
              
              -
              
              
              2,000,000Repayments
                  of notes payable
              
              
              (290,713
              )
              
              -Advances
                  on notes payable
              
              
              2,250,000
              
              
              262,709Loans
                  from shareholders
              
              
              -
              
              
              (52,188
              )**Net
                  cash provided by financing activities**
              
              
              1,959,287
              
              
              2,210,521**Effect
                  of exchange rate**
              
              
              438,090
              
              
              (34,019
              )**Net
                  increase (decrease) in cash**
              
              
              (2,739,820
              )
              
              1,540,689**Cash
                  and cash equivalents at beginning of period**
              
              
              6,560,931
              
              
              641,164**Cash
                  and cash equivalents at end of period**
              
              $
              3,821,111
              
              $
              2,181,853
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  4
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **1.**
              **Description
                  of Business**
 
 Emerald
        Dairy, Inc. (the Company), a Nevada corporation, is a producer of milk powder,
        rice powder and soybean milk powder in the People’s Republic of China through
        its wholly owned subsidaries.
 
 American
        International Dairy Holdings, Inc., a Nevada corporation, was formed in 2005
        for
        the purpose of acquiring the stock in Heilonjang Xing An Ling Dairy, Co.
        On May
        30, 2005, AIDH, pursuant to the Share Transfer Agreement acquired Heilonjiang
        Xing An Ling Dairy Co. Limited, (XAL) a corporation formed on September 8,
        2003
        in Heilonjiang Providence, The People’s Republic of China, (PRC). This
        transaction was treated as a recapitalization of XAL for financial reporting
        purposes. The effect of this recapitalization was rolled back to the inception
        of XAL for financial reporting purposes.
  XAL
        is a
        dairy company engaged in manufacturing of milk, soybean and rice powder.
        Through
        the Company’s network of over 600 salespeople, the Company’s products are
        distributed throughout 20 provinces in the People’s Republic of China, and sold
        in over 5,600 retail outlets.
 
 Prior
        to
        September 23, 2006, XAL owned 57.69% of Heilongjiang Beian Nongken Changxing
        LvBao Dairy Limited Liability Company (“LvBao”) with the remaining balance being
        held by the Company’s sole shareholder. On September 23, 2006, the remaing
        42.31% ownership in LvBao was transferred to XAL and was treated as an
        additional capital contribution. The effect of this contribution by the sole
        shareholder was rolled back to September 8, 2003 for financial reporting
        purposes. LvBao was formed on January 20, 2000 and is engaged in manufacturing
        and sales of dairy products.
 
 On
        May
        22, 2008, the Company formed a new wholly-owned subsidiary,
        Hailun Xinganling Dairy Co., Ltd. (“HXD”), under the laws of the PRC. In July
        2008, HXD commenced construction of a production facility in Hailun City,
        Heilongjiang Province, PRC. The Company estimates that the cost of the new
        facility, including land use rights, construction and equipment, will be
        approximately $20.0 million. It is anticipated that HXD will engage in the
        manufacture of the Company's milk, soybean and rice powder products at this
        new
        facility, beginning in the first quarter of 2009.
 
 **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 June 30, 2008 and the results of their
        operations for the three and six months ended June 30, 2008 and 2007, and
        cash
        flows for the six months ended June 30, 2008 and 2007. The results of operations
        for the three and six months ended June 30, 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).
  5
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 
 **2.**
              **Basis
                  of Preparation of Financial Statements
                  (Continued)**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiaries, XAL, LvBao and HXD. All inter-company transactions
        and balances were eliminated.
 
 **3.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 **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.
 
 **Foreign
        Currency** -
        The
        Company’s principal country of operations is The People’s Republic of China. The
        financial position and results of operations of the Company are determined
        using
        the local currency (“Renminbi” or “Yuan”) as the functional currency. The
        results of operations denominated in foreign currency are translated at the
        average rate of exchange during the reporting period.
  Assets
        and liabilities denominated in foreign currencies at the balance sheet date
        are
        translated at the exchange rates prevailing at the balance sheet date. The
        registered equity capital denominated in the functional currency is translated
        at the historical rate of exchange at the time of capital contribution. All
        translation adjustments resulting from the translation of the financial
        statements into the reporting currency (“US Dollars”) are dealt with as a
        separate component within stockholders’ equity. Translation adjustments totaled
        $440,717 and $1,375,312, for the three and six months ended June 30, 2008,
        respectively. Translation adjustments totaled $(274,045) and $156,667 for
        the
        three and six months ended June 30, 2007, respectively.
 
 As
        of
        June 30, 2008 and 2007, the exchange rate was 6.8543 Yuan and 7.613 Yuan
        per
        U.S. Dollar, respectively.
 
 **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
        June 30, 2008, the Company has no sales or contracts that included multiple
        deliverables that would fall under the scope of EITF 00-21, “Revenue
        Arrangements with Multiple Deliverables.”
 
 **Earnings
        per share -** Basic
        net
        earnings per common share is computed by dividing net earnings applicable
        to
        common shareholders by the weighted-average number of common shares outstanding
        during the period. Diluted net earnings per common share is determined using
        the
        weighted-average number of common share shares outstanding during the period,
        adjusted for the dilutive effect of common stock equivalents, 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.
  6
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **3.**
              **Summary
                  of Significant Accounting Policies
                  (Continued)**
 
 **Taxation
        -** Taxation
        on profits earned in the PRC has been calculated on the estimated assessable
        profits for the year at the rates of taxation prevailing in the PRC in which
        the
        Company operates after taking into effect the benefits from any special tax
        credits or “tax holidays” allowed in the country of operations.
  The
        Company accounts for income tax under the provisions of SFAS 109, *Accounting
        for Income Taxes,* which
        requires recognition of deferred tax assets and liabilities for the expected
        future tax consequences of the events that have been included in the financials
        statements or tax returns. Deferred income taxes are recognized for all
        significant temporary differences between tax and financial statements bases
        of
        assets and liabilities. Valuation allowances are established against net
        deferred tax assets when it is more likely than not that some portion or
        all of
        the deferred tax asset will not be realized.
 
 The
        Company does not have any long-term deferred tax assets or liabilities in
        China
        that will exist once the tax holiday (See Note 9) 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.
 
 **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.
 
 **Recent
        accounting pronouncements**
 
 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.
        The adoption of this standard did not have a material impact on our financial
        condition, results of operations or cash flows.
  7
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **3.**
              **Summary
                  of Significant Accounting Policies
                  (Continued)**
 
 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 adopted this
        Statement on December 31, 2006 and the adoption of SFAS No. 158
        did 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 adoption
        of
        this standard did not have a material impact on our financial condition,
        results
        of operations or cash flows.
 
 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* (SFAS
        161). SFAS 161 changes the disclosure requirements for derivative instruments
        and hedging activities. Entities are required to provide enhanced disclosures
        about (a) how and why an entity uses derivative instruments, (b) how
        derivative instruments and related hedged items are accounted for under
        Statement 133 and its related interpretations, and (c) how derivative
        instruments and related hedged items affect an entity’s financial position,
        financial performance, and cash flows. The guidance in SFAS 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 SFAS
        161.
  8
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **3.**
              **Summary
                  of Significant Accounting Policies
                  (Continued)**
 
 In
        June
        2008, the Emerging Issues Task Force (EITF) reached a final consensuses on
        EITF
        Issue 08-4, *Transition
        Guidance for Conforming Changes to Issue No. 98-5* *.* Certain
        conclusions reached in EITF
        Issue No. 98-5, “Accounting for Convertible Securities with Beneficial
        Conversion Features or Contingently Adjustable Conversion Ratios,”were
        nullified in EITF
        Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
        Instruments.”Moreover, some of the conclusions in Issue No. 98-5 and Issue No. 00-27 were
        superseded by SFAS
        No.
        150,
        Accounting for Certain Financial Instruments with Characteristics of both
        Liabilities and Equity. While the conclusions reached in Issue No. 98-5 were
        subsequently updated to reflect the issuance of Issue No. 00-27 and SFAS
        No.
        150, the transition guidance in Issue No. 98-5 was not revised. The EITF
        reached
        a consensus on Issue No. 08- 4,
        which
        provides such guidance and requires that (1) conforming changes made to Issue
        No. 98-5 resulting from Issue No. 00-27 and SFAS No. 150 be effective for
        financial statements of fiscal years ending after December 15, 2008, with
        early
        application allowed, and (2) the effect of applying the conforming changes
        be
        presented retrospectively (with the cumulative effect of the change reported
        in
        retained earnings as of the beginning of the first period presented). The
        Company is currently assessing the impact of EITF Issue 08-4.
 
 **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 June 30,
        2008
        $236,681 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
        six months ended June 30, 2008 and 2007, no single customer accounted for
        10% or
        more of sales revenues.
 
