UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2011

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

For the transition period from ~~____________________________________~~__________________________ to ~~____________________________________~~_______________________________

Commission File Number:

000-52174

EMERALD DAIRY INC.

(Exact name of registrant as specified in its charter)

Nevada		80-0137632
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
11990 Market Street, Suite 205 Reston, Virginia		20190
(Address of principal executive offices)		(Zip Code)
(703) 867-9247
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

(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.

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ x No

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

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨ (do not check if a smaller reporting company)	Smaller reporting company x

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

¨ Yes x No

The registrant had 34,207,379 shares of common stock issued and outstanding as of ~~May~~October 1611, 2011 (not including an additional 68,000 shares the registrant is obligated to issue in connection with a private offering it is conducting and 1,944,444 shares of common stock of the registrant currently being held in treasury).

QUARTERLY REPORT ON FORM 10-Q

OF EMERALD DAIRY INC. AND SUBSIDIARIES

FOR THE PERIOD ENDED ~~MARCH~~JUNE 3130, 2011

TABLE OF CONTENTS

			PAGE	~~PAGE~~
PART I	-	FINANCIAL INFORMATION
Item 1.		Financial Statements	1	1
		Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		1
		Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	1
		Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (unaudited)		2
		Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)	2
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)		3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)	3
		Notes to Condensed Consolidated Financial Statements (unaudited)	4	4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	20	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	45	35
Item 4.		Controls and Procedures	45	35
PART II	-	OTHER INFORMATION
Item 1.		Legal Proceedings	47	37
Item 1A.		Risk Factors	47	37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	47	37
Item 3.		Defaults Upon Senior Securities	48	37
Item 4.		(Removed and Reserved)	48	37
Item 5.		Other Information	48	37
Item 6.		Exhibits	49	37
Signatures			51	38

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Emerald Dairy Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

~~March~~June 3130, 2011 and December 31, 2010

(Unaudited)

	March 31,			December 31,
	June 30, 2011			December 31, 2010
	2011			2010
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1621,~~327~~396,~~220~~775		$	17,131,274
Trade accounts receivable,net		86,~~525~~755,~~802~~966			8,220,622
Inventory, net		1,~~254~~097,~~903~~442			1,052,594
Advances to equipment supplier		~~10,663,324~~0			10,154,264
Other current assets		3,~~462~~748,~~104~~903			2,697,946
Total current assets		4032,~~233~~999,~~353~~086			39,256,700
Property, plant and equipment
Property, plant and equipment, net		2333,~~147~~902,~~446~~349			23,039,183
Contruction in progress		~~895~~919,~~527~~841			875,934
		24,042,973			23,915,117
		34,822,190			23,915,117
Intangible assets, net		1,~~349~~357,~~379~~199			1,348,161
	$	6569,~~625~~178,~~705~~475		$	64,519,978
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	56,~~260~~050,~~254~~565		$	6,596,367
Notes payable, net of debt discount of $0 and $729,830 at March 31, 2011 and December 31, 2010, respectively		6,396,411			6,358,295
Notes payable, net of debt discount of $0 and $38,116 at
Other current liabilities		630,190			539,332
June 30, 2011 and December 31, 2010, respectively		6,396,411			6,358,295
Current portion of long-term lease		1,263,336			1,171,566
Other current liabilities		758,768			539,332
Loan from shareholder		219,076			217,294
Current portion of long-term lease		1,369,026			1,171,566
Total current liabilities		13,769,267			14,882,854
Loan from shareholder		662,647			217,294
Long-term lease payable		2,140,860			2,468,984
Total current liabilities		15,237,417			14,882,854
Commitments and Contingencies (Note 20)
Long-term lease payable		1,791,567			2,468,984
Commitments and Contingencies (Note 21)
Stockholders' Equity
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued and outstanding at March 31, 2011 and December 31, 2010)		-			-
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued and outstanding at June 30, 2011 and December 31, 2010)		-			-
Common stock ($0.001 par value, 100,000,000 shares authorized, 36,151,823 and 35,976,575 issued and outstanding at March 31, 2011 and December 31, 2010, respectively)		36,152			35,977
Common stock ($0.001 par value, 100,000,000 shares authorized, 36,151,823 and 35,976,575 issued and outstanding at June 30, 2011 and December 31, 2010, respectively)		36,152			35,977
Treasury Stock (1,944,444 shares at March 31, 2011 and December 31, 2010, respectively)		(1,944	)		(1,944	)
Treasury Stock (1,944,444 shares at June 30, 2011 and December 31, 2010, respectively)		(1,944	)		(1,944	)
Additional paid-in capital		26,~~116~~168,~~359~~143			26,007,743
Retained earnings (of which $4,603,066 and $3,191,614 are restricted at March 31, 2011 and December 31, 2010, respectively, for common welfare reserves)		19,409,427			17,431,350
Retained earnings (of which $4,603,066 and $3,191,614 are restricted at June 30, 2011 and December 31, 2010, respectively, for common welfare reserves)		21,040,138			17,431,350
Accumulated other comprehensive income		4,~~155~~907,~~584~~002			3,695,014
Total stockholders' equity		4952,~~715~~149,~~578~~491			47,168,140
	$	6569,~~625~~178,~~705~~475		$	64,519,978

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

Emerald Dairy Inc. and Subsidiaries

Condensed Consolidated Statements of Income

For the Three and Six Months Ended ~~March~~June 3130, 2011 and 2010

(Unaudited)

	2011			2010
	Three months ended						Six months ended
Sales	$	14,679,052		$	14,252,856
	June 30,			June 30,			June 30,			June 30,
Cost of Goods Sold		7,489,607			7,153,772
	2011			2010			2011			2010
Gross Profit		7,189,445			7,099,084
Sales	$	14,487,068		$	13,309,502		$	29,166,120		$	27,562,358
Operating Expenses
Cost of Goods Sold		7,634,895			6,794,707			15,124,502			13,948,479
Selling expenses and administrative expenses		3,825,619			3,902,390
Gross Profit		6,852,173			6,514,795			14,041,618			13,613,879
Liquidated damages		-			5,021,669
Operating Expenses
Depreciation and amortization		244,537			51,228
Selling expenses and administrative expenses		3,810,069			4,004,280			7,635,688			7,906,670
Total operating expenses		4,070,156			8,975,287
Liquidated damages		-			-			-			5,021,669
Other Income (Expense)
Depreciation and amortization		85,271			51,724			329,808			102,952
Interest income		1,087			1,058
Total operating expenses		3,895,340			4,056,004			7,965,496			13,031,291
Interest expense		(184,263	)		-
Other Income (Expense)
Total other income (expense)		(183,176	)		1,058
Interest income		1,275			1,077			2,362			2,135
Net Income (Loss) Before Provision for Income Tax		2,936,113			(1,875,145	)
Interest expense		(393,308	)		(784,679	)		(577,571	)		(784,679	)
Provision for Income Taxes
Total other income (expense)		(392,033	)		(783,602	)		(575,209	)		(782,544	)
Current		958,036			421,499
Net Income (Loss) Before Provision for Income Tax		2,564,800			1,675,189			5,500,913			(199,956	)
		958,036			421,499
Provision for Income Taxes
Net Income (Loss)	$	1,978,077		$	(2,296,644	)
Current		934,089			391,243			1,892,125			812,742
Basic Earnings Per Share	$	0.06		$	(0.07	)
		934,089			391,243			1,892,125			812,742
Basic Weighted Average Shares Outstanding		34,059,392			32,945,823
Net Income (Loss)	$	1,630,711		$	1,283,946		$	3,608,788		$	(1,012,698	)
Diluted Earnings Per Share	$	0.06		$	(0.07	)
Basic Earnings Per Share	$	0.05		$	0.04		$	0.11		$	(0.03	)
Diluted Weighted Average Shares Outstanding		34,447,114			32,945,823
Basic Weighted Average Shares Outstanding		34,207,379			33,941,295			34,133,794			33,446,310
The Components of Other Comprehensive Income (Loss)
Diluted Earnings Per Share	$	0.05		$	0.04		$	0.11		$	(0.03	)
Net Income (Loss)	$	1,978,077		$	(2,296,644	)
Diluted Weighted Average Shares Outstanding		34,393,323			34,660,893			34,347,184			33,446,310
Foreign currency translation adjustment		697,833			10,295
The Components of Other Comprehensive Income (Loss)
Income tax related to other comprehensive income		(237,263	)		(3,500	)
Net Income (Loss)	$	1,630,711		$	1,283,946		$	3,608,788		$	(1,012,698	)
Comprehensive Income (Loss)	$	2,438,647		$	(2,289,849	)
Foreign currency translation adjustment		1,138,512			444,016			1,836,345			454,311
Income tax related to other comprehensive income		(387,094	)		(150,966	)		(624,357	)		(154,466	)
Comprehensive Income (Loss)	$	2,382,129		$	1,576,996		$	4,820,776		$	(712,853	)

