Unassociated Document

On January 7, 2008, the Company acquired all of the hogs and stock of Gang Feng Animal Husbandry Co., Ltd. (“Gang Feng”), a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 7, 2008, among the Company and Gang Feng, the selling party. The aggregate purchase price was 4,820,000 RMB, equivalent to $655,782. Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 6.5-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 450,000 RMB (approximately $61,225) per year in exchange for use of the facilities.

On January 9, 2008, the Company acquired 55% of the issued and outstanding capital stock of Yichun Tianpeng Domestic Livestock Farm, Ltd. (“Yichun”), a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 9, 2008, among the Company and Yichun, the selling party. The aggregate purchase price was 8,855,000 RMB, equivalent to $1,204,762. Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 800,000 RMB (approximately $108,844) per year in exchange for use of the facilities.

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

The Company is engaged in the research and development, manufacturing, marketing, distribution and sale of pre-mix fodder blended feed and feed additives primarily for use in China's domestic pork husbandry market as well as raising, breeding and sale of pigs. The Company operates production plants in Nanchang City, Shanghai City and Nanning City and has swine farms located in Town of HuaLin, Town of Peimei, Town of Huyun, Town of Hengshui, Ganzhou City and Yichun City. The Company sells to distributors and large-scale swine farms.

Stock Splits

On November 17, 2006, the Company declared a stock dividend of two additional shares of common stock for each share of common stock outstanding (effectively a three for one stock split). All share information for common shares has been retroactively restated for this stock split.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of AgFeed Industries, Inc. and its 100% wholly-owned subsidiaries Nanchang Best, Shanghai Best, Guangxi Huijie, and Jiangxi Best and Nanchang Best’s partially and wholly owned subsidiaries, Lushan (90%), Wannian (70%), Huyun (70%), Ganzhou (60%), Gang Feng (100%) and Yichun (55%) All significant inter-company accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s functional currency is the Chinese Yuan Renminbi (CNY); however the accompanying consolidated financial statements have been translated and presented in United States Dollars ($).

Foreign Currency Translation

As of March 31, 2008, the accounts of the Company were maintained, and their consolidated financial statements were expressed in the Chinese Yuan Renminbi (CNY). Such consolidated financial statements were translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income”.

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns.

Reclassification

Certain prior period amounts have been reclassified to conform to the period ended March 31, 2008 presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. The allowance for doubtful debts amounted to$ 222,879 and $191,497 at March 31, 2008 and December 31, 2007, respectively.

Advances to Suppliers

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

Inventories

Inventory is stated at the lower of cost, as determined by weighted-average method, or market. Management compares the cost of inventories with the market value, and allowance is made for writing

down the inventories to their market value, if lower. Costs of raised animals include proportionate costs of breeding, including depreciation of the breeding herd, plus the costs of maintenance through the balance sheet date. Purchased cattle are carried at purchase cost plus costs of maintenance through the balance sheet date.

Property & Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

Office equipment	5 years
Operating equipment	10 years
Vehicles	5 years
Buildings	20 years
Swine for reproduction	3.5 years

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

	March 31, 2008			December 31, 2007
Office equipment	$	129,095		$	100,072
Operating equipment		583,200			547,560
Vehicles		304,988			271,652
Buildings		2,019,002			1,568,816
Swines for reproduction		4,199,550			1,940,784
Total		7,235,835			4,428,884

Less accumulated depreciation		(698,260	)		(498,169	)

	$	6,537,575		$	3,930,715

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

Long-Lived Assets

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

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(UNAUDITED)

similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of March 31, 2008 there were no significant impairments of its long-lived assets.

Intangible Assets

Intangible assets consist of the right to use land and computer software. Net intangible assets at March 31, 2008 and December 31, 2007 are as follows:

	March 31, 2008			December 31, 2007

Right to use land	$	613,247		$	589,489
Customer list		285,226			274,176
Computer software		79,309
Intangible related to hog farm acquisitions		3,184,877			15,366
Total		4,162,659			879,031

Less Accumulated amortization		(45,070	)		(39,229	)

Intangibles, net	$	4,117,589		$	839,802

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

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

Revenue Recognition

The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. The Company is not subject to VAT withholdings.

The Company gives volume rebates to certain customers based on volume achieved. The Company accrues sales rebates based on actual sales volume.

Sales returns and rebates included in the Company's revenues were $41,067 and $2,635 for the three month periods ended March 31, 2008 and 2007, respectively.

Advertising Costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the three months ended March 31, 2008 and 2007, were $15,247 and $343, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 67,000 options outstanding at March 31, 2008.

Income Taxes

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

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

Foreign Currency Transactions and Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company is Chinese Renminbi. The unit of Renminbi is in Yuan. Translation gains of $1,792,608 and $780,907 at March 31, 2008 and December 31, 2007, respectively, are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet. During the three months ended March 31, 2008 and 2007, other comprehensive income in the consolidated statements of income and other comprehensive income included translation gains of $1,011,701 and $50,906, respectively.