 As
        of
        June 30, 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.
  9
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 
 **5.**
              **Inventory**
 
 As
        of
        June 30, 2008 and December 31, 2007 inventory consists of the
        following:
 
 2008
              
              2007Raw
                  materials
              
              $
              1,808,549
              
              $
              634,018Work-in-process
              
              
              389,661
              
              
              349,334Finished
                  goods
              
              
              66,694
              
              
              8,490Repair
                  parts
              
              
              9,424
              
              
              8,585$
              2,274,328
              
              $
              1,000,427
  **6.**
              **Other
                  current assets**
 
 As
        of
        June 30, 2008 and December 31, 2007, other current assets consist of the
        following:
 
 2008
              
              2007Advances
                  to milk suppliers
              
              $
              371,273
              
              $
              652,398Deposit
                  on building purchase
              
              
              1,172,985
              
              
              1,101,370Deposit
                  on new facility site
              
              
              574,821
              
              
              539,725Deposit
                  on contract
              
              
              1,163,613
              
              
              1,534,247Other
                  Receivables
              
              
              50,000
              
              
              50,000Advances
                  to staff
              
              
              13,703
              
              
              18,924Prepaid
                  expenses
              
              
              272,485
              
              
              40,087$
              3,618,880
              
              $
              3,936,751
  **7.**
              **Property,
                  Plant, and Equipment**
 
 As
        of
        June 30, 2008 and December 31, 2007, Property, Plant, and Equipment consist
        of
        the following:
 
 2008
              
              2007Building
              
              $
              1,147,407
              
              $
              1,007,475Plant
                  and Machinery
              
              
              2,938,882
              
              
              2,512,451Motor
                  vehicles
              
              
              524,500
              
              
              459,547Dairy
                  cows
              
              
              233,183
              
              
              211,220Office
                  equipment
              
              
              43,432
              
              
              52,6964,887,403
              
              
              4,243,389Less:
                  Accumulated depreciation
              
              
              (1,172,142
              )
              
              (923,308
              )$
              3,715,262
              
              $
              3,320,081
  Depreciation
        expenses totaled $94,396 and $183,302 for the three and six months ended
        June
        30, 2008, respectively, and $37,149 and $105,412 for the three and six months
        ended June 30, 2007, respectively. $78,826 and $152,871 were included as
        a
        component of cost of goods sold for the three and six months ended June 30,
        2008, respectively, and $25,163 and $81,567 for the three and six months
        ended
        June 30, 2007, respectively.
  10
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **8.**
              **Intangible
                  Assets**
 
 June 30,
                2008
              
              December 31,
                2007Land
                  use rights
              
              $
              1,350,190
              
              $
              66,839Patents
              
              
              52,959
              
              
              49,7261,403,149
              
              
              116,565Less:
                  Accumulated amortization
              
              
              (10,564
              )
              
              (1,338
              )$
              1,392,585
              
              $
              115,227
  For
        the
        three and six months months ended June 30, 2008, amortization expenses totaled
        $5,813 and $8,187, respectively. There was no amortization for the six months
        ended June 30, 2007.
 
 **9.**
              **Income
                  Taxes**
 
 On
        May
        30, 2005, American International Dairy Holdings, Inc. executed a Share Transfer
        Agreement with Heilongjian Xing An Ling Dairy Co., Ltd., a corporation organized
        and existing under the laws of People’s Republic of China. XAL applied to be as
        a foreign invested company right after the share transfer, which business
        license has been approved as a foreign invested company on January 10, 2006.
        According to Chinese taxation policy, there is income tax exemption for 2
        years
        and half for 3 years suitable to foreign invested company, advanced Technology
        Company or software Development Company. XAL is considered an Advanced
        Technology Company. Therefore the Company receives this income tax exemption
        policy from January 10, 2006 the date approval as a foreign invested company.
        The Company received a 100% tax holiday as of January 10, 2006. On January
        10,
        2008 the Company’s tax exemption was reduced to 50% of the prevailing tax rate
        and will continue at this reduced rate for three additional years.
 
 LvBao
        is
        currently subject to the Enterprise income tax of 33%.
 
 A
        reconciliation of the provision for income taxes with amounts determined
        by the
        U.S. federal income tax rate to income before income taxes is as
        follows.
 
 The
        components of net income (loss) before provision for income tax consist of
        following:
 
 Three Months
                Ended June 30,
              
              Six Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007U.S.
                  Operations
              
              $
              (815,000
              )
              $
              (39,000
              )
              $
              (1,189,000
              )
              $
              (53,000
              )Chinese
                  Operations
              
              
              1,751,000
              
              
              1,020,000
              
              
              2,208,000
              
              
              1,698,000$
              936,000
              
              $
              981,000
              
              $
              1,019,000
              
              $
              1,645,000
  11
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **9.**
              **Income
                  Taxes (Continued)**
 
 The
        components of the provision for income taxes are approximately as
        follows:
  Three Months
                Ended June 30,
              
              Six Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007Federal,
                  State and Local
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Peoples
                  Republic of China -Federal and Local
              
              
              236,700
              
              
              58,300
              
              
              317,000
              
              
              82,600$
              236,700
              
              $
              58,300
              
              $
              317,000
              
              $
              82,600
  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 June 30,
              
              Six Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007Income
                  tax provision at Federal statutory rate
              
              $
              319,000
              
              $
              334,000
              
              $
              347,000
              
              $
              559,000State
                  income taxes, net of Federal benefit
              
              
              57,000
              
              
              59,000
              
              
              62,000
              
              
              99,000U.S.
                  tax rate in excess of foreign tax rate
              
              
              (123,000
              )
              
              (72,000
              )
              
              (155,000
              )
              
              (119,000
              )Abatement
                  of foreign income taxes
              
              
              (339,300
              )
              
              (277,700
              )
              
              (408,000
              )
              
              (477,400
              )Increase
                  in valuation allowance
              
              
              323,000
              
              
              15,000
              
              
              471,000
              
              
              21,000$
              236,700
              
              $
              58,300
              
              $
              317,000
              
              $
              82,600
  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 June
        30,
        2008.
 
 The
        change in the valuation allowance as of June 30, 2008 and 2007 was $471,000
        and
        $21,000, respectively.
 
 The
        effects of the tax exemption per share were as follows:
 
 Three
                  Months
                Ended June 30,
              
              Six
                  Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007Tax
                  Saving
              
              $
              339,300
              
              $
              277,700
              
              $
              408,000
              
              $
              477,400Benefit
                  per share:Basic
              
              $
              0.01
              
              $
              0.01
              
              $
              0.01
              
              $
              0.02Diluted
              
              $
              0.01
              
              $
              0.01
              
              $
              0.01
              
              $
              0.02
  12
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **9.**
              **Income
                  Taxes (Continued)**
 
 Had
        the
        tax exemption not been in place for the three and six months ended June 30,
        2008
        and 2007, the Company estimates the following proforma financial statement
        impact.
 
 Three Months
                Ended June 30,
              
              Six Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007Net
                  income before tax provision, as reported
              
              $
              936,000
              
              $
              981,000
              
              $
              1,019,000
              
              $
              1,645,000Less
                  Tax provision not exempted
              
              
              236,700
              
              
              58,300
              
              
              317,000
              
              
              82,600Less
                  Tax provision exempted
              
              
              339,300
              
              
              277,700
              
              
              408,000
              
              
              477,400$
              360,000
              
              $
              645,000
              
              $
              294,000
              
              $
              1,085,000,
  **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 three and six
        months ended June 30, 2008 and 2007, respectively, the Company contributed
        $27,910, $54,813, $22,893 and $45,043 in pension contributions.
 
 **11.**
              **Notes
                  payable**
 
 In
        June
        2008, the Company sold 8% promissory notes maturing December 31, 2008 and
        three-year warrants to purchase 225,000 shares of common stock at an exercise
        price of $2.61 for $2,250,000. Any amount of principal or interest outstanding
        after December 31, 2008 will bear interest at a rate of 12%. In accordance
        with
        Accounting Principles Board Opinion No. 14, "Accounting for Convertible Debt
        and
        Debt Issued with Stock Purchase Warrants", the proceeds from issuance of
        the
        notes were allocated to the notes and warrants based upon their relative
        fair
        values. This allocation resulted in allocating $210,600 to the warrants to
        be
        treated as loan discount to be amortized over the life of the notes. During
        the
        three and six months ended June 30, 2008, $18,766 of the loan discount was
        amortized to interest expense. The following assumptions were used to calculate
        the fair value of the warrants using the Black - Scholes Model:
 
 Dividend
                  yield
              
              
              0
              %Expected
                  volatility
              
              
              118.01
              %Risk-free
                  interest rate
              
              
              3.17
                  - 3.35
              %Expected
                  life
              
              
              3
                  yearsStock
                  price
              
              $
              1.63Exercise
                  price
              
              $
              2.61
  13
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **11.**
              **Notes
                  payable (Continued)**
 
 The
        notes
        may be prepaid in their entirety without penalty upon 15 day notice. So long
        as
        the Company has any obligation under the notes, there are limitations on
        its
        ability to: (a) pay dividends or make other distributions on its capital
        stock;
        (b) redeem, repurchase or otherwise acquire any of its securities; (c) create,
        incur or assume any liability for borrowed money; (d) sell, lease or otherwise
        dispose of any significant portion of its assets; (e) lend money, give credit
        or
        make advances; or (f) assume, guarantee, endorse, contingently agree to purchase
        or otherwise become liable upon the obligation of any other person or
        entity.
 
 In
        connection with the sale of the notes in June 2008, the Company paid a placement
        agent $122,500 in fees and delivered 45,000 three- year warrants to purchase
        45,000 shares of common stock at an exercise price of $2.61. The warrants
        were
        valued at $46,507 using a Black-Scholes Model and together with the fee were
        treated as deferred issuance costs to be amortized over the life of the notes.
        Deferred
        issuance costs are included in prepaid expenses in the consolidated balance
        sheet. The following assumptions were used to calculate the fair
        value of the warrants:
 
 Dividend
                  yield
              
              
              0
              %Expected
                  volatility
              
              
              118.01
              %Risk-free
                  interest rate
              
              
              3.35
              %Expected
                  life
              
              
              3
                  yearsStock
                  price
              
              $
              1.63Exercise
                  price
              
              $
              2.61
 
 In
        connection with the sale of notes in June 2008, the Company paid legal fees
        of
        $15,000 that were treated as deferred issuance costs and are being amortized
        over the life of the notes.
 
 **12.**
              **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 $209,305, which approximated
        historical cost of these assets. The note does not bear interest and is due
        on
        demand.
 
 **13.**
              **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.
  14
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **13.**
              **Put/Call
                  Liability (Continued)**
 
 T he
        Company may only exercise its Call Option by delivering a written notice
        (a
“Call Option Exercise Notice”) to the Put/Call Stockholders within thirty (30)
        days of such time as all of the Call Option Conditions have been met. The
        Call
        Option may be exercised for all, but not less than all, of the Put/Call Shares.
        The repurchase shall be consummated within ninety (90) days following the
        date
        of the Call Option Exercise Notice.
 