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

Emerald Dairy Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the ~~Three~~Six Months Ended ~~March~~June 3130, 2011 and 2010

(Unaudited)

	2011			2010
Cash flows from operating activities
Net Income (Loss)	$	13,~~978~~608,~~077~~788		$	(21,~~296~~012,~~644~~698	)
Adjustments to reconcile net cash provided by operating activities
Depreciation and amortization		~~320~~1,~~829~~073,805			~~141~~283,~~255~~526
Amortization of loan discount		38,116			~~186~~372,~~025~~050
Capitalized interest		(243,669	)		(~~630~~458,~~918~~872	)
Warrants issued for services		27,245			-
Stock issued for services		27,245			34,657
Warrants modified for liquidated damages		-			5,021,669
Incentive stock options		81,546			213,361
Warrants issued for services					90,137
Warrants issued for loan costs					79,991
Incentive stock options		133,330			385,891
Net change in assets and liabilities
Trade accounts receivable		~~(238~~1,~~317~~637,602	)		~~298~~(188,~~933~~123	)
Inventory		(~~193~~22,~~748~~703	)		(~~622~~260,~~331~~477	)
Other current assets		(~~742~~994,~~214~~197	)		~~171~~(877,~~145~~809	)
Accounts payable and accrued expenses		(1684,~~389,765~~577	)		~~358~~576,~~770~~581
Other current liabilities		86208,~~471~~089			(~~280~~248,~~844~~574	)
Net cash (used in) provided by operating activities		(275,429	)		2,560,421
Net cash provided by operating activities		4,781,829			3,797,949
Cash flows from investing activities
Deposit on equipment and construction		~~(426,470~~-	)		(911,~~411~~543,~~275~~962	)
Construction in progress		-			(~~113~~119,~~874~~489	)
Purchases of fixed assets and intangibles		(~~713~~846,486	)		(4445,~~548~~995	)
Net cash used in investing activities		(~~427~~846,~~183~~486	)		(911,~~569~~709,~~697~~446	)
Cash flows from financing activities
Repayments of sale-leaseback		(236,354	)		-
Advances on notes payable		-			800,000
Net cash used in financing activities		(236,354	)		-
Advances from related parties		440,782			-
Effect of exchange rate		134,912			5,440
Repayments of notes payable		-			(477,464	)
Net decrease in cash		(804,054	)		(7,003,836	)
Exercise of warrants		-			296,408
Advances on sale-leaseback		-			5,006,340
Repayments of sale-leaseback		(479,957	)		-
Net cash (used in)provided by financing activities		(39,175	)		5,625,284
Effect of exchange rate		369,333			128,735
Net increase(decrease) in cash and cash equivalents		4,265,501			(2,157,478	)
Cash and cash equivalents at beginning of period		17,131,274			13,486,429
Cash and cash equivalents at end of period	$	1621,~~327~~396,~~220~~775		$	611,~~482~~328,~~593~~951

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

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

~~March~~June 3130, 2011 and 2010

1.	Description of Business

Emerald Dairy, Inc. (“Company”), a Nevada corporation, is a producer of milk powder, rice powder and soybean milk powder in the People’s Republic of China (“PRC”), through its wholly owned subsidiaries. Through the Company’s network of over 1,200 salespeople, the Company’s products are distributed throughout 20 provinces in the PRC, and sold in over 6,500 retail outlets.

The Company’s subsidiary, American International Dairy Holdings, Inc. (“AIDH”), a Nevada corporation, was formed in 2005 for the purpose of acquiring the stock in Heilongjiang Xing An Ling Dairy, Co. (“XAL”), a corporation formed on September 8, 2003 in Heilongjiang Providence, pursuant to the laws of the PRC. XAL is a dairy company engaged in manufacturing of milk powder, soybean powder and rice powder. On May 30, 2005, AIDH acquired XAL, pursuant to a Share Transfer Agreement. 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.

Prior to September 23, 2006, XAL owned 57.69% of Heilongjiang Be’ian Nongken Changxing LvBao Dairy Limited Liability Company (“LvBao”), with the remaining balance being held by the Company’s sole shareholder. On September 23, 2006, the remaining 42.31% ownership in LvBao was transferred to XAL and was treated as an additional capital contribution. The effect of this contribution by the sole shareholder was rolled back to September 8, 2003 for financial reporting purposes. LvBao was formed on January 20, 2000 and is engaged in manufacturing and sales of dairy products.

On May 22, 2008, the Company formed a new wholly-owned subsidiary, Hailun Xinganling Dairy Co., Ltd. (“HXD”), pursuant to the laws of the PRC. In July 2008, HXD commenced construction of a production facility in Hailun City, Heilongjiang Province, PRC,. ~~which~~During ~~construction was completed in~~ the fourth fiscal quarter of 2010~~. In~~ ~~March 2011,~~ HXD ~~received~~started ~~authorization~~the ~~from~~manufacture of the ~~PRC~~Company's ~~government~~milk topowder, ~~start~~soybean ~~the~~powder ~~manufacture~~and ofrice ~~the~~powder ~~Company’s~~ products at this new facility.

2.	Basis of Preparation of Financial Statements

XAL, LvBao and HXD 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, 2010 which are included in the Company’s Form 10-K/A for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2011.

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 consolidated balance sheets of Emerald Dairy Inc. and subsidiaries as of ~~March~~June 3130, 2011, and the results of their operations for the three and six months ended ~~March~~June 3130, 2011 and 2010, and cash flows for the ~~three~~six months ended ~~March~~June 3130, 2011 and 2010. The results of operations for the three and six months ended ~~March~~June 3130, 2011 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 ~~condensed~~ consolidated financial position and ~~condensed~~ 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 entitled “Foreign Currency” in Note 3).

The ~~condensed~~ consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, XAL, LvBao and HXD. All inter-company transactions and balances have been eliminated in consolidation.

3.	Summary of Significant Accounting Policies

Use of Estimates - The preparation of these ~~condensed~~ consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) 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 dates of the ~~condensed~~ consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

Significant estimates and assumptions by management include, 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, deferred tax assets, property, plant and equipment, reserve for employee benefit obligations, stock warrant valuation, income tax uncertainties and other uncertainties. Actual results may differ from these estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

Statement of Cash Flows – In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations is 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.

Cash and Cash Equivalents - Cash and cash equivalents represent cash on hand, demand deposits and all highly liquid investments placed with banks or other financial institutions with original maturities of three months or less ~~when purchased~~. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by Federal Deposit Insurance Corporation (“FDIC”) insurance, or any other similar insurance. Accounts held at U.S. financial institutions are insured by the FDIC up to $250,000. As of ~~March~~June 3130, 2011, no U.S. balances are in excess of insured amounts. Given the current economic environment and risks in the banking industry, there is a risk that the deposits may not be readily available or covered by such insurance.

~~Trade~~Inventory ~~Accounts Receivable~~ - ~~Trade~~Inventory ~~accounts~~is ~~receivable~~stated ~~are recorded~~ at the ~~invoiced~~lower ~~amount~~of ~~and~~cost door ~~not bear interest~~market. ~~Amounts~~Cost ~~collected~~is ondetermined ~~trade~~using ~~accounts receivable are included in net cash provided by operating activities in~~ the ~~consolidated~~weighted ~~statements~~average ~~of cash flows~~method. ~~The~~Market ~~Company~~value ~~maintains~~represents anthe ~~allowance for doubtful accounts for~~ estimated ~~losses~~selling ~~inherent~~price in ~~its accounts receivable portfolio. In establishing~~ the ~~required~~ordinary ~~allowance,~~course management considers historical losses, current receivables aging, and existing industry and PRC economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of ~~collection~~business ~~have~~less ~~been exhausted and~~ the ~~potential~~estimated ~~for~~costs ~~recovery~~necessary isto ~~considered~~complete ~~remote. At March 31, 2011 and 2010 there was no allowance for doubtful accounts based on~~ the ~~review of the above factors~~sale. ~~There were no write-off’s for the three months ended March 31, 2011 and 2010, respectively. The Company does not have any off-balance-sheet credit exposure related to its customers.~~