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basic and Diluted Earnings Per Share

Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings Per Share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earnings per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were no options, warrants or dilutive securities outstanding during the three months ended March 31, 2007 and during the three months ended March 31, 2008, there were 67,000 options outstanding and 804,287 warrants outstanding. For the three months ended March 31, 2008, the Company’s average stock price was greater than some of the exercise prices which resulted in additional common stock equivalents of 243,815.

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

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

Statement of Cash Flows

In accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Minority Interest

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

Segment Reporting

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

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair value of financial instruments

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

·	Level 1	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·	Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Recent Pronouncements

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The provisions of SFAS No. 158 are effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. The adoption of this statement had no effect on the Company‘s reported financial position or results of operations.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. Management is currently evaluating the effect of this pronouncement on financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

a wider range of transactions or events. SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

Note 3 – Short Term Loans

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

		March 31, 2008		December 31, 2007
Short-term bank loan; interest rate of 7.884% and 7.02% payable monthly. The term of the loan is from May 28, 2007 to May 27, 2008 and May 18, 2006 to May 17, 2007. This loan is collateralized by the Company’s office building, workshop, employee dorms and use right of land	$	855,678	$	822,528
Short-term bank loan; interest rate of 6.57% and 6.12%. The term of the loan is from May 25, 2007 to May 24, 2008 and December 5, 2006 to December 4, 2007. This loan is collateralized by the Company’s right to use land, machinery and equipment.		299,487		287,885
	$	1,155,165	$	1,110,413

Note 4 – Convertible Notes

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

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

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

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

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

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

Note 5 – Stockholders’ Equity

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

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

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Note 6 - Employee Welfare Plan

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

Note 7 - Statutory Common Welfare Fund

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

	i.	Making up cumulative prior years’ losses, if any;

	ii.	Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

	iii.	Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory common welfare fund” (“SCWF”), which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

	iv.	Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

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

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

Note 8 – Stock Options and Warrants

Stock Options

Following is a summary of the stock option activity:

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

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Risk-free interest rate	2.5%
Expected life of the options	4 years
Expected volatility	72%
Expected dividend yield	0%

Warrants

The following is a summary of the warrant activity:

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

Note 9 - Related Party Transactions

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

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

Sales to related parties amounted to $0 and $77,054 for the three months ended March 31, 2008 and 2007, respectively.

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

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

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

Note 10 - Taxes

Local PRC Income Tax

AGFEED INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Pursuant to the tax laws of China, general enterprises are subject to income tax at an effective rate of 33%.

In July 2006, as a result of an investment by a foreign investor in one of the Company’s subsidiaries, the Company’s subsidiary became a Sino-Foreign Joint Venture. Pursuant to the Chinese income tax law, the Company’s subsidiary became fully exempt from income tax for a period of two years from July 14, 2006 to July 14, 2008, followed by a reduced tax rate of 15% for the next three years. Concurrent with the exemption, the tax authorities waived approximately CNY 3,400,000 ($425,429) in taxes due.

On June 5, 2007, Shanghai Best received a tax exemption certificate from the local tax bureau and is exempt from income tax from January 1, 2007 to December 31, 2008, followed by a reduced tax rate of 15% for the next three years.

On April 25, 1007, Guangxi Huijie also received an exemption from income tax for the period from January 1, 2006 to December 31, 2008. The exemption was issued by the local government because Guangxi Huijie is located in a zone where the federal government encourages the establishment of new entities.

The effect of the change of tax status has been accounted for in accordance with SFAS No. 109, par. 28, which states that the effect of a change in tax status is computed as of the date of change and is included in the tax provision for continuing operations. Management believes that the local tax authorities would not have waived past taxes had it not been for the change in the Company’s subsidiary’s tax status.

If the Company’s subsidiary had not been exempt from paying income taxes due to the Sino-Foreign Joint Venture described above, income tax expense for the three months ended March 31, 2008 would have been approximately $373,000 and earnings per share would have been reduced by approximately $0.01 per share.

Note 11 – Acquisitions

Purchase of Hog Farms

On January 3, 2008, the Company acquired 70% of the issued and outstanding capital stock of Wannian Xiandai Animal Husbandry Limited Liability Co., a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, among the Company and Wannian Xiandai Animal Husbandry Limited Liability Co., the selling party. The aggregate purchase price was 12,250,000 RMB, equivalent to $1,666,666. Under the terms of the transaction documents, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (approximately $122,450) per year in exchange for use of the facilities.

On January 3, 2008, the Company acquired 70% of the issued and outstanding capital stock of Jiangxi Huyun Livestock Co., Ltd., a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 3, 2008, among the Company and Jiangxi Huyun Livestock Co., Ltd., the selling party. The aggregate purchase price was 6,482,000 RMB, equivalent to $881,905. Under the terms of the transaction documents, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 900,000 RMB (approximately $122,450) for the first year and 450,000 RMB (approximately

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$61,225) for every 10,000 hogs sold beginning in the second year and thereafter in exchange for use of the facilities.