 In
        addition, the Put/Call Stockholders shall have the right to cause the Company
        to
        repurchase the Put/Call Shares from the Put/Call Stockholders (the “Put Right”),
        for a price of $1.63 per share (the “Put Purchase Price”), if:
 
 ·
              the
                  Company fails to exercise its Call Option within ten (10) days
                  of a date
                  on which all of the Call Option Conditions have been met;
                  or
 
 ·
              the
                  Company consummates a private offering of not less than $5,000,000
                  of its
                  securities (a “Qualified Offering”); or
 
 ·
              the
                  Company fails to (i) file the Registration Statement within thirty
                  (30)
                  business days of the Closing Date (the “Filing Date”), (B) have the
                  Registration Statement declared effective within ninety (90) calendar
                  days
                  from the Filing Date, or, if reviewed by the Commission, within
                  one
                  hundred eighty (180) calendar days after the Filing Date, or (C)
                  keep the
                  Registration Statement continuously effective until all of the
                  Shares are
                  available for sale without registration pursuant to Rule 144(k);
                  or
  ·
              the
                  Company fails to consummate a Qualified Offering within two (2)
                  years of
                  the date hereof (each of the aforementioned conditions, a “Put Right
                  Trigger”).
 
 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 June 30, 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).
  15
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **14.**
              **Equity**
 
 **Registration
        Rights Agreement**
 
 On
        October 9, 2007 and October 19, 2007, the Company entered into Registration
        Rights Agreements (each, a “Registration Rights Agreement,” and collectively the
“Registration Rights Agreements”) with the accredited investors,( the
“Investors”), pursuant to which it agreed that within thirty (30) business days
        of the Closing Date (the Filing Date), the Company will file a registration
        statement (the Registration Statement) with the Securities and Exchange
        Commission (the “Commission”) covering the resale of (i) the shares of Common
        Stock purchased in the above placements (collectively, the “Offerings”) (the
“Purchased Shares”), (ii) the Common Stock issuable upon exercise of the
        warrants issued in the Offerings (the “Registrable Securities”). Further, the
        Company agreed to use its best efforts to (i) cause the Registration Statement
        to be declared effective within ninety (90) calendar days from the Filing
        Date,
        or, if reviewed by the Commission, within one hundred eighty (180) calendar
        days
        after the Filing Date, and (ii) keep the Registration Statement continuously
        effective until two (2) years after the Closing Date, subject to normal and
        customary blackout periods. After two years the Company’s obligation to keep the
        Registration Statement ends.
  Pursuant
        to the Registration Rights Agreements, the Company will be required to pay
        liquidated damages (payable in cash in arrears at the end of each month during
        which a registration default occurs and is continuing) to the holders of
        the
        Purchased Shares, the First Investor Warrants, the Class A Warrants, the
        Class B
        Warrants, or the Common Stock issued upon exercise of the First Investor
        Warrants, Class A Warrants and Class B Warrant (collectively, the “Securities”)
        if (i) the Company fails to file the Registration Statement within thirty
        (30)
        business days from the Closing Date, (ii) the Commission does not declare
        the
        Registration Statement effective within ninety (90) days of the Filing Date
        (or
        one hundred eighty (180) days in the event of a review by the Commission)
        (the
“Effectiveness Date”), (iii) the Company fails to request acceleration of
        effectiveness within five (5) business days of a notice of no further review
        from the Commission, (iv) the Company fails to respond to the Commission
        within
        ten (10) business days of receipt by the Company of any comments on the
        Registration Statement, or (v) after it has been declared effective, the
        Registration Statement ceases to be effective or available or if the Company
        suspends the use of the prospectus forming a part of the Registration Statement
        (A) for more than thirty (30) days in any period of 365 consecutive days
        if the
        Company suspends in reliance on its ability to do so due to the existence
        of a
        development that, in the good faith discretion of its board of directors,
        makes
        it appropriate to so suspend or which renders the Company unable to comply
        with
        SEC requirements, or (B) for more than sixty (60) days in any period of 365
        consecutive days for any reason. The liquidated damages will accumulate at
        the
        rate of one and one-half percent (1.5%) of the purchase price paid by the
        Investors for the Securities offered for each thirty (30) day period during
        which a registration default is continuing.
 
 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
        June 30, 2008 there were accrued liquidated damages of $702,498. Additional
        liquidated damages of $359,299 and $552,799 were accrued in the three and
        six
        months ended June 30, 2008. Additionally the Company is accruing $4,500 per
        day
        in liquidated damages with maximum additional damages possible of $1,097,503.
  16
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **14.**
              **Equity
                  (Continued)**
 
 **Warrants**
 
 Information
        with respect to stock warrants outstanding as of June 30, 2008 are as
        follows:
  Exercise Price
              
              Outstanding
                December 31,
                2007
              
              Granted
              
              Expired or
                Exercised
              
              Outstanding
                June 30,
                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-
              
              
              804,884
              
              
              10/09/2010$2.04
              
              
              569,346
              
              
              -0-
              
              
              -0-
              
              
              569,346
              
              
              10/19/2010$2.61
              
              
              -0-
              
              
              195,000
              
              
              -0-
              
              
              195,000
              
              
              6/12/2011$2.61
              
              
              -0-
              
              
              75,000
              
              
              -0-
              
              
              75,000
              
              
              6/20/2011$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
 
 **Warrant
        Tender Offer**
 
 As
        of
        April 24, 2008, we commenced an offer (“Offer”) to the holders
        (“Warrantholders”) of our then outstanding 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. The Offer will expire on
        October 31, 2008, as extended, 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.
 
 **15.**
              **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
        June 30, 2008. The balance of these reserves at June 30, 2008 and 2007, was
        $1,340,713 and $639,331, respectively. These amounts are restricted and are
        included in retained earnings.
  17
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **15.**
              **Common
                  Welfare Reserves
                  (Continued)**
 
 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.
  **16.**
              **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.
 
 **17.**
              **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 and six months ended June 30, 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 6,552,193 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 and six months ended June 30,
        2007.
 
 The
        following reconciles the components of the EPS computation:
 
 Income
              
              Shares
              
              Per Share(Numerator)
              
              (Denominator)
              
              AmountFor
                  the three months ended June 30, 2008:Net
                  income
              
              $
              698,350Basic
                  EPS income available to common shareholders
              
              $
              698,350
              
              
              29,299,332
              
              $
              0.02Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              264,376Diluted
                  EPS income available to common shareholders
              
              $
              698,350
              
              
              29,563,708
              
              $
              0.02For
                  the three months ended June 30, 2007:Net
                  income
              
              $
              922,830Basic
                  EPS income available to common shareholders
              
              $
              922,830
              
              
              23,536,315
              
              $
              0.04Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              —Diluted
                  EPS income available to common shareholders
              
              $
              922,830
              
              
              23,536,315
              
              $
              0.04
  18
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **17.**
              **Earnings
                  Per Share (Continued)**
 
 Income
              
              Shares
              
              Per Share(Numerator)
              
              (Denominator)
              
              AmountFor
                  the six months ended June 30, 2008:Net
                  income
              
              $
              701,168Basic
                  EPS income available to common shareholders
              
              $
              701,168
              
              
              29,299,332
              
              $
              0.02Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              264,376Diluted
                  EPS income available to common shareholders
              
              $
              701,168
              
              
              29,563,708
              
              $
              0.02For
                  the three months ended June 30, 2007:Net
                  income
              
              $
              1,561,616Basic
                  EPS income available to common shareholders
              
              $
              1,561,616
              
              
              21,674,862
              
              $
              0.07Effect
                  of dilutive securities:Warrants
              
              
              —
              
              
              —Diluted
                  EPS income available to common shareholders
              
              $
              1,561,616
              
              
              21,674,862
              
              $
              0.07
 
 **18.**
              **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.
 
 The
        Company has placed a deposit of $574,821 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 $1,172,985 has been made. The balance of $738,025 will be due
        on
        expected completion of the building expected by the end of the third quarter
        of
        2008.
  The
        Company has contracted to purchase equipment from a supplier for a second
        processing facility for $5,279,897 of which $3,695,928 has been
        advanced.
 
 The
        Company has advances to milk suppliers of $371,273 which will be offset against
        future milk purchases from those suppliers.
 
 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.
  19
  Emerald
        Dairy, Inc and Subsidiaries
 Footnotes
        to Condensed Consolidated Financial Statements
 June
        30,
        2008 and 2007
 
 **18.**
              **Commitments
                  and Contingencies
                  (Continued)**
 
 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.
 
 **19.**
              **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 and six months
        ended June 30, 2008 and 2007, the Company incurred rental expense of $32,440,
        $63,960, $37,161 and $56,745, respectively. As of June 30, 2008, the Company
        had
        outstanding lease commitments totaling $65,880, all of which are due within
        the
        next year.
 
 **20.**
              **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 and six months ended June 30, 2008, the Company’s sales revenue from
        various products are as follows:
 
 Three Months
                Ended June 30,
              
              Six Months
                Ended June 30,2008
              
              2007
              
              2008
              
              2007Milk
                  powder
              
              $
              8,529,387
              
              $
              5,245,419
              
              $
              16,828,825
              
              $
              9,682,094Soybean
                  milk powder
              
              
              204,917
              
              
              144,380
              
              
              418,715
              
              
              287,142Rice
                  powder
              
              
              261,835
              
              
              220,140
              
              
              532,338
              
              
              436,185Sub-contract
                  processing
              
              
              1,908,639
              
              
              1,035,641
              
              
              3,559,359
              
              
              2,122,773$
              10,904,778
              
              $
              6,645,580
              
              $
              21,339,237
              
              $
              12,528,194,
 
 20




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





**Forward
      Looking Statements**





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





**Overview**





We
      are a
      producer of milk powder, rice powder and soybean milk powder, which currently
      comprise approximately 96%, 2% and 2% of our sales, respectively. Through our
      network of over 600 salespeople, our products are distributed throughout 20
      provinces in the People’s Republic of China (“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 23%
      through 2011. Currently, it is estimated that demand for infant formula in
      China
      outstrips supply by at least 2-to-1.