~~Construction-in-Progress~~Raw -materials ~~Plant~~consist ~~and~~of ~~production~~raw ~~lines currently under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost~~milk, ~~including land rights cost~~soybeans, ~~development~~rice ~~expenditure, professional fees~~ and ~~the~~rice ~~interest~~powder. ~~expenses~~Work ~~capitalized~~in ~~during~~process ~~the~~consists ~~course~~ of ~~construction~~materials ~~for the purpose of financing the project. Upon completion~~ and ~~readiness~~products ~~for~~in ~~use~~process of ~~the~~conversion ~~project, the cost of construction-in-progress is~~ to bepowder ~~transferred~~but ~~to fixed assets, at which time depreciation will commence. As of March 31, 2011, the Company had construction costs and capitalized interest of $895,527, which has~~ not yet ~~been transferred to fixed assets~~packaged. ~~The estimated cost to be incurred in 2011 to complete the project is approximately $490,181.~~

~~Capitalized Interest –~~ The ~~Company’s~~cost ~~policy~~of isinventory tocomprises ~~capitalize~~all ~~interest~~ costs onof ~~debt~~purchases, ~~during~~costs ~~the construction~~ of ~~major~~conversion ~~projects~~and ~~exceeding~~other ~~one~~costs ~~year. A~~incurred ~~reconciliation~~in ofbringing ~~total~~the ~~interest~~inventory ~~cost~~ to ~~interest~~its ~~expense~~present aslocation ~~reported~~and incondition. ~~the~~The ~~condensed~~costs ~~consolidated~~of ~~statements~~conversion of ~~income~~inventory ~~for~~include ~~the~~fixed ~~three~~and ~~months~~variable ~~ended~~production ~~March 31~~overheads, ~~2011~~taking ~~and~~into ~~2010~~account isthe asstage ~~follows:~~of completion.

	2011		2010
Interest cost capitalized	$	243,669	$	630,918
Interest cost charged to income		184,263		-
	$	427,932	$	630,918

Trade Accounts Receivable - Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging, and existing industry and PRC economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At June 30, 2011 and December 31, 2010 there was no allowance for doubtful accounts based on the review of the above factors. There were no write-off’s for the three and six months ended June 30, 2011 and 2010, respectively. The Company does not have any off-balance-sheet credit exposure related to its customers.

Construction-in-Progress - Plant and production lines currently under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including land rights cost, development expenditure, professional fees and the interest expenses capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-progress is to be transferred to fixed assets, at which time depreciation will commence. As of June 30, 2011, the Company has construction costs and capitalized interest of $919,841 which have not yet been transferred to fixed assets. The estimated cost to be incurred in 2011 to complete the project is approximately $497,000.

Capitalized Interest – The Company’s policy is to capitalize interest costs on debt during the construction of major projects exceeding one year. A reconciliation of total interest cost to interest expense as reported in the condensed consolidated statements of income for the three and six months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Interest cost capitalized	$	20,908	$	(172,046	)	$	264,577	$	458,872
Interest cost charged to income		393,308		784,679			577,571		784,679
	$	414,216	$	612,633		$	842,148	$	1,243,551

Foreign Currency - The Company’s principal country of operations is 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 US Dollars are dealt with as a separate component within stockholders’ equity. Translation adjustments net of tax totaled $~~460~~751,~~570~~418 and $6293,~~795~~050, for the three months ended ~~March~~June 3130, 2011 and 2010, respectively. and $1,211,988 and $299,845, for the six months ended June 30, 2011 and 2010, respectively

As of March 31, 2011 and 2010, the exchange rate was 6.5486 Yuan and 6.8259 Yuan per US Dollar, respectively.

Revenue Recognition - Revenue is 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.

~~Emerald~~As ~~Dairy~~of ~~Inc~~June 30, 2011 and 2010, the exchange rate was 6.4634 Yuan and ~~Subsidiaries~~6.7814 Yuan per US Dollar, respectively.

~~Footnotes~~Revenue toRecognition ~~Condensed~~- ~~Consolidated~~Revenue ~~Financial~~is ~~Statements~~recognized in the period 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.

~~March~~Interest 31income is recognized when earned, ~~2011~~taking into account the average principal amounts outstanding and ~~2010~~the interest rates applicable.

As of ~~March~~June 3130, 2011, the Company had no sales or contracts that included multiple deliverables that would fall under accounting guidance.

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

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

The Company accounts for income tax under the provisions of FASB ASC Topic 740, “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 financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company does not have any long-term deferred tax assets or liabilities in China that will exist once the tax holiday (See Note 11) expires. The Company does not have any significant deferred tax asset or liabilities that relate to tax jurisdictions not covered by the tax holiday.

The Company does not accrue United States income tax on unremitted earnings from foreign operations, as it is the Company’s intention to invest these earnings in the foreign operations indefinitely.

Enterprise income tax

Under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on Enterprises promulgated by the State Council which came into effect on January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises at a rate of 15% of their taxable income. Preferential tax treatment may, however, be granted pursuant to any law or regulations from time to time promulgated by the State Council. XAL enjoyed a 100% exemption from enterprise income taxes starting on January 10, 2006, due to its classification as a “Wholly Foreign Owned Enterprise.” On March 16, 2007, the 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 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 qualified under the current tax structure for a 50% reduction in the statutory enterprise income tax rates for an additional three years which expired in January 2011.

Freestanding Financial Instruments with Characteristics of Both Liabilities and Equity - In accordance with accounting guidance FASB Topic ASC 825, the Company accounts for a financial ~~instrument~~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 ~~are~~is entered into in conjunction with some other transaction and ~~are~~is legally detachable and separately exercisable. As of ~~March~~June 3130, 2011 and 2010, there were no financial instruments recorded as a liability.

Share-based Compensation - For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “ Equity ” and FASB ASC Topic 718, “ Compensation — Stock Compensation,” the Company performs an analysis of current market data and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, the Company uses these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in the Company’s consolidated statement of income and other comprehensive income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.

There was $81,546 and $213,361 of share-based compensation in the three months ended March 31, 2011 and 2010, respectively.

Fair Value of Financial Instruments - The Company applies the provisions of FASB Topic ASC 825, which requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2011 and December 31, 2010, the fair value of cash, trade accounts receivable, other receivables, accounts payable, notes payables, and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices, or interest rates, which fluctuate with market rates.

~~Emerald~~There ~~Dairy~~was ~~Inc.~~share-based compensation of $51,784 and ~~Subsidiaries~~$172,530 in the three months ended June 30, 2011 and 2010, respectively and $133,330 and $385,891 in the six months ended June 30, 2011 and 2010, respectively

~~Footnotes~~Fair Value of Financial Instruments - The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to ~~Condensed~~disclose ~~Consolidated~~the ~~Financial~~fair ~~Statements~~value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 2011 and December 31, 2010 the fair value of cash, trade accounts receivable, other receivables, accounts payable, notes payables, and other payable approximated carrying value due to the short maturity of the instruments, quoted market prices, or interest rates, which fluctuate with market rates.

~~March~~Fair 31Value Measurements - The FASB ASC Topic 820, ~~2011~~“ Fair Value Measurements and ~~2010~~Disclosures, ” clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Fair Value Measurements - Effective April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires disclosures regarding fair value of financial instruments in quarterly reports as well as in annual reports.

The FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the fair value of the Company’s financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.

Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of financial instruments).

The Company’s adoption of FASB ASC Topic 825 did not have a material impact on the Company’s consolidated financial statements.

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and/or liabilities carried at fair value on a recurring basis at ~~March~~June 3130, 2011.

The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, “ Improving Disclosures about Fair Value Measurements ”. ASU 2010-06 amends ASC Topic 820, “ Fair Value Measurement and Disclosure ” (“ASC 820”) to require a number of additional disclosures regarding fair value measurements. In addition to the new disclosure requirements, ASU 2010-06 also amends ASC 820 to clarify that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities. Prior to the issuance of ASU 2010-06, the guidance in ASC 820 required separate fair value disclosures for each major category of assets and liabilities.

ASU 2010-06 also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. Except for the requirement to disclose information about purchases, sales, issuance and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all of the provisions of ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, or January 1, 2010 for the Company. The requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 measurements does not become effective until fiscal years beginning after December 15, 2010, or January 1, 2011 for the Company. The adoption of ASU 2010-06 is for disclosure purposes only and did not have any effect on the Company’s financial position or results of operations.

4In May 2011, the FASB amended fair value measurement and disclosure guidance to achieve convergence with International Financial Reporting Standards ("IFRS"). ~~Concentrations~~ ofThe ~~Business~~amended guidance clarified existing fair value measurement guidance, revised certain measurement guidance and ~~Credit~~expanded ~~Risk~~the disclosure requirements concerning Level 3 fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. Adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

The Company conducts all of its primary trade in the PRC. There can be no assurance that the Company will be able to successfully conduct its trade, and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, price of raw material, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on foreign trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.