On January 4, 2008, the Company acquired 60% of the issued and outstanding capital stock of Ganzhou Green Animal Husbandry Development Co., Ltd., a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 4, 2008, among the Company and Ganzhou Green Animal Husbandry Development Co., the selling party. The aggregate purchase price was 6,480,000 RMB, equivalent to $881,633. Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 700,000 RMB (approximately $97,000) per year in exchange for use of the facilities.

On January 7, 2008, the Company acquired 100% of the hogs and stock of Gang Feng Animal Husbandry Co., Ltd., a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 7, 2008, among the Company and Gang Feng Animal Husbandry Co., Ltd., the selling party. The aggregate purchase price was 4,820,000 RMB, equivalent to $655,782. Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 6.5-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 450,000 RMB (approximately $61,225) per year in exchange for use of the facilities.

On January 9, 2008, the Company acquired 55% of the issued and outstanding capital stock of Yichun Tianpeng Domestic Livestock Farm, Ltd., a PRC company located in Jiangxi Province. The acquisition was consummated pursuant to a stock purchase agreement, dated January 9, 2008, among the Company and Yichun Tianpeng Domestic Livestock Farm, Ltd., the selling party. The aggregate purchase price was 8,855,000 RMB, equivalent to $1,204,761. Under the terms of the transaction, the master lease position for the facilities remains with the shareholders of the selling party and the Company will lease the underlying facilities under a 10-year lease agreement. The lease agreement calls for semi-annual rent payments totaling 800,000 RMB (approximately $108,844) per year in exchange for use of the facilities.

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

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

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

The following pro forma financial information presents the consolidated operations of the Company as if the Wannian, Huyun, Ganzhou, Gang Feng, and Yichun acquisitions had occurred on January 1, 2007.

For the three months ended March 31, 2007

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

Note 12 – Segment Information

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

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

The following tables summarize segment information:

	3/31/2008		3/31/2007
Revenues from unrelated entities
Shanghai	$	3,503,801	$	1,383,925
Guangxi		1,269,478		1,543,893
Nanchang		4,239,022		2,050,477
Hog farms		3,134,783		-
		12,147,084		4,978,295

Intersegment revenues
Shanghai		148,891		-
Guangxi		-		-
Nanchang		441,565		-
Hog farms		4,492		496,987
		594,948		496,987

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Total Revenues
Shanghai	3,652,692		1,383,925
Guangxi	1,269,478		1,543,893
Nanchang	4,680,587		2,547,464
Hog farms	3,139,275		-
Less Intersegment revenues	(594,948	)	(496,987	)
	12,147,084		4,978,295

Income from operations
Shanghai	646,689		234,387
Guangxi	188,032		392,022
Nanchang	704,904		420,483
Hog farms	503,648		-
Holding Company	(318,155	)	(69,001	)
	1,725,118		977,891

Interest income
Shanghai	730		214
Guangxi	1,038		164
Nanchang	13,286		938
Hog farms	617		-
Holding Company	34,504		8,851
	50,175		10,167


Interest and financing costs
Shanghai	-		-
Guangxi	4,835		1,885
Nanchang	12,566		10,184
Hog farms	-		-
Holding Company	309,241		30,580
	326,642		42,649


Income tax expense
Shanghai	-		78,736
Guangxi	52,925		96,562
Nanchang	43,338		-
Hog farms	-		-
	96,263		175,298

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Net Income
Shanghai	650,968		159,856
Guangxi	130,929		293,739
Nanchang	436,818		416,316
Hog farms	294,703		-
Holding Company	(594,121	)	(90,730	)
	919,297		779,181

Provision for depreciation
Shanghai	21,373		8,696
Guangxi	12,991		8,660
Nanchang	6,216		22,489
Hog farms	145,173		-
	185,753		39,845


Total Assets
Shanghai	4,234,297
Guangxi	17,953,310
Nanchang	24,603,149
Hog farms	17,494,108
Holding Company	2,067,259
	66,352,123

Note 13 - Subsequent Event

Sale of Common Stock

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

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

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

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

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

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

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

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

Purchase of Hog Farms

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

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

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

Guangxi Nanning Wanghua Hog Farm

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

Guangxi Guigang Gangda Hog Farm

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

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Guangxi Xingye Guihong Hog Farm

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

Hainan Haikou Meilan Hog Farm

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

Hainan Haikou Wohao Hog Farm

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

Guangxi Guilin Fuzhi Hog Farm

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

Guangdong Lianjiang Xinfa Hog Farm

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

Zhejiang Pinghu Yongxin Hog Farm

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

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

Shanghai Fengxian Hog Farm

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

Shanghai Tuanxi Hog Farm

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

Shanghai Senrong Hog Farm

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

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

Fujian Xiamen Muxin Hog Farm

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

Xiamen Yuanshengtai Food Co., Ltd.

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