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





Because
      of our close proximity to its sources of fresh milk, we are able to complete
      the
      production process in approximately 30 hours, 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, in July 2008, through
      our
      wholly-owned subsidiary, Hailun Xinganling Dairy Co., Ltd. (“HXD”), we commenced
      construction of a new production facility in Hailun City, Heilongjiang Province,
      PRC, which will enable us to produce an additional 9,000 tons of milk powder
      annually, beginning in fiscal 2009. As a result, we believe we will have the
      capacity to produce almost 20,000 tons of milk powder per year by fiscal 2010.
      It is expected that our production of rice powder and soymilk powder will also
      increase in volume, while continuing to comprise approximately 2% and 2% of
      our
      overall sales, respectively.




21





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





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




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




·
            HXD,
                which will handle additional production of our products in Hailun
                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 “Merger”), pursuant to which
      our wholly-owned subsidiary merged with and into a private company, American
      International Dairy Holding Co., Inc. (“AIDH”), with such private company being
      the surviving company. In connection with this Merger, we discontinued our
      former business and succeeded to the business of AIDH as our sole line of
      business. For financial reporting purposes, AIDH is considered to be the
      accounting acquirer. Accordingly, the historical financial statements presented
      and the discussion of financial condition and results of operations herein
      are
      those of AIDH and do not include our historical financial results.





Simultaneously
      with the Merger, we 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 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.




22





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.





***Warrant
      Tender Offer***





As
      of
      April 24, 2008, we commenced an offer (“Offer”) to the holders
      (“Warrantholders”) of our then outstanding 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. The Offer will expire on
      October 31, 2008, as extended, 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.




23





As
      of the
      date hereof, a limited number of Warrantholders have elected to tender their
      warrants. However, since any Warrantholder may change its election and withdraw
      from the Offer, the funds related to such transactions are being held in escrow,
      and will not be released to us until the Offer expires.





***Sale
      of Notes and Warrants***





In
      June
      2008, we conducted a private offering of up to a maximum of (i) $3,000,000
      of
      our 8% promissory notes (the “Notes”) and (ii) warrants to purchase 300,000
      shares of our Common Stock, at an exercise price of $2.61 per share (the “New
      Warrants”) (the “Note Offering”). On June 12, 2008, one “accredited investor”
purchased, for a purchase price of $1,500,000, a Note in the principal amount
      of
      $1,500,000, and New Warrants to purchase 150,000 shares of our Common Stock.
      On
      June 20, 2008, an additional “accredited investor” purchased, for a purchase
      price of $750,000, a Note in the principal amount of $750,000, and New Warrants
      to purchase 75,000 shares of our Common Stock. The rights and obligations under
      the warrants are further described in “- Liquidity and Capital Resources -
      Warrants” below.





In
      connection with the Note Offering, we engaged a placement agent to whom we
      paid
      a non-refundable retainer of $25,000, and a placement fee in the amount of
      $97,500, and granted warrants to purchase an aggregate of 45,000 shares of
      our
      Common Stock, the terms and conditions of which are identical to the those
      of
      the New Warrants.





***Construction
      of New Production Facility***





On
      May
      22, 2008, we organized our wholly-owned subsidiary, HXD, under the laws of
      the
      PRC. In July 2008, HXD commenced construction on a production facility to be
      located in Hailun City, Heilongjiang Province, PRC. When completed, the new
      facility will have the capacity to produce approximately 9,000 tons of infant
      formula milk powder annually, expandable to 18,000 tons annually. We anticipate
      that production will begin at this facility in the first quarter of
      2009.





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




24




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.
      We
      have commenced construction of a new production facility with annual production
      capacity of 9,000 tons of milk powder, which is expected to start production
      in
      the first quarter of 2009. We expect that this increase in production capacity
      of approximately 100% will result in the doubling of our sales revenues, with
      a
      corresponding increase in cost of goods sold and sales and administrative
      expenses.





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





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





***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.




25




***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
      Months Ended June 30, 2008 Compared to Three Months Ended June 30,
      2007***





The
      following summarizes changes in our operations for the three months ended June
      30, 2008 and 2007. Net income decreased by $224,480, or 24.3%, from $922,830
      in
      the three months ended June 30, 2007 to $698,350 for the three months ended
      June
      30, 2008.





***Sales
      and Cost of Goods Sold***





**For
                the Three Months**
              **Ended
                June 30,****2008**
            
            **2007****Sales**
            
            $
            10,904,778
            
            $
            6,645,580**Cost
                of Goods Sold**
            
            
            7,281,163
            
            
            4,926,820**Gross
                Profit**
            
            $
            3,623,615
            
            $
            1,718,760





**Sales.** Sales
      volume increased by 302 metric tons, or 16.2%, period on period, to 2,168
      metric tons for the three months ended June 30, 2008, from 1,866 metric tons
      for
      the three months ended June 30, 2007. As a result, sales revenues increased
      by
      $4,259,198, or 64.1%, from $6,645,580 in the three months ended June 30, 2007,
      to $10,904,778 for the three months ended June 30, 2008. This increase was
      due
      to the following factors:





·
            We
                expanded the market areas in the twenty provinces in which we sell
                our
                products and our products are now sold in over 5,600 retail
                outlets;




·
            Our
                products have became increasing popular in mainland China due to
                our
                continued sales and marketing efforts;
                and




26




·
            The
                average selling price for all products has increased by $1,493 per
                metric
                ton, or 42.2%, as compared to the three months ended June 30,
                2007.




**Sales
      by product line.** A
      break-down of our sales by product line for the three months ended June 30,
      2008
      and 2007 is as follows:




********
                
                **Three
                    Months Ended June 30,****2008**
                
                **2007**
                
                **Period-on-period****Product category******
                
                **Quantity**
                  ******(tons)**
                
                **$  Amount******
                
                **% of sales**
                
                **Quantity**
                  **(tons)**
                
                **$****Amount******
                
                **% of********sales**
                
                **Quantity******
                  **Variance******Milk
                    powder
                
                
                1,426
                
                
                8,529,387
                
                
                78.2
                
                
                1,239
                
                
                5,245,419
                
                
                78.9
                
                
                187Rice
                    powder
                
                
                48
                
                
                261,835
                
                
                2.4
                
                
                47
                
                
                220,140
                
                
                3.3
                
                
                1Soybean
                    powder
                
                
                113
                
                
                204,917
                
                
                1.9
                
                
                96
                
                
                144,380
                
                
                2.2
                
                
                17Subcontracting
                
                
                581
                
                
                1,908,639
                
                
                17.5
                
                
                484
                
                
                1,035,6411
                
                
                15.6
                
                
                97Total
                
                
                2,168
                
                
                10,904,778
                
                
                100.0
                
                
                1,866
                
                
                6,645,580
                
                
                100.0
                
                
                302





There
      were very few changes to the break-down of sales among our products over the
      three months ended June 30, 2008, as compared to the three months ended June
      30,
      2007. Soybean powder only accounted for 1.9% of our sales mix for the three
      months ended June 30, 2008, at an average selling price of $1,813 per metric
      ton, as compared to 2.2% of our sales mix in the three months ended June 30,
      2007, at an average selling price of $1,504 per metric ton. Milk powder
      accounted for 78.2% of the sales mix for the quarter ended June 30, 2008, at
      an
      average selling price of $5,981 per metric ton, as compared to 78.9% of the
      quarter ended June 2007, at an average selling price of $3,962 per metric ton.
      We increased our subcontract production during the quarter ended June 30, 2008
      to 17.5% of the sales mix, at an average selling price of $3,285 per metric
      ton,
      as compared to 15.6% of the sales mix in the same quarter in 2007, at an average
      sales price of $2,140 per metric ton.





A
      breakdown of our average selling price by product line for the three months
      ended June 30, 2008 and 2007 is as follows:





**Three
                Months  Ended**
              **June 30,****Average selling prices
                (per ton)**
            
            **2008**
            
            **2007**
            
            **Variance**$
            
            $
            
            $
            
            %Milk
                powder
            
            
            5,981
            
            
            3,962
            
            
            2,019
            
            
            51.0Rice
                powder
            
            
            5,455
            
            
            4,684
            
            
            771
            
            
            16.5Soybean
                powder
            
            
            1,813
            
            
            1,504
            
            
            309
            
            
            20.5Subcontracting
            
            
            3,285
            
            
            2,140
            
            
            1,145
            
            
            53.5Average
                total selling price
            
            
            5,030
            
            
            3,537
            
            
            1,493
            
            
            42.2





**Cost
      of Goods Sold.** Cost of
      goods sold increased by $2,354,343, or 47.8%, from $4,926,820 in the three
      months ended June 30, 2007, to $7,281,163 for the three months ended June 30,
      2008. This increase was directly related to an increase in sales during quarter
      of 64.1%. Overall, our cost per metric ton increased by $736, or 28.1%, to
      $3,358 per metric ton in the quarter ended June 30, 2008, as compared to $2,622
      per metric ton in quarter ended June 30, 2007. This increase in cost per metric
      ton was the result of an increase in the price of raw materials we use to
      produce our products.