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 FDIC up to $250,000. As of March 31, 2011 no U.S. cash balances are in excess of insured amounts.

~~Emerald~~In ~~Dairy~~May ~~Inc~~2011, the FASB issued amendments on the presentation of other comprehensive income that (1) eliminate the current option to present the components of other comprehensive income in the statement of changes in equity, and (2) require presentation of net income and other comprehensive income either in a continuous statement or in two separate but consecutive statements. The amendments do not alter any current recognition or measurement requirements with respect to items of other comprehensive income. The amendments are effective for fiscal years and ~~Subsidiaries~~interim periods within such years beginning after December 15, 2011. Adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

~~Footnotes~~4. toConcentrations ~~Condensed~~of ~~Consolidated~~Business ~~Financial~~and ~~Statements~~Credit Risk

~~March~~The 31Company conducts all of its primary trade in the PRC. There can be no assurance that the Company will be able to successfully conduct its trade, ~~2011~~and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and ~~2010~~cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, price of raw material, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on foreign trade in PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.

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 FDIC up to $250,000. As of June 30, 2011 no U.S. cash balances are in excess of insured amounts.

Milk powder (not including subcontracting) is historically 75% to 80% of the Company’s total sales. Dairy product consumption in China has historically been lower than in many other countries in the world. Growing interest in milk products in China is a relatively recent phenomenon which makes the market for the Company’s products less predictable. Consumers may lose interest in the products. As a result, achieving and maintaining market acceptance for our products will require substantial marketing efforts and the expenditure of significant funds to encourage dairy consumption in general, and the purchase of the Company’s products in particular. There is substantial risk that the market may not accept or be receptive to the Company’s products. Market acceptance of the Company’s current and proposed products will depend, in large part, upon its ability to inform potential customers that the distinctive characteristics of the Company’s products make them superior to competitive products and justify their pricing. The Company’s current and proposed products may not be accepted by consumers or able to compete effectively against other premium or non-premium dairy products. Lack of market acceptance would limit the Company’s revenues and profitability.

The Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between US dollars and the Chinese currency RMB.

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and trade accounts receivable, the balances of which are stated on the balance sheet. Concentration of credit risk with respect to trade accounts receivable is limited due to the Company's large number of diverse customers in different locations in the PRC. The Company does not require collateral or other security to support financial instruments subject to credit risk.

For the three and six months ended ~~March~~June 3130, 2011 and 2010, no single customer accounted for 10% or more of sales revenues.

Payments of dividends may be subject to some restrictions due to the fact that the operating activities are conducted in subsidiaries residing in the PRC.

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.

Inventory

As of ~~March~~June 3130, 2011 and December 31, 2010 inventory consisted of the following:

	March 31, 2011		December 31, 2010
	June 30, 2011		December 31, 2010
Raw materials	$	~~970,~~739,826	$	704,737
Work-in-process		~~231~~310,~~757~~127		307,069
Finished goods		4339,~~105~~890		31,553
Repair parts		97,~~302~~599		9,235
	$	1,~~254~~097,~~903~~442	$	1,052,594

6.	Advances to equipment supplier

As of ~~March~~June 3130, 2011 and December 31, 2010 advances to equipment ~~suppliers~~supplier consisted of $~~10,663,324~~0 and $10,154,264, respectively., ~~These were comprised~~ of advances on a contract to purchase equipment from a supplier for the Company’s second processing facility then under construction.

7. Other current assets

As of March 31, 2011 and December 31, 2010, advances to suppliers and other receivables consisted of the following:

	March 31, 2010		December 31, 2010
Advances to milk suppliers	$	1,399,137	$	375,816
Other Receivables		4,581		4,544
Advances to staff		1,399		1,387
Prepaid loan costs		86,296		108,805
Deposit on advertising contract		-		90,877
Deposit on lease		1,068,931		1,060,237
Prepaid expenses		901,760		1,056,280
	$	3,462,104	$	2,697,946

~~Emerald Dairy Inc~~7. ~~and~~Other ~~Subsidiaries~~current assets

~~Footnotes~~As of June 30, 2011 and December 31, 2010, advances to ~~Condensed~~suppliers ~~Consolidated~~and ~~Financial~~other ~~Statements~~receivables consisted of the following:

March 31, 2011 and 2010

	June 30, 2011		December 31, 2010
Advances to milk suppliers	$	1,839,776	$	375,816
Other Receivables		4,642		4,544
Advances to staff		1,417		1,387
Prepaid loan costs		69,947		108,805
Deposit on advertising contract		-		90,877
Deposit on lease		1,083,021		1,060,237
Prepaid expenses		750,100		1,056,280
	$	3,748,903	$	2,697,946

8.	Property, Plant, and Equipment

As of ~~March~~June 3130, 2011 and December 31, 2010, property, plant, and equipment consisted of the following:

	March 31, 2010			December 31, 2010
	June 30, 2011			December 31, 2010
Building	$	1719,~~695~~069,~~224~~821		$	17,378,577
Plant and Machinery		717,~~446~~330,~~878~~401			7,329,651
Motor vehicles		~~591~~599,~~550~~348			586,739
Dairy cows		~~269~~272,~~667~~913			266,695
Office equipment		8397,~~221~~365			82,686
		26,086,540			25,644,348
		37,369,848			25,644,348
Less: Accumulated depreciation		(23,~~939~~467,~~094~~499	)		(2,605,165	)
	$	2333,~~147~~902,~~446~~349		$	23,039,183

Depreciation expenses totaled $~~311~~743,~~040~~062 and $~~131~~1,~~819~~054,102 for the three and six months ended ~~March~~June 3130, 2011, respectively, and ~~2010~~$132,831 ~~respectively~~and $264,650 offor ~~which~~the three and six months ended June 30, 2010, respectively. $76667,~~291~~706 and $90743,~~027~~997 were included as a component of cost of goods sold for the three and six months ended ~~March~~June 3130, 2011, respectively, and $90,548 and $180,575 for the three and six months ended June 30, 2010, respectively.

9.	Construction in progress

	March 31, 2011		December 31, 2010
	June 30, 2011		December 31, 2010
Construction in progress	$	~~895~~919,~~527~~841	$	875,934

Construction-in-progress represents construction and equipping of the Company’s new production facility in Hailun City.

10.	Intangible Assets

	March 31, 2011			December 31, 2010
	June 30, 2011			December 31, 2010
Land use rights	$	1,~~413~~431,~~219~~848		$	1,401,724
Patents		5556,~~432~~162			54,981
		1,468,651			1,456,705
		1,488,010			1,456,705
Less: Accumulated amortization		(~~119~~130,~~272~~811	)		(108,544	)
	$	1,~~349~~357,~~379~~199		$	1,348,161

~~For~~Amortization expenses totaled $9,914 and $19,703 for the three and six months ended ~~March~~June 3130, 2011, ~~and 2010~~respectively, ~~amortization~~and ~~expenses totaled~~ $9,~~789~~440 and $918,~~436~~876 for the three and six months ended June 30, 2010, respectively. Amortization expense is estimated to be $39,~~156~~656 for each of the next five years.

11.	Income Taxes

On May 30, 2005, AIDH executed a Share Transfer Agreement with XAL, a corporation organized and existing under the laws of the PRC. XAL applied to be ~~treated as~~ a foreign invested company right after ~~consummation of~~ the share transfer, ~~and~~the ~~its~~ business license was approved as a foreign invested company ~~was approved~~ on January 10, 2006. According to Chinese ~~taxation~~tax policy, anthere ~~entity~~is ~~designated~~a astotal aincome ~~foreign~~tax ~~invested~~exemption ~~company,~~for ~~advanced~~2 ~~technology~~years ~~company~~followed orby ~~software~~a ~~development~~50% ~~company,~~reduction ~~receives~~for a3 ~~100%~~years ~~income~~applicable ~~tax~~to ~~exemption~~foreign ~~for~~invested ~~the~~companies, ~~first~~Advanced 2Technology ~~years~~Companies ~~and~~or aSoftware ~~50%~~Development ~~tax~~Companies. ~~exemption~~XAL ~~for~~is ~~the~~considered ~~next~~an 3Advanced ~~years~~Technology Company. Therefore, the Company ~~received~~receives ~~the benefit of~~ 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~~expired ~~continue~~as atof ~~this~~December ~~reduced~~31, ~~rate for three additional years from such date expiring in January 2011~~2010.

LvBao is currently subject to the ~~enterprise~~Enterprise income tax of 33%.

HXD is currently subject to the enterprise income tax of 25%. The Company believes the local government will refund the local portion (25% of the total tax payment) to HXD for five years. The local government refund is expected to expire on December 31, 2015.