27




A
        breakdown of cost of sales by product line for the three months ended June
        30,
        2008 and 2007 is as follows:
 
 **Three
                  Months Ended June 30,****2008**
              
              **2007**
              
              **Variance**$
              
              $
              
              $
              
              %**Cost
                  of sales**Milk
                  powder
              
              
              5,397,268
              
              
              3,831,293
              
              
              1,565,975
              
              
              40.9Rice
                  powder
              
              
              110,345
              
              
              100,232
              
              
              10,113
              
              
              10.1Soybean
                  powder
              
              
              128,073
              
              
              100,264
              
              
              27,809
              
              
              27.7Subcontracting
              
              
              1,645,477
              
              
              895,031
              
              
              750,446
              
              
              83.8Total
              
              
              7,281,163
              
              
              4,926,820
              
              
              2,354,343
              
              
              47.8**Cost
                  per units sold (per ton)**Milk
                  powder
              
              
              3,785
              
              
              2,894
              
              
              891
              
              
              30.8Rice
                  powder
              
              
              2,298
              
              
              2,133
              
              
              165
              
              
              7.7Soybean
                  powder
              
              
              1,133
              
              
              1,044
              
              
              89
              
              
              8.5Subcontracting
              
              
              2,832
              
              
              1,849
              
              
              983
              
              
              53.2Average
                  cost per unit sold
              
              
              3,358
              
              
              2,622
              
              
              736
              
              
              28.1
 
 **Gross
        Profit.** Gross
        profit was $3,623,615, or 33.2% of our sales for the three months ended June
        30,
        2008, compared to gross profit of $1,718,760, or 25.7% for the three months
        ended June 30, 2007. During the quarter ended June 30, 2008 our gross margin
        on
        milk powder increased 9.7% due to an increase in the average sales price
        of
        51.0% from quarter ended June 30, 2007, partially offset by a 30.8% increase
        in
        the cost per metric ton from the quarter ended June 30, 2007. The gross margin
        for soybean powder increased 6.9% to 37.5% in quarter ended June 30, 2008,
        as
        compared to 30.6% in quarter ended June 30, 2007 due to increase in the average
        sales price of 20.5% in quarter ended June 30, 200, as compared to 2006,
        partially offset by an increase of 8.5% in the cost per metric ton from the
        quarter ended June 30, 2007 to the quarter ended June 30, 2008.
 
 A
        breakdown of gross margin by product line for the three months ended June
        30,
        2008 and 2007 is as follows:
 **Three
                    Months Ended June 30,****2008**
                
                **2007**
                
                **Period-on-period****Product category**
                
                **$  Amount**
                
                **Gross**
                  **Margin
                    %**
                
                **$****Amount**
                
                **Gross**
                  **Margin
                    %**
                
                **Margin**
                  **Variance**Milk
                    powder
                
                
                3,132,119
                
                
                36.7
                
                
                1,414,126
                
                
                27.0
                
                
                9.8Rice
                    powder
                
                
                151,490
                
                
                57.9
                
                
                119,908
                
                
                54.5
                
                
                3.4Soybean
                    powder
                
                
                76,844
                
                
                37.5
                
                
                44,116
                
                
                30.6
                
                
                6.9Subcontracting
                
                
                263,162
                
                
                13.8
                
                
                140,610
                
                
                13.6
                
                
                0.2Total
                
                
                3,623,615
                
                
                33.2
                
                
                1,718,760
                
                
                25.7
                
                
                7.4
  28
  ***Operating
        Expenses***
 
 **For
                  the Three Months**
                **Ended
                  June 30,****2008**
              
              **2007****Operating
                  Expenses**Selling
                  expenses
              
              $
              1,650,537
              
              $
              531,767Administrative
                  expenses
              
              
              984,275
              
              
              190,457Depreciation
                  and amortization
              
              
              15,570
              
              
              11,986Total
                  operating expenses
              
              $
              2,650,382
              
              $
              734,210
 
 **Selling
        Expenses** .
        Selling
        expenses overall increased by $1,118,770, or 210.4%, from $531,767 in the
        quarter ended June 30, 2007, to $1,650,537 for the quarter ended June 30,
        2008.
        The major factors in the increase in selling expenses are as
        follows:
 
 ·
              Advertising
                  increased by $518,848, or 1,583.6%, to $551,612 in 2008, from $32,765
                  in
                  2007, due to our marketing campaign to increase brand awareness
                  and
                  sales.
 
 ·
              Selling
                  salaries increased by $174,983, or 56.9%, to $482,611 in 2008,
                  from
                  $307,628 in 2007, as the amounts we paid to our sales staff rose
                  due to
                  increased sales.
 
 ·
              Travelling
                  expenses incurred by the sales staff increased by $136,444, or
                  105.6%, to
                  $265,655 in 2008, from $129,211 in 2007, due to the expansion of
                  our sales
                  network.
 
 ·
              Transportation
                  expenses increased by $69,700, or 34.7%, to $270,838 in 2008, from
                  $201,138 in 2007, as a result of shipping more product in 2008
                  as compared
                  to 2007.
 
 ·
              Entertainment
                  expenses increased by $70,855, or 86.9%, to $152,413 in 2008, from
                  $81,558
                  in 2007, as a result of the increase in the sales staff and
                  network.
 
 **Administrative
        Expenses** .
        Administrative expenses increased by $793,818, or 416.8%, from $190,457 in
        the
        quarter ended June 30, 2007, to $984,275 for the quarter ended June 30, 2008.
        The major factors in the increase in administrative expenses are as
        follows:
 
 ·
              Liquidated
                  damages incurred in 2008 of $359,299 related to registration rights
                  agreements we entered into, which were not similarly incurred in
                  2007.
 
 ·
              Increase
                  in legal and accounting fees in 2008 of $214,323, or 451.2%, to
                  $261,823,
                  as compared to $47,500 in 2007, due to costs associated with audits
                  and
                  SEC filings not required prior to the reverse merger we consummated
                  in
                  October 2007.
 
 ·
              Increase
                  in consultant expenses of $49,197, or 696.2%, to $56,263 in 2008,
                  as
                  compared to $7,066 in 2007, for services related to possible financing
                  and
                  funding.
 
 ·
              Increase
                  of administrative salaries of $43,407, or 126%, to 77,853 in 2008,
                  from
                  $34,446 in 2007, related to 6 additional administrative personnel
                  hired
                  during 2008.
  29
  ·
              Increase
                  in entertainment expenses of $30,710, or 118%, to $56,744 in 2008,
                  from
                  $26,035 in 2007, due to increased travel and entertainment by
                  administrative personnel to develop financing and funding for our
                  growth.
 
 ·
              Increase
                  of travel expenses of $26,775, or 120.7%, to $48,952 in 2008, from
                  $22,177
                  in 2007, due to the increase in travel by administrative personnel
                  to
                  develop financing and funding for our
                  growth.
  ***Provision
        for Income Taxes***
 
 **For
                  the Three Months**
                **Ended
                  June 30,****2008**
              
              **2007****Provision
                  for Income Taxes**Current
              
              $
              236,711
              
              $
              58,350Deferred
              
              
              —
              
              
              —$
              236,711
              
              $
              58,350
 
 **Provision
        for Income Taxes** .
        Income
        taxes increased by $178,361, or 305.7%, from $58,350 in the three months
        ended
        June 30, 2007, to $236,711 for the three months ended June 30, 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.
 
 ***Six
        Months Ended June 30, 2008 Compared to Six Months Ended June 30,
        2007***
 
 The
        following summarizes changes in our operations for the six months ended June
        30,
        2008 and 2007. Net income decreased by $860,448, or 55.1%, from $1,561,616
        in
        the six months ended June 30, 2007, to $701,168 for the six months ended
        June
        30, 2008.
 
 ***Sales
        and Cost of Goods Sold***
 
 **For
                  the Three Months**
                **Ended
                  June 30,****2008**
              
              **2007****Sales**
              
              $
              21,339,237
              
              $
              12,528,194**Cost
                  of Goods Sold**
              
              
              13,292,397
              
              
              8,430,391**Gross
                  Profit**
              
              $
              8,046,840
              
              $
              4,097,803
 
 **Sales.** Sales
        volume increased by 706 metric tons, or 19%, period on period to 4,418 metric
        tons for the six months ended June 30, 2008, from 3,712 metric tons for the
        six
        months ended June 30, 2007. As a result, sales revenues increased by $8,811,043,
        or 70.3%, from $12,528,194 in the six months ended June 30, 2007, to $21,339,237
        for the six months ended June 30, 2008. This increase was due to the following
        factors:
 
 ·
              We
                  expanded the market areas in the twenty provinces in which we sell
                  our
                  products and our products are now sold in over 5,600 retail
                  outlets;
  30
  ·
              Our
                  products have became increasing popular in mainland China due to
                  our
                  continued sales and marketing efforts;
                  and
  ·
              The
                  average selling price for all products has increased by $1,455
                  per metric
                  ton, or 43.1%, as compared to the six months ended June 30,
                  2007.
  **Sales
        by product line.** A
        break-down of our sales by product line for the six months ended June 30,
        2008
        and 2007 is as follows:
 **Six
                    Months Ended June 30,****2008**
                
                **2007**
                
                **Period-on-period****Product category**
                
                **Quantity**
                  **(tons)**
                
                **$  Amount**
                
                **% of sales**
                
                **Quantity**
                  **(tons)**
                
                **$****Amount**
                
                **% of**
                  **sales**
                
                **Qty.**
                  **Variance**Milk
                    powder
                
                
                2,922
                
                
                16,828,825
                
                
                78.9
                
                
                2,493
                
                
                9,682,094
                
                
                77.3
                
                
                429Rice
                    powder
                
                
                97
                
                
                532,338
                
                
                2.4
                
                
                922
                
                
                436,185
                
                
                3.5
                
                
                5Soybean
                    powder
                
                
                230
                
                
                418,715
                
                
                2.0
                
                
                192
                
                
                287,142
                
                
                2.3
                
                
                38Subcontracting
                
                
                1,169
                
                
                3,559,359
                
                
                16.7
                
                
                935
                
                
                2,122,7731
                
                
                16.9
                
                
                234Total
                
                
                4,418
                
                
                21,339,237
                
                
                100.0
                
                
                3,712
                
                
                12,528,194
                
                
                100.0
                
                
                706
 
 There
        were very few changes to the break-down of sales among our products over
        the six
        months ended June 30, 2008, as compared to the six months ended June 30,
        2007.
        Soybean powder only accounted for 2.0% of our sales mix for the six months
        ended
        June 30, 2008, at an average selling price of $1,820 per metric ton, as compared
        to 2.3% of our sales mix in the six months ended June 30, 2007, at an average
        selling price of $1,499 per metric ton. Milk powder accounted for 78.9% of
        sales
        mix in the six months ended June 30, 2008, at an average selling price of
        $5,759
        per metric ton, as compared to 77.3% of the sales mix in six months ended
        June
        30, 2007, at an average selling price of $3,884 per metric ton. Our subcontract
        production during the six months ended June 30, 2008 decreased to 16.7% of
        the
        sales mix, at an average selling price of $3,045 per metric ton, as compared
        to
        16.9% of the sales mix in the six months ended June 30, 2007, at an average
        sales price of $2,270 per metric ton.
 