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.

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

The components of net income (loss) before provision for income tax consist of following:

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
U.S. Operations	$	(~~694~~868,~~000~~100	)	$	(51,~~583~~482,000	)	$	(1,562,000	)	$	(7,065,000	)
Chinese Operations		3,~~630~~432,~~000~~900			3,~~708~~157,000			7,063,000			6,865,000
	$	2,~~936~~564,~~000~~800		$	(1,~~875~~675,000	)	$	5,501,000		$	200,000

The components of the provision for income taxes are approximately as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Federal, State and Local	$	-	$	-	$	-	$	-
People’s Republic of China -Federal and Local		958,000		421,500
Peoples Republic of China -Federal and Local		934,100		391,200		1,892,000		812,700
	$	~~958~~934,~~000~~100	$	~~421~~391,~~500~~200	$	1,892,000	$	812,700

The table below approximately summarizes the reconciliation of the Company’s income tax provision computed at the statutory U.S. Federal rate and the actual tax provision:

	Year Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2010
	2011			2010			2011			2010
Income tax provision at Federal statutory rate	$	~~998~~871,~~200~~000		$	~~(637~~569,600	)	$	1,870,000		$	(68,000	)
State income taxes, net of Federal benefit		-0-			-0-			-0-			-0-
U.S. tax rate in excess of foreign tax rate		(~~358~~344,~~800~~000	)		(~~333~~284,~~700~~100	)		(704,000	)		(617,800	)
Abatement of foreign income taxes		82113,~~500~~100			(~~505~~398,~~500~~000	)		195,000			(903,500	)
Increase in valuation allowance		~~236~~294,~~100~~000			1503,~~898,300~~700			531,000			2,402,000
Tax provision	$	~~958~~934,~~000~~100		$	~~421~~391,~~500~~200		$	1,892,000		$	812,700

The Company had a U.S. net operating loss carryforward of approximately $1516,~~546~~414,000 as of ~~March~~June 3130, 2011 which expires in 2030.

Significant components of the Company’s deferred tax assets and liabilities as of ~~March~~June 3130, 2011 and December 31, 2010 are as follows:

Deferred tax assets:	March 31, 2010			December 31, 2010
	June 30, 2011			December 31, 2010
Net operating loss carryforward	$	5,285,780		$	5,049,680
Deferred tax assets:
Valuation allowance		(5,285,780	)		(5,049,680	)
Net operating loss carryforward	$	5,580,680		$	5,049,680
Valuation allowance		(5,580,680	)		(5,049,680	)
Net deferred tax asset	$	-		$	-

The change in the valuation allowance as of ~~March~~June 3130, 2011 and 2010 was $~~236~~531,~~100~~000 and $12,~~898~~402,~~300~~000, respectively.

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

	Three Months Ended March 31,
	2011			2010
Tax savings	$	(82,500	)	$	505,500
Benefit per share:
Basic	$	(0.01	)	$	0.02
Diluted	$	(0.01	)	$	0.02

Had the tax exemption not been in place for the three months ended March 31, 2011 and 2010, the Company estimates the following proforma financial statement impact:

	Three Months Ended March 31,
	2011			2010
Net income before tax provision, as reported	$	2,936,100		$	(1,875,100	)
Less Tax provision not exempted		958,000			421,500
Less Tax provision exempted		(82,500	)		505,500
Proforma Net income	$	2,060,600		$	(2,802,100	)
Proforma Net income per share
Basic	$	0.06		$	(0.09	)
Diluted	$	0.06		$	(0.09	)

~~Emerald~~The ~~Dairy~~effects ~~Inc.~~of ~~and~~the ~~Subsidiaries~~tax exemption per share were as follows:

Footnotes to Condensed Consolidated Financial Statements

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2011
Tax Saving	$	(113,100	)	$	398,000	$	(195,000	)	$	903,500
Benefit per share:
Basic	$	(0.01	)	$	0.01	$	(0.01	)	$	0.03
Diluted	$	(0.01	)	$	0.01	$	(0.01	)	$	0.03

~~March~~Had 31the tax exemption not been in place for the three and six months ended June 30, 2011 and 2010, the Company estimates the following proforma financial statement impact:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Net income (loss) before tax provision, as reported	$	2,564,800		$	1,676,000	$	5,501,000		$	(200,000	)
Less Tax provision not exempted		934,100			391,000		1,892,000			812,700
Less Tax provision exempted		(113,100	)		398,000		(195,000	)		903,500
	$	1,743,800		$	887,000	$	3,804,000		$	(1,916,200	)

12.	Employee Retirement Benefits and Post Retirement Benefits

According to the Heilongjiang Provincial regulations on state pension program, both employees and employers have to contribute toward pensions. The pension contributions range from 2% to 8% that was contributed by individuals (employees), and the Company is required to make contributions to the state retirement plan based on 20% of the employees’ monthly basic salaries. Employees in the PRC are entitled to retirement benefits calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed benefits plan. The PRC government is responsible for the benefit liability to these retired employees. During the ~~years~~three and six months ended ~~March~~June 3130, 2011, respectively, the Company contributed $18,012 and $42,538 in pension contributions. During the three and six months ended June 30, 2010, respectively, the Company contributed $2427,~~526~~353 and $3260,~~668~~021 in pension contributions.

13.	Accounts Payable and Accrued Expenses

At ~~March~~June 3130, 2011 and December 31, 2010 accrued expenses consisted of:

	March 31, 2011		December 31, 2010
	June 30, 2011		December 31, 2010
Accounts payable	$	4,~~221~~208,~~458~~885	$	5,523,712
Accrued payroll		102,443		72,567
Payable to equipment supplier		541,511		-
Accrued interest		534,661		400,515
Accrued payroll		77,200		72,567
Accrued education funds		206,055		191,327
Accrued interest		694,572		400,515
Economic development advance		45,811		45,439
Accrued education funds		220,393		191,327
Other payables		14,137		15,667
Accrued welfare		21,459		-
Accrued insurance		135,689		347,140
Economic development advance		63,401		45,439
	$	5,260,254	$	6,596,367
Other payables		3,786		15,667
Accrued insurance		219,358		347,140
	$	6,050,565	$	6,596,367

14. Notes Payable

At March 31, 2011 and December 31, 2010 notes payable consisted of the following:

	March 31, 2011		December 31, 2010
Notes dated June 2008, due December 31, 2010 with a interest rate of 10%	$	1,716,411	$	1,716,411
Note dated November 30, 2010 due November 30, 2011 with a interest rate of 10%		1,750,000		1,750,000
Notes dated December 24, 2009 due February 22, 2010 with a interest rate of 10%, net of debt discount of $38,116 at December 31, 2010		1,750,000		1,711,884
Note dated June 24, 2010 due June 24, 2011 with a interest rate of 10%		800,000		800,000
Note dated December 1, 2010 due December 1, 2011 with a interest rate of 10%		380,000		380,000
	$	6,396,411	$	6,358,295

The Company is currently negotiating the extension of the June 2008 and December 24, 2009 notes that were past due as of March 31, 2011.

15. Lease payable

On June 23, 2010, HXD entered into a sale and leaseback agreement pursuant to which the lessor purchased certain equipment from HXD located in HXD’s new milk powder production facility in Hailun City, PRC.

HXD retained the benefits and risks incident to the ownership of the equipment, and title to the equipment will transfer back to HXD at the completion of the lease. Therefore the lease was treated as a financing with no recognition of gain or loss on the sale. Pursuant to accounting guidance, the lease was recorded as a capital lease at the present value of the minimum lease payments, including the commission fee and the fair value of the warrants issued.

~~Emerald Dairy Inc~~14. ~~and~~Notes ~~Subsidiaries~~Payable

~~Footnotes~~At toJune ~~Condensed~~30, ~~Consolidated~~2011 ~~Financial~~and ~~Statements~~December 31, 2010 notes payable consisted of the following:

March 31, 2011 and 2010

	June 30, 2011		December 31, 2010
Notes dated June 2008, due December 31, 2010 with a interest rate of 10%	$	1,716,411	$	1,716,411
Note dated November 30, 2010 due November 30, 2011 with a interest rate of 10%		1,750,000		1,750,000
Notes dated December 24, 2009 due February 22, 2010 with a interest rate of 10%, net of debt discount of $38,116 at December 31, 2010		1,750,000		1,711,884
Note dated June 24, 2010 due June 24, 2011 with a interest rate of 10%		800,000		800,000
Note dated December 1, 2010 due December 1, 2011 with a interest rate of 10%		380,000		380,000
	$	6,396,411	$	6,358,295

In August 2011 the Company completed extension of all of the notes that were past due as of June 30, 2011 (See Note 24).