 A
        breakdown of our average selling price by product line for the six months
        ended
        June 30, 2008 and 2007 is as follows:
 
 **Six
                  Months  Ended**
                **June 30,****Average selling prices
                  (per ton)**
              
              **2008**
              
              **2007**
              
              **Variance**$
              
              $
              
              $
              
              %Milk
                  powder
              
              
              5,759
              
              
              3,884
              
              
              1,875
              
              
              48.3Rice
                  powder
              
              
              5,488
              
              
              4,725
              
              
              763
              
              
              16.1Soybean
                  powder
              
              
              1,820
              
              
              1,499
              
              
              321
              
              
              21.4Subcontracting
              
              
              3,045
              
              
              2,270
              
              
              775
              
              
              34.1Average
                  total selling price
              
              
              4,830
              
              
              3,375
              
              
              1,455
              
              
              43.1
 
 **Cost
        of Goods Sold.** Cost of
        goods sold increased by $4,862,006, or 57.7%, from $8,430,391 in the six
        months
        ended June 30, 2007, to $13,292,397 for the six months ended June 30, 2008.
        This
        increase was directly related to an increase in sales during quarter of 70.3%.
        Overall our cost per metric ton increased by $738, or 32.5%, to $3,009 per
        metric ton in the quarter ended June 30, 2008, as compared to $2,271 per
        metric
        ton in quarter ended June 30, 2007.
  31
  A
        breakdown of cost of sales by product line for the six months ended June
        30,
        2008 and 2007 is as follows:
 
 **Six
                  Months Ended June 30,****2008**
              
              **2007**
              
              **Variance**$
              
              $
              
              $
              
              %**Cost
                  of sales**Milk
                  powder
              
              
              9,702,132
              
              
              6,260,815
              
              
              3,441,317
              
              
              55.0Rice
                  powder
              
              
              208,760
              
              
              190,251
              
              
              18,509
              
              
              9.7Soybean
                  powder
              
              
              261,697
              
              
              199,404
              
              
              62,293
              
              
              31.2Subcontracting
              
              
              3,119,808
              
              
              1,779,921
              
              
              1,339,887
              
              
              75.3Total
              
              
              13,292,397
              
              
              8,430,391
              
              
              4,862,006
              
              
              57.7**Cost
                  per units sold(per ton)**Milk
                  powder
              
              
              3,320
              
              
              2,511
              
              
              809
              
              
              32.2Rice
                  powder
              
              
              2,152
              
              
              2,061
              
              
              91
              
              
              4.4Soybean
                  powder
              
              
              1,138
              
              
              1,041
              
              
              97
              
              
              9.3Subcontracting
              
              
              2,669
              
              
              1,904
              
              
              765
              
              
              40.2Average
                  cost per unit sold
              
              
              3,009
              
              
              2,271
              
              
              738
              
              
              32.5
 
 **Gross
        Profit.** Gross
        profit was $8,046,840, or 37.7%, of our sales for the six months ended June
        30,
        2008, compared to gross profit of $4,097,803, or 32.7%, for the six months
        ended
        June 30, 2007. During the six months ended June 30, 2008 our gross margin
        on
        milk powder increased 7.0%, due to an increase in the average sales price
        of
        48.3% from six months ended June 30, 2007, partially offset by a 32.2% increase
        in the cost per metric ton from the six months ended June 30, 2007. The gross
        margin for soybean powder increased 6.9%, to 37.5% in six months ended June
        30,
        2008, as compared to 30.6% in six months ended June 30, 2007, due to increase
        in
        the average sales price of 21.4% in six months ended June 30, 2008, as compared
        to 2007, partially offset by an increase of 9.3% in the cost per metric ton
        from
        the six months ended June 30, 2007 to the six months ended June 30,
        2008.
 
 A
        breakdown of gross margin by product line for the six months ended June 30,
        2008
        and 2007 is as follows:
 **Six Months Ended June 30,****2008**
                
                **2007**
                
                **Period-on-period****Product category**
                
                **$  Amount**
                
                **Gross**
                  **Margin %**
                
                **$****Amount**
                
                **Gross**
                  **Margin %**
                
                **Margin**
                  **Variance**Milk
                    powder
                
                
                7,126,693
                
                
                42.3
                
                
                3,421,279
                
                
                35.3
                
                
                7.0Rice
                    powder
                
                
                323,578
                
                
                60.8
                
                
                245,934
                
                
                56.4
                
                
                4.4Soybean
                    powder
                
                
                157,018
                
                
                37.5
                
                
                87,738
                
                
                30.6
                
                
                6.9Subcontracting
                
                
                439,551
                
                
                12.3
                
                
                342,852
                
                
                116.2
                
                
                (3.8
                )Total
                
                
                8,046,840
                
                
                37.7
                
                
                4,097,803
                
                
                32.7
                
                
                5.0
  32


***Operating
      Expenses***





**For the Six Months Ended**
              **June 30,****2008**
            
            **2007****Operating
                Expenses**Selling
                expenses
            
            $
            5,381,870
            
            $
            2,071,845Administrative
                expenses
            
            
            1,582,279
            
            
            351,887Depreciation
                and amortization
            
            
            30,431
            
            
            23,845Total
                operating expenses
            
            $
            6,994,581
            
            $
            2,447,577





**Selling
      Expenses** .
      Selling
      expenses overall increased by $3,310,025, or 159.8%, from $2,071,845 in the
      six
      months ended June 30, 2007, to $5,381,870 for the six months ended June 30,
      2008. The major factors in the increase in selling expenses are as
      follows:





·
            Advertising
                increased by $2,060,7888, or 3,787.2%, to $2,115,203 in 2008, from
                $54,415
                in 2007, due to our marketing campaign to increase brand awareness
                and
                sales.





·
            Selling
                salaries increased by $321,985, or 52.9%, to $930,627 in 2008, from
                $608,642 in 2007, the amounts we paid to our sales staff rose due
                to
                increased sales.





·
            Travelling
                expenses incurred by the sales staff increased by $260,096, or 101.3%,
                to
                $516,743 in 2008, from $256,648 in 2007, due to the expansion of
                our sales
                network.





·
            Transportation
                expenses increased by $127,475 or 32.5%, to $519,880, in 2008 from
                $392,406 in 2007, as a result of shipping more product in 2008 as
                compared
                to 2007.





·
            Entertainment
                expenses increased by $137,991, or 85.1%, to $300,051 in 2008, from
                $162,061 in 2007, as a result of the increase in the sales staff
                and
                network.





**Administrative
      Expenses** .
      Administrative expenses increased by $1,230,392, or 349.7%, from $351,887 in
      the
      six months ended June 30, 2007, to $1,582,279 for the six months ended June
      30,
      2008. The major factors in the increase in administrative expenses are as
      follows:





·
            Liquidated
                damages incurred in 2008 of $487,199 related to registration rights
                agreements we entered into, which were not similarly incurred in
                2007.





·
            Increase
                in legal and accounting fees in 2008 of $296,707, or 624.6%, to $344,207,
                as compared to $47,500 in 2007, due to costs associated with audits
                and
                SEC filings not required prior to the reverse merger we consummated
                in
                October 2007.





·
            Increase
                in consultant expenses of $49,771, or 672.7%, to $57,171 in 2008,
                as
                compared to $7,399 in 2007, for services related to possible financing
                and
                funding.





·
            Increase
                of administrative salaries of $141,238, or 207.7%, to $209,252 in
                2008,
                from $68,014 in 2007, related to 10 additional administrative personnel
                hired during 2008.


33


·
            Increase
                in entertainment expenses of $53,585, or 105.3%, to $104,462 in 2008,
                from
                $50,878 in 2007, due to increased travel and entertainment by
                administrative personnel to develop financing and funding for our
                growth.





·
            Increase
                of travel expenses of $50,580, or 105.7%, to $98,418 in 2008, from
                $47,838
                in 2007, due to the increase in travel by administrative personnel
                to
                develop financing and funding for our
                growth.





***Provision
      for Income Taxes***





**For the Six Months Ended**
              **June 30,****2008**
            
            **2007****Provision
                for Income Taxes**Current
            
            $
            317,291
            
            $
            82,652Deferred
            
            
            —
            
            
            —$
            317,291
            
            $
            82,652





**Provision
      for Income Taxes** .
      Income
      taxes increased by $234,639, or 283.9%, from $82,652 in the six months ended
      June 30, 2007, to $317,291 for the six months ended June 30, 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 Six Months Ended**
              **June 30,****2008**
            
            **2007****Net
                cash provided by operating activities**
            
            $
            (3,480,997
            )
            $
            (114,644
            )**Net
                cash used in investing activities**
            
            
            (1,656,200
            )
            
            (521,169
            )**Net
                cash provided by (used in) financing activities**
            
            $
            1,959,287
            
            $
            2,210,521





**Net
      Cash Provided By Operating Activities.** For
      the
      six months ended June 30, 2008, $3,480,997 was used in operating activities,
      compared with $114,644 used in operating activities for the six months ended
      June 30, 2007. Our net cash flows used in operating activities increased during
      2008 due to the following factors:





·
            We
                paid out advances on the purchase of equipment for a new processing
                facility in the amount of $3,695,928 during
                2008.