15.	Loan from Shareholder

At June 30, 2011 and December 31, 2010 the balance of the loan from shareholder was $662,647 and $217,294, respectively. During the six months ended June 30, 2011 a shareholder advanced $440,782 in loans to be used for the payment of accounts payable and accrued interest on notes payable for the extension of the notes.

16.	Lease payable

On June 23, 2010, HXD entered into a sale and leaseback agreement pursuant to which the lessor purchased certain equipment from HXD located in HXD’s new milk powder production facility.

HXD retained the benefits and risks incident to the ownership of the equipment, and title to the equipment will transfer back to HXD at the completion of the lease. Therefore the lease was treated as a financing with no recognition of gain or loss on the sale. Per accounting guidance, the lease was recorded as a capital lease at the present value of the minimum lease payments, including the commission fee and the fair value of the warrants issued.

The balances on the lease are as follows:

	March 31, 2011			December 31, 2010
	June 30, 2011			December 31, 2010
Remaining lease payments	$	4,~~588~~132,~~882~~776		$	5,057,288
Imputed interest		(1972,~~184,686~~183	)		(1,416,738	)
Lease balance		3,~~404~~160,~~196~~593			3,640,550
Less current portion		(1,~~263~~369,~~336~~026	)		(1,171,566	)
Long-term lease payable	$	21,~~140~~791,~~860~~567		$	2,468,984

Future principal payments on the lease over the next three years are as follows:

2011	$	~~914~~638,~~966~~550
2012		1,~~545~~566,~~735~~110
2013		~~943~~955,~~495~~933

1617. Equity

Warrants

Information with respect to stock warrants outstanding as of ~~March~~June 3130, 2011 is as follows:

Exercisable:

Exercise Price			Outstanding ~~March~~June 3130, 2011		Granted Modified		Modified, Expired or Exercised		Outstanding December 31, 2010		Expiration Date
$	1.50	*		833,811		-0-		-0-		833,811	8/02/2011
$	2.04	*		578,884		-0-		-0-		578,884	8/01/2012
$	2.04	*		296,631		-0-		-0-		296,631	8/11/2012
$	1.63	*		235,583		-0-		-0-		235,583	8/11/2012
$	1.63	*		195,000		-0-		-0-		195,000	6/12/2013
$	1.63	*		75,000		-0-		-0-		75,000	6/20/2013
$	1.63			97,500		-0-		-0-		97,500	12/31/2011
$	1.63			100,000		-0-		-0-		100,000	11/10/2012
$	1.63			120,000		-0-		-0-		120,000	11/30/2012
$	1.63			536,809		-0-		-0-		536,809	12/24/2012
$	1.63			789,356		-0-		-0-		789,356	12/31/2012
$	1.63			44,643		-0-		-0-		44,643	9/2/2014
$	1.63			40,000		-0-		-0-		40,000	6/25/2013
$	1.65			623,000		-0-		-0-		623,000	7/22/2013
$	1.65			120,000		-0-		-0-		120,000	3/31/2014
$	1.65			934,600		-0-		-0-		934,600	6/24/2013
$	3.26	*		981,747		-0-		-0-		981,747	8/02/2011
$	3.26	*		1,391,087		-0-		-0-		1,391,087	8/11/2011
$	2.61			75,000		-0-		-0-		75,000	11/10/2011

* On January 28, 2010, the Company’s registration statement became effective which extended the expiration date of these warrants.

Extension of Warrants

Pursuant to the terms of the common stock purchase warrants (the “Warrants”) previously issued by the Company to the investors and certain finders and placement agents in connection with private offerings the Company consummated in October 2007, the original expiration dates of the Warrants were to be extended beyond their initial stated termination dates for certain specified periods until the Company satisfied certain registration rights provisions relating to the shares of the Company’s common stock underlying the Warrants. As a result of the Company’s satisfaction on January 28, 2010 of certain registration rights provisions relating to the Warrants, the expiration dates of the Warrants were adjusted to provide as follows:

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

373,334 Warrants exercisable at $0.94 per share that would otherwise have expired on October 9, 2010 now expire on August 1, 2012;

1,333,333 Warrants exercisable at $1.50 per share that would otherwise have expired on October 9, 2009 now expire on August 2, 2011;

190,245 Warrants exercisable at $2.04 per share that would otherwise have expired on October 9, 2010 now expire on August 1, 2012;

981,747 Warrants exercisable at $3.26 per share that would otherwise have expired on October 9, 2009 now expire on August 2, 2011;

235,583 Warrants exercisable at $1.63 per share that would otherwise have expired on October 19, 2010 now expire on August 11, 2012;

715,945 Warrants exercisable at $2.04 per share that would otherwise have expired on October 19, 2010 now expire on August 11, 2012; and

1,544,461 Warrants exercisable at $3.26 per share that would otherwise have expired on October 19, 2009 now expire on August 12, 2011.

The fair value of the Warrants as of January 28, 2010, before modification of the terms, was calculated to be $759,035. The fair value of the Warrants as of January 28, 2010, after modification of the terms, was calculated to be $5,780,704. The incremental change in the value of the warrants is $5,021,669, which was recorded to liquidated damages in the three months ended March 31, 2010.

Third Warrant Tender Offer

On February 10, 2010, the Company commenced an offer (the “Third Offer”) to the holders of 5,374,648 outstanding warrants to purchase shares of the Company’s common stock originally issued in connection with the private offerings the Company consummated in October 2007, having exercise prices of either $0.94, $1.50, $1.63, $2.04 or $3.26 per share (the “Original Warrants”), to voluntarily exchange any or all of the Original Warrants for amended warrants exercisable at reduced exercise prices (“Amended Warrants”). The reduced exercise prices of the Amended Warrants will depend on the current exercise prices applicable to the Original Warrants. As of February 10, 2010, the Original Warrants included:

373,334 Original Warrants to purchase shares of Common Stock at an exercise price of $0.94 per share, which may be exchanged for Amended Warrants exercisable at a reduced price of $0.75 per share,

1,333,333 Original Warrants to purchase shares of Common Stock at an exercise price of $1.50 per share, which may be exchanged for Amended Warrants exercisable at a reduced price of $1.20 per share,

235,583 Original Warrants to purchase shares of Common Stock at an exercise price of $1.63 per share, which may be exchanged for Amended Warrants exercisable at a reduced price of $1.30 per share,

906,190 Original Warrants to purchase shares of Common Stock at an exercise price of $2.04 per share, which may be exchanged for Amended Warrants exercisable at a reduced price of $1.63 per share, and

2,526,208 Original Warrants to purchase shares of Common Stock at an exercise price of $3.26 per share, which may be exchanged for Amended Warrants exercisable at a reduced price of $1.63 per share.

On March 17, 2010, the Company closed the Third Offer with the following warrants exchanged:

a total of 373,334 Original Warrants with exercise prices of $0.94 per share were exchanged for Amended Warrants with reduced exercise prices of $0.75 per share;

a total of 499,522 Original Warrants with exercise prices of $1.50 per share were exchanged for Amended Warrants with reduced exercise prices of $1.20 per share;

no Original Warrants with exercise prices of $1.63 per share were exchanged for Amended Warrants with reduced exercise prices of $1.30 per share;

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

a total of 30,675 Original Warrants with exercise prices of $2.04 per share were exchanged for Amended Warrants with reduced exercise prices of $1.63 per share; and

a total of 153,374 Original Warrants with exercise prices of $3.26 per share were exchanged for Amended Warrants with reduced exercise prices of $1.63 per share.

On April 6, 2010, the holder of the Company’s 10% promissory notes in the principal amount of $856,890, due on December 31, 2010 (the “Note”), requested that the Company apply the $879,427 balance due to him under the Note (which balance included $19,537 of accrued and unpaid interest) to the holder’s exercise of (a) 373,334 of his Amended Warrants, at an exercise price of $0.75 per share, and (b) 499,522 of his Amended Warrants, at an exercise price of $1.20 per share. The Company’s Board approved the request and, accordingly, on April 6, 2010 the holder exercised his Amended Warrants, the Company issued 872,856 shares of its common stock to the holder, and the Note was cancelled.

On April 6, 2010, one holder of Amended Warrants exercised all 184,049 of his Amended Warrants, at an exercise price of $1.63 per share, resulting in gross proceeds to the Company of approximately $300,000.

The Company incurred $3,592 of expenses related to the closing of the Third Offer. This offset against additional paid-in capital.