·
            Trade
                accounts receivable increased by $1,565,617, due to the increase
                level of
                sales during the year.


34


·
            We
                increased inventory at June 30, 2008 by $1,212,775, due to better
                management of the production
                process.





·
            Accounts
                payable and accrued expenses increased by $1,440,002 at June 30,
                2008, as
                compared to 2007, due to increases in production of products and
                expenses.





**Net
      Cash Used In Investing Activities.** For
      the
      six months ended June 30, 2008, we used $1,656,200 in investing activities,
      compared with $521,169 used in investing activities for the six months ended
      June 30, 2007. Our increase in net cash flows used in investing activities
      during 2008 was due to our purchase of land use rights for a new production
      facility in the amount of $1,280,574, and our purchase of fixed assets of
      $375,626.




**Net
      Cash Provided By (Used In) Financing Activities.** For
      the
      six months ended June 30, 2008, $1,959,287 was provided by financing activities,
      compared with approximately $2,210,521 provided by financing activities for
      the
      six months ended June 30, 2007. We raised $2,250,000 with the sale of 8%
      promissory notes payable due on December 31, 2008 and warrants in June 2008.
      We
      also paid off notes payable of $290,713 in the six months ended June 30,
      2008.





***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 June 30, 2008 decreased by 41.8%, to $3,821,111, from
      $6,560,931 at December 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.





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.





In
      July
      2008, we commenced construction of a new facility that will have annual
      production capacity of 9,000 tons of milk powder, which is expected to commence
      production in the first quarter of 2009. If our sales for fiscal 2009 meet
      management’s expectations, management plans to build another new facility with
      annual production capacity of 18,000 tons of milk powder. If management
      successfully executes its three-year plan, our total production capacity is
      expected to reach between 25,000 and 35,000 tons of milk powder by 2010. This
      project is expected to cost an aggregate of approximately $20.0 million,
      including land use rights, construction expenses and equipment costs. Management
      will need to raise $10.0 million to $15.0 million to fund the construction
      of
      new production facility **.**





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.


35


In
      connection with the October Offerings, we received aggregate net proceeds of
      $4,395,104. The net proceeds from the October Offerings are being used for
      general working capital purposes. The October Offerings are further described
      in
“- Recent Developments - Reverse Merger, Private Placements and Related
      Transactions” above.





In
      June
      2008, we closed the Note Offering, pursuant to which we received aggregate
      net
      proceeds of $2,003,742. We plan to use the needs proceeds from the Note Offering
      primarily for the construction and equipping of our new production facility
      in
      Hailun City, Heilongjiang Province, PRC. The Note Offering is further described
      in “- Recent Developments - Sale of Notes and Warrants” above.





One
      additional way we expect to raise funds in the short term, is through the Offer
      we have made to our Warrantholders, as further described in “Recent Developments
      - Warrant Tender Offer” above. As of the date hereof, a limited number of
      Warrantholders have elected to tender their warrants. However, since any
      Warrantholder may change its election and withdraw from the Offer, the funds
      related to such transactions are being held in escrow, and will not be released
      to us until October 31, 2008, the expiration date of the Offer, unless we sooner
      extend or terminate the period of time during which the Offer is open. If all
      of
      the Warrantholders exercise their warrants in connection with the Offer, we
      will
      raise an aggregate of $16,929,805.





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.





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.





***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 two (2) years after the Closing Date, subject to normal and customary
      blackout periods.


36


Pursuant
      to the Registration Rights Agreements, 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.





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.





We
      are
      accruing $4,500 per day in liquidated damages with a maximum liability of
      $1,584,701. As of June 30, 2008, there were accrued liquidated damages of
      $702,498.





***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




37


·
            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




·
            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.





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. The October Offerings are further described in
      “Recent Developments - Reverse Merger, Private Placements and Related
      Transactions” above.


38


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.





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.


39


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. However, as of April 24, 2008, we commenced
      the
      Offer to the holders of the October Warrants, pursuant to which they may tender
      their October Warrants for shares of our Common Stock at a reduced exercise
      prices. The Offer is further described in “Recent Developments - Warrant Tender
      Offer” above. The purpose of this Offer is to encourage the exercise of the
      October Warrants in order to raise additional capital. We intend to apply the
      proceeds toward costs related to constructing and equipping our 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. If all of October Warrants were exercised pursuant to the Offer,
      we
      will raise $16,929,805 in proceeds.





In
      June
      2008 we closed the Note Offering, pursuant to which we granted the New Warrants.
      The Note Offering is further described in “Recent Developments - Sale of Notes
      and Warrants” above. The New Warrants represent the right to purchase an
      aggregate of 225,000 shares of our Common Stock, at an exercise price of $2.61
      per share. The New Warrants will expire three years after the date of issuance.
      The New Warrants may be exercised for cash only. The number of shares of our
      Common Stock deliverable upon exercise of the New Warrants will be subject
      to
      adjustment for, among other things, subdivision or consolidation of shares,
      and
      certain other standard dilutive events. The holder of the New Warrants will
      not
      be entitled to exercise a number of New Warrants in excess of the number of
      New
      Warrants upon exercise of which would result in beneficial ownership by such
      holder and his, her or its affiliates of more than 9.9% of the outstanding
      shares of our Common Stock, unless this provision is waived by written agreement
      between us and the holder not less than sixty-one (61) days from the date of
      such waiver. Warrants to purchase 45,000 shares of our Common Stock issued
      to a
      placement agent, have terms and conditions identical to the those of the New
      Warrants.


40


***Promissory
      Notes***





In
      the
      Note Offering, further described in “- Recent Developments - Sale of Notes and
      Warrants” above, we also issued the Notes. The Notes will bear interest at a
      rate of 8% until they become due and payable. Any amount of principal or
      interest which is not paid when due will bear interest at a rate of 12%. We
      may
      prepay the entire amount due under the Notes at any time without penalty, upon
      15 days prior written notice. Each holder of the Notes has the right to be
      prepaid any amounts due under his, her or its Note from the proceeds of any
      future offering we consummate resulting in gross proceeds of $4,500,000 or
      more.
      So long as we have any obligation under the Notes, there are limitations on
      our
      ability to: (a) pay dividends or make other distributions on its capital stock;
      (b) redeem, repurchase or otherwise acquire any of its securities; (c) create,
      incur or assume any liability for borrowed money; (d) sell, lease or otherwise
      dispose of any significant portion of its assets; (e) lend money, give credit
      or
      make advances; or (f) assume, guarantee, endorse, contingently agree to purchase
      or otherwise become liable upon the obligation of any other person or entity.
      It
      shall be deemed an “Event of Default” under each Note if: (a) we fail to pay
      principal or interest when due on the Note; (b) we breach any material covenant
      or other material term or condition contained in the Note or securities purchase
      agreement entered into in connection with the Note Offering (the “Purchase
      Agreement”), and such breach continues for a period of thirty (30) days after
      written notice thereof; (c) any representation or warranty we made under the
      Note or the Purchase Agreement shall be false or misleading in any material
      respect; (d) we, or any subsidiary of ours, shall make an assignment for the
      benefit of creditors, or apply for or consent to the appointment of a receiver
      or trustee, or such a receiver or trustee shall otherwise be appointed; (e)
      a
      money judgment shall be entered against us, or any subsidiary of ours, for
      more
      than $250,000, that remains in effect for a period of twenty (20) days; (f)
      bankruptcy, insolvency, reorganization or liquidation proceedings or other
      similar proceedings shall be instituted by or against us, or any subsidiary
      of
      ours, which are not dismissed within sixty (60) days; or (g) we fail to maintain
      the listing of our Common Stock on at least one of the OTCBB, the Nasdaq
      National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
      the
      American Stock Exchange. Upon the occurrence of any Event of Default under
      a
      Note, unless such Event of Default shall have been waived in writing by the
      holder, the holder may consider the Note immediately due and payable, without
      presentment, demand, protest or notice of any kind, and the holder may
      immediately enforce any and all of its rights and remedies provided in the
      Note
      or any other right or remedy afforded by law.





**Transactions
      with Related Parties**





***Loan
      from Chief Executive Officer***





On
      May
      28, 2006, American International Dairy Holding Co., Inc. (“AIDH”), our
      wholly-owned subsidiary, purchased machinery, facilities, housing and 100 cows
      from Yang Yong Shan, our President, Chief Executive Officer and director, in
      exchange for a promissory note in the amount of $209,305. The note does not
      bear
      interest and is due on demand. We believe this was an arms-length transaction,
      since the price paid for this property and equipment was approximately the
      same
      as the seller’s cost in these assets, and was approximately the same amount we
      would have had to pay to purchase similar assets from a third
      party.





**Dividends**





We
      have
      not paid any dividends. In all likelihood, we will use our earnings to develop
      our business and do not intend to declare dividends for the foreseeable future.
      Any decision to pay dividends on our Common Stock in the future will be made
      by
      our board of directors on the basis of earnings, financial requirements and
      other such conditions that may exist at that time. In addition, the Notes we
      issued in the Note Offering, further described in “- Recent Developments - Sale
      of Notes and Warrants” above, contain restrictive covenants on our payment of
      dividends, as further described in “- Liquidity and Capital Resources -
      Promissory Notes” above.