Warrants Issued for Services

In April 2010, the Company issued 4 year warrants to purchase 160,000 shares of common stock for $1.65 per share. The warrants vest 25% per quarter over the one year life of the contract. Pursuant to accounting guidance the fair value of the warrants will be measured and recorded when vested. During the quarter ended June 30, 2010 the fair value of the 40,000 warrants vested was calculated to be $46,097 and was expensed to selling, general and administrative expense. The following assumptions were used to calculate the fair value of the warrants:

Dividend yield		0	%
Expected volatility		146.93	%
Risk-free interest rate		1.37	%
Expected life	3.75 years
Stock price	$	1.38
Exercise price	$	1.65

During the quarter ended September 30, 2010, the fair value of the 40,000 warrants vested was calculated to be $31,676 and was expensed to selling, general and administrative expense. The following assumptions were used to calculate the fair value of the warrants:

Dividend yield		0	%
Expected volatility		139.06	%
Risk-free interest rate		.68	%
Expected life	3.5 years
Stock price	$	1.04
Exercise price	$	1.65

During the quarter ended December 31, 2010, the fair value of the 40,000 warrants vested was calculated to be $38,181 and was expensed to general and administrative expense. The following assumptions were used to calculate the fair value of the warrants:

Dividend yield		0	%
Expected volatility		135.78	%
Risk-free interest rate		.68	%
Expected life	3.25 years
Stock price	$	1.27
Exercise price	$	1.65

During the quarter ended March 31, 2011, the fair value of the 40,000 warrants vested was calculated to be $27,245 and was expensed to general and administrative expense. The following assumptions were used to calculate the fair value of the warrants:

Dividend yield		0	%
Expected volatility		131.17	%
Risk-free interest rate		1.26	%
Expected life	3 years
Stock price	$	1.00
Exercise price	$	1.65

1418. Common Welfare Reserves

~~Emerald~~The ~~Dairy~~Company ~~Inc~~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 years ended December 31, 2010 and ~~Subsidiaries~~2009. The balance of these reserves at June 30, 2011 and December 31, 2010, was $4,603,066 and $3,191,614, respectively. These amounts are restricted and are included in retained earnings.

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

17. 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 years ended March 31, 2011 and 2010. The balance of these reserves at March 31, 2011 and December 31, 2010, was $4,603,066 and $3,191,614, respectively. These amounts are restricted and are included in retained earnings.

This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. The fund is non-distributable other than upon liquidation.

1819. Earnings Per Share

When calculating diluted earnings per share for stock option common stock equivalents, the Earnings Per Share Topic, ASC 260, requires the Company to include the potential shares that would be outstanding if all outstanding stock options or warrants were exercised. This is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.

The following reconciles the components of the EPS computation:

For the three months ended ~~March~~June 3130, 2011, dilutive shares include ~~641~~388,~~333~~000 stock options. ~~506~~760,~~667~~000 stock options and warrants to purchase 8,068,651 ~~shares~~share of common stock were not included in dilutive shares as the effect would have been anti-dilutive.

For the three months ended ~~March~~June 3130, 2010 dilutive shares include 703,200 of stock options and outstanding warrants to purchase 833,811 shares of common stock at an exercise price of $1.50. 760,~~463,200~~000 ~~and~~of ~~outstanding~~stock options and warrants to purchase 76,~~395~~564,~~598~~125 shares of common stock were not included in dilutive shares as the effect would have been anti-dilutive.

For the six months ended June 30, 2011, dilutive shares include 388,000 stock options. 760,000 stock options and warrants to purchase 8,068,651 share of common stock were not included in dilutive shares as the effect would have been anti-dilutive.

For the six months ended June 30, 2010, 1,463,200 of stock options and outstanding warrants to purchase 7,397,936 shares of common stock were not included in dilutive shares as the effect would have been anti-dilutive.

The following reconciles the components of the EPS computation:

	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
For the three months ended March 31, 2011:
For the three months ended June 30, 2011:
Net income	$	1,~~978~~630,~~077~~711
Basic EPS income available to common shareholders	$	1,~~978~~630,~~077~~711			34,~~059~~207,~~392~~379	$	0.0605
Effect of dilutive securities:
Warrants		-—			-
Stock options		-—			~~387~~185,~~722~~944
Diluted EPS income available to common shareholders	$	1,~~978~~630,~~077~~711			34,~~447~~393,~~114~~323	$	0.0605
For the three months ended March 31, 2010:
For the three months ended June 30, 2010:
Net loss	$	(2,296,644	)
Net income	$	1,283,946
Basic EPS income available to common shareholders	$	(21,~~296~~283,~~644~~946	)		3233,~~945~~941,~~823~~295	$	(0.0704	)
Effect of dilutive securities:
Warrants		-—			-240,036
Stock options		-—			-479,562
Diluted EPS income available to common shareholders	$	(21,~~296~~283,~~644~~946	)		3234,~~945~~660,~~823~~893	$	(0.0704	)

19. Equity Incentive Plan

	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
For the six months ended June 30, 2011:
Net income	$	3,608,788
Basic EPS income available to common shareholders	$	3,608,788			34,133,794	$	0.11
Effect of dilutive securities:

Warrants		—			-
Stock options		—			213,390
Diluted EPS income available to common shareholders	$	3,608,788			34,347,184	$	0.11

For the six months ended June 30, 2010:
Net loss	$	(1,012,698	)
Basic EPS income available to common shareholders	$	(1,012,698	)		33,446,310	$	(0.03	)
Effect of dilutive securities:
Warrants		—			—
Stock options		—			—
Diluted EPS income available to common shareholders	$	(1,102,698	)		33,446,310	$	(0.03	)

20.	Equity Incentive Plan

On March 2, 2009, the Company’s board of directors and majority stockholders adopted the 2009 Equity Incentive Plan (the “Plan”) to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of the Company’s business. 1,500,000 shares of the Company’s common stock have been reserved for issuance under the Plan.

Eligibility

The Company may grant awards to its employees, directors and consultants, including those of the Company’s subsidiaries. However, the Company may grant options that are intended to qualify as incentive stock options (“ISOs”) only to its employees and employees of its subsidiaries.

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

Acceleration of Awards upon Corporate Transactions.

The outstanding awards will terminate and/or accelerate upon occurrence of certain significant corporate transactions, including amalgamations, consolidations, liquidations or dissolutions, sales of substantially all or all of the Company’s assets, reverse takeovers or acquisitions resulting in a change of control.

Exercise Price and Term of Awards.

In general, the plan administrator will determine the exercise price of an option in the award agreement. The exercise price may be a fixed price, or it may be a variable price related to the fair market value of the Company’s ordinary shares. If the Company grants an ISO to an employee, the exercise price may not be less than 100% of the fair market value of its common stock on the date of the grant, except that if the grantee, at the time of that grant, owns shares representing more than 10% of the voting power of all classes of the Company’s shares of common stock, the exercise price may not be less than 110% of the fair market value of its common stock on the date of that grant. If the Company grants a non-qualified share option to a grantee, the exercise price may not be less than 100% of the fair market value of its common stock on the date of grant.

The term of each award under the Plan will be specified in the award agreement, but may not exceed ten years from the earlier of the adoption or the approval of the plan, unless sooner terminated.

Total share-based compensation costs included in the ~~Condensed~~ Consolidated Statements of Income were $8151,~~546~~784 and $~~213~~133,~~361~~330 during the three and six months ended ~~March~~June 3130, 2011, respectively, and $172,530 and $385,891 during the three and six months ended June 30, 2010, respectively. All share-based compensation costs are included in general and administrative expenses.

The Company estimates the fair value of stock options using a Black-Scholes option pricing valuation model, consistent with accounting guidance. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by grantees, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.

No options were granted during the three months ended ~~March~~June 3130, 2011.

Share Options

A summary of the Company’s outstanding share option award grants as of ~~March~~June 3130, 2011 and changes during the ~~three~~six months then ended are presented below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)		(in millions)
Outstanding at December 31, 2010		1,448,000		$	1.14
Granted		-0-			-—
Exercised		(300,000	)		0.42
Expired		-0-			-—
Forfeited		-0-			-—
Outstanding at March 31, 2011		1,148,000		$	1.33		8.38	$	225,040
Outstanding at June 30, 2011		1,148,000		$	1.33		8.14	$	100,880
Vested and expected to vest at March 31, 2011		1,148,000		$	1.33		8.38	$	225,040
Vested and expected to vest at June 30, 2011		1,148,000		$	1.33		8.14	$	100,880
Exercisable at March 31, 2011		768,000		$	1.10		8.38	$	225,040
Exercisable at June 30, 2011		958,000		$	1.24		8.14	$	100,880

As of ~~March~~June 3130, 2011, there was $~~100~~48,~~393~~ 609 of total unrecognized compensation costs related to non-vested Company share options granted under Company share option plans. The cost is expected to be recognized over a weighted-average period of 0.52 36 years.