41




**Contractual
      Obligations and Commercial Commitments**





Our
      contractual obligations, as of June 30, 2008, were as follows:





**Payments
                Due By Period****Contractual
                obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1-3 years**
            
            **After**
              **3-5 years**
            
            **More than**
              **5 years**Building
                purchase
            
            $
            738,025
            
            $
            738,025
            
            
            —
            
            
            —
            
            
            —Equipment
                purchase
            
            $
            1,583,969
            
            $
            1,583,969Operating
                leases
            
            $
            65,880
            
            $
            65,880
            
            
            —
            
            
            —
            
            
            —**Total:**
            
            $
            2,387,874
            
            $
            2,387,874
            
            
            —
            
            
            —
            
            
            —





**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.


42


***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 June 30, 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.


43


***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
      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 PRC 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.




A
      provision has not been made at June 30, 2008 for U.S. or additional foreign
      withholding taxes on approximately $8,525,000 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.


44


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 June 30, 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 June 30, 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 People’s Republic of China 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 PRC 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.


45


***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 June 30, 2008 because
      of
      the relatively short-term maturity of these instruments.




**Recently
      Issued Accounting Pronouncements**





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.
      The adoption of this standard did not have a material impact on our financial
      condition, results of operations of cash flows.





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 adopted this Statement
      on
      December 31,2006 and the adoption of SFAS No. 158 did 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. The adoption
      of
      this standard did not have a material impact on our financial condition, results
      of operations of cash flows.





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.


46


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.





In
      June
      2008, the Emerging Issues Task Force (EITF) reached a final consensuses on
      EITF
      Issue 08-4, *Transition
      Guidance for Conforming Changes to Issue No. 98-5* .
      Certain
      conclusions reached in EITF Issue No. 98-5, “ *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* ,”
were
      nullified in EITF Issue No. 00-27, “ *Application
      of Issue No. 98-5 to Certain Convertible Instruments* .”
      Moreover, some of the conclusions in Issue No. 98-5 and Issue No. 00-27 were
      superseded by SFAS No. 150 , *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity* .
      While
      the conclusions reached in Issue No. 98-5 were subsequently updated to reflect
      the issuance of Issue No. 00-27 and SFAS No. 150, the transition guidance in
      Issue No. 98-5 was not revised. The EITF reached a consensus on Issue No. 08-4,
      which provides such guidance and requires that (1) conforming changes made
      to
      Issue No. 98-5 resulting from Issue No. 00-27 and SFAS No. 150 be effective
      for
      financial statements of fiscal years ending after December 15, 2008, with early
      application allowed, and (2) the effect of applying the conforming changes
      be
      presented retrospectively (with the cumulative effect of the change reported
      in
      retained earnings as of the beginning of the first period presented). We are
      currently assessing the impact of EITF Issue 08-4.





**Off-Balance
      Sheet Arrangements**





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


47


**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
      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 SEC's rules and forms, and
      that such information is accumulated and communicated to our management,
      including our president (also our principal executive officer) and our chief
      financial officer (also our principal financial and accounting officer) to
      allow
      for timely decisions regarding required disclosure.





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





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




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




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




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




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





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


48


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





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





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





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





The
      material weaknesses identified by Windes were as follows:





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




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




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





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




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


49


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.





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





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


50


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





We
      are
      not a party to any pending legal proceedings.





**Item
      1A. Risk Factors.**





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





In
      the
      three-month period ended June 30, 2008, and subsequent period through the date
      hereof, we did not consummate any unregistered sales of equity securities,
      except as follows:





**Sales
      of Notes and Warrants**





In
      June
      2008, we conducted a private offering of up to a maximum of (i) $3,000,000
      of
      our 8% promissory notes (the “Notes”) and (ii) warrants to purchase 300,000
      shares of our Common Stock, at an exercise price of $2.61 per share (the “New
      Warrants”) (the “Note Offering”). On June 12, 2008, one “accredited investor”
(the “First Purchaser”) purchased, for a purchase price of $1,500,000, a Note in
      the principal amount of $1,500,000, and New Warrants to purchase 150,000 shares
      of our Common Stock. On June 20, 2008, an additional “accredited investor” (the
“Second Purchaser”) purchased, for a purchase price of $750,000, a Note in the
      principal amount of $750,000, and New Warrants to purchase 75,000 shares of
      our
      Common Stock.





In
      connection with the Note Offering, we engaged a placement agent (the “Placement
      Agent”) to whom we paid a non-refundable retainer of $25,000, and a placement
      fee in the amount of $97,500, and granted warrants to purchase an aggregate
      of
      45,000 shares of our Common Stock, the terms and conditions of which are
      identical to the those of the New Warrants.





The
      maturity date of the Notes is December 31, 2008. The Notes will bear interest
      at
      a rate of 8% until they become due and payable. Any amount of principal or
      interest which is not paid when due will bear interest at a rate of 12%. We
      may
      prepay the entire amount due under the Notes at any time without penalty, upon
      15 days prior written notice. Each holder has the right to be prepaid any
      amounts due under his, her or its Note from the proceeds of any future offering
      we conduct resulting in gross proceeds of $4,500,000 or more. So long as we
      have
      any obligation under the Notes, there are limitations on its ability to: (a)
      pay
      dividends or make other distributions on its capital stock; (b) redeem,
      repurchase or otherwise acquire any of its securities; (c) create, incur or
      assume any liability for borrowed money; (d) sell, lease or otherwise dispose
      of
      any significant portion of its assets; (e) lend money, give credit or make
      advances; or (f) assume, guarantee, endorse, contingently agree to purchase
      or
      otherwise become liable upon the obligation of any other person or entity.
      It
      shall be deemed an “Event of Default” under each Note if: (a) we fail to pay
      principal or interest when due on the Note; (b) we breach any material covenant
      or other material term or condition contained in the Note or securities purchase
      agreement entered into in connection with the Note Offering (“Purchase
      Agreement”), and such breach continues for a period of thirty (30) days after
      written notice thereof; (c) any representation or warranty made by us under
      the
      Note or the Purchase Agreement shall be false or misleading in any material
      respect; (d) we, or any subsidiary of ours, shall make an assignment for the
      benefit of creditors, or apply for or consent to the appointment of a receiver
      or trustee, or such a receiver or trustee shall otherwise be appointed; (e)
      a
      money judgment shall be entered against us, or any subsidiary of ours, for
      more
      than $250,000, that remains in effect for a period of twenty (20) days; (f)
      bankruptcy, insolvency, reorganization or liquidation proceedings or other
      similar proceedings shall be instituted by or against us, or any subsidiary
      of
      ours, which are not dismissed within sixty (60) days; or (g) we fail to maintain
      the listing of our Common Stock on at least one of the OTCBB, the Nasdaq
      National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
      the
      American Stock Exchange. Upon the occurrence of any Event of Default under
      a
      Note, unless such Event of Default shall have been waived in writing by the
      holder, the holder may consider the Note immediately due and payable, without
      presentment, demand, protest or notice of any kind, and the holder may
      immediately enforce any and all of its rights and remedies provided in the
      Note
      or any other right or remedy afforded by law.


51


The
      New
      Warrants represent the right to purchase an aggregate of 225,000 shares of
      our
      Common Stock, at an exercise price of $2.61 per share. The New Warrants will
      expire three years after the date of issuance. The New Warrants may be exercised
      for cash only. The number of shares of our Common Stock deliverable upon
      exercise of the New Warrants will be subject to adjustment for, among other
      things, subdivision or consolidation of shares, and certain other standard
      dilutive events. The holder of a New Warrant will not be entitled to exercise
      a
      number of New Warrants in excess of the number of New Warrants upon exercise
      of
      which would result in beneficial ownership by such holder and his, her or its
      affiliates of more than 9.9% of the outstanding shares of our Common Stock,
      unless this provision is waived by written agreement between us and the holder
      not less than sixty-one (61) days from the date of such waiver.





We
      have
      granted the First Purchaser, Second Purchaser and Placement Agent “piggyback”
registration rights with respect to the shares underlying the New Warrants
      they
      received in connection with the Note Offering.





We
      believe that these transactions are exempt from registration under the
      Securities Act of 1933, as amended, pursuant to Section 4(2), or Regulation
      D
      promulgated thereunder, as transactions by an issuer not involving a public
      offering.





**Adjustment
      to Outstanding Shares**





Due
      to an
      administrative error by our predecessor filer, occurring on or around October
      2,
      1986, our total number of shares of Common Stock outstanding was short by 2,500
      shares. Therefore, as of July 17, 2008, we authorized the transfer agent to
      issue an aggregate of 2,500 shares to two shareholders.





We
      believe that this transaction are exempt from registration under the Securities
      Act of 1933, as amended, pursuant to Section 4(2), or Regulation D promulgated
      thereunder, as a transaction by an issuer not involving a public
      offering.





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





In
      the
      three-month period ended June 30, 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 June 30, 2008, and subsequent period through the date
      hereof, the we did not submit any matters to a vote of our
      stockholders.


52


**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 June 30, 2008, or subsequent period through the date
      hereof, which was not so reported.





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





**Exhibit No.**
            
            **Description
                of Exhibit**4.1
            
            Form
                of 8% Promissory Note — incorporated by reference from our Current
                Report on Form 8-K, filed on June 12, 20084.2
            
            Form
                of Warrant — incorporated by reference from our Current Report on Form
                8-K, filed on June 12, 200810.1
            
            Form
                of Securities Purchase Agreement — incorporated by reference from our
                Current Report on Form 8-K, filed on June 12, 200831.1
            
            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


53


**SIGNATURES**




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




**EMERALD
                DAIRY INC.**Dated:
                August 14, 2008
            
            By:
            /s/
                Yang Yong ShanYang
                Yong Shan
              Chairman,
                Chief Executive Officer and
              PresidentDated:
                August 14, 2008
            
            By:
            /s/
                Shu KanekoShu
                Kaneko
              Chief
                Financial Officer and Secretary


54