2021. 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 advances to milk suppliers of $1,~~399~~839,~~139,~~776 which will be offset against future milk purchases from those suppliers (see Note 7, Other Current Assets).

16In order for the Company to conduct its current operations, an Infant & Baby Formula Milk Powder Production Permit is required from the State General Administration of Quality Supervision and Inspection and Quarantine of the People’s Republic of China (the “Administration”). The Company’s current license will expire on April 25, 2013. Other than the foregoing, no government approvals are required to conduct the Company’s principal operations, and the Company is not aware of any probable governmental regulation of our business sectors in the near future. Although management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Emerald Dairy Inc. and Subsidiaries

Footnotes to Condensed Consolidated Financial Statements

March 31, 2011 and 2010

In order for the Company to conduct its current operations, an Infant & Baby Formula Milk Powder Production Permit is required from the State General Administration of Quality Supervision and Inspection and Quarantine of the People’s Republic of China (the “Administration”). The Company’s production permits for its production facilities in Hailun City and Beian City will expire on March 22, 2014 and March 30, 2014, respectively. Other than the foregoing, no government approvals are required to conduct the Company’s principal operations, and the Company is not aware of any probable governmental regulation of our business sectors in the near future. Although management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company 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.

2122. Operating Leases

The Company leases various distribution facilities. All of these leases are on an annual basis and ~~commence~~commenced on January 1, of each year. ~~The~~ ~~Company~~For ~~also~~the ~~leases~~three ~~office~~and ~~space,~~six ~~which~~months ~~expires~~ended inJune ~~September~~30, 2011 the Company incurred rental expense of $19,856 and $38,890, respectively. For the three and six months ended ~~March~~June 3130, ~~2011 and~~ 2010, the Company incurred rental expense of $19,~~382~~034 and $1938,~~030~~064, respectively. As of ~~March~~June 3130, 2011, the Company had outstanding lease commitments totaling $~~121~~82,~~323~~009 due in 2011.

23.	Segment Reporting

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 ~~March~~June 3130, 2011 and 2010, the Company’s sales revenue from various products are as follows:

	Three months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2010
	2011		2010		2011		2010
Milk powder	$	1312,~~216~~778,~~590~~372	$	1211,~~424~~517,~~193~~627	$	25,994,962	$	23,941,820
Soybean milk powder		~~397~~295,~~487~~549		~~382~~356,~~471~~712		754,644		739,183
Rice powder		~~455~~298,~~847~~797		~~444~~408,~~587~~453		693,036		853,040
Sub-contract processing		~~609~~1,~~128~~114,350		1,~~001~~026,~~605~~710		1,723,478		2,028,315
	$	14,~~679~~487,~~052~~068	$	1413,~~252~~309,~~856~~502	$	29,166,120	$	27,562,358

1724. Subsequent Events

Extension of the December 2009 Notes Payable

On August 30, 2011, the Company and the holders of the December 2009 notes payable in principal amount of $1,750,000 entered into a second amendment to the notes payable dated December 24, 2009.

Pursuant to the second amendment:

(a) the maturity date of the indebtedness represented by the December 2009 Notes was further extended from February 22, 2011 to December 31, 2011;

(b) effective as of February 23, 2011, the interest rate on the indebtedness represented by the December 2009 notes payable increased from 10% to 15% per annum;

(c) accrued and unpaid interest on the indebtedness represented by the December 2009 notes payable, in the aggregate amount of $225,103, was paid to the December 2009 Investors (representing the full amount of interest payable through December 31, 2011);

(d) the exercise price of the December 24, 2009 Warrants was reduced from $1.63 per share to $1.00 per share, subject to adjustment under certain circumstances;

(e) a loan extension fee in an aggregate amount of $50,000 is to be paid to the December 2009 Investors on or before December 31, 2011;

In consideration for its services in connection with the consummation of the transactions, the Company entered into an agreement with a consultant, pursuant to which the Company (a) paid the consultant a cash fee in the amount of $105,000; (b) reduced the exercise price of the consultant’s existing warrants to purchase 44,643 shares of the Company’s common stock from $1.63 per share to $1.00 per share; (c) will issue to the consultant additional three-year warrants to purchase 75,000 shares of common stock of the Company, at an exercise price of $1.00 per share; and (d) is to pay the consultant an additional cash fee in the amount of $26,250 on or before December 31, 2011.

Extension of the June 2010 Notes Payable

On August 30, 2011, the Company and holders of the June, 2010 notes payable in the principal amount of $800,000 entered into a loan extension agreement.

Pursuant to the loan extension agreement:

(a) the maturity date of the June 2010 Note was extended from June 24, 2011 to June 24, 2012; and

Extension of the June 2008 Notes Payable

On August 31, 2011, the Company and the holders of the June 2008 notes payable in the principal amount of $1,716,411 an agreement for extension of the notes payable.

Pursuant to the loan extension agreement:

(a) the maturity date of the June 2008 notes payable was further extended from December 31, 2010 to December 31, 2012;

(b) effective as of December 31, 2010, the interest rate on the indebtedness represented by the June 2008 Note increased from 10% to 15% per annum;

(c) Commencing on September 1, 2011, and continuing until such time as accrued and unpaid interest in the aggregate amount of $343,282, representing the full amount of accrued and unpaid interest payable on the indebtedness represented by the June 2008 Note for the period from January 1, 2010 through August 31, 2011, has been paid by the Company to the June 2008 notes payable holders, the Company shall pay $50,000 (or such lesser amount of accrued interest as is then remaining) to the June 2008 notes payable holders on the first day of each month, subject to a forty-five (45) day cure period;

(e) the exercise price of 150,000 warrants to purchase shares of common stock of the Company, originally issued by the Company to the June 2008 notes payable holders on June 12, 2008, was reduced from $1.63 per share to $1.00 per share, subject to adjustment under certain circumstances;

(f) the expiration date of the 150,000 warrants was extended to December 31, 2013;

(g) the exercise price of 526,506 warrants to purchase shares of common stock of the Company, originally issued by the Company to the June 2008 notes payable holders on December 31, 2009 was reduced from $1.63 per share to $1.00 per share;

(h) the expiration date of the 526,506 warrants was extended to December 31, 2013;

(i) a loan extension fee in the amount of $17,164 is to be paid to the June 2008 notes payable holders on or before December 31, 2012;

(j) the number of shares of common stock of the Company pledged by the Company’s Chairman, Chief Executive Officer and President, to secure the Company’s obligations under the June 2008 notes payable was increased from 2,104,950 shares to 4,000,000 shares.

Private offering

The Company has entered into a Securities Purchase Agreement with certain accredited investors (the “Investors”), pursuant to which the Company may offer and sell, in one or more closings to occur on or prior to October 31, 2011, Convertible Promissory Notes in the principal amount of up to an aggregate of $500,000 (the “Offering”).

In connection with the Offering:

· On September 20, 2011, the Company sold one Investor a Convertible Promissory Note in the amount of $250,000 (the “Initial Note”), with a stated maturity date of September 20, 2012 (the “Initial Placement”); and

· On September 30, 2011, the Company sold two additional Investors Convertible Promissory Notes in the aggregate principal amount of $90,000 (the “Additional Notes” and, together with the Initial Note, the “September 2011 Notes”), with a stated maturity date of September 30, 2012 (the “Additional Placement” and, together with the Initial Placement, the “September 2011 Private Placements”).

The September 2011 Notes bear interest at a rate of 15% per annum, which is also payable on maturity. Upon the maturity of the September 2011 Notes, by acceleration or otherwise, interest on unpaid amounts shall thereafter be payable at the default interest rate of 17% per annum, until the obligations are paid in full. The Company may from time-to-time prepay any amount due under the September 2011 Notes, in whole or in part, without penalty. The principal amount of the September 2011 Notes, and any accrued and unpaid interest thereon, may be converted into such number of shares of common stock of the Company as is determined by dividing the amount to be converted by a price equal to the greater of (i) $1.00, or (ii) 75% of the offering price for the securities offered by the Company in its next offering of equity securities which results in cumulative gross offering proceeds to the Company of at least $2,000,000. Upon the occurrence of an “Event of Default” under the terms of the September 2011 Notes (as defined therein), the entire unpaid principal balance of the September 2011 Notes, together with any accrued and unpaid interest thereon, shall become due and payable, without presentment, demand, protest or notice of any kind.

The Company is using the proceeds from the September 2011 Private Placements primarily for repayment of certain existing indebtedness and expenses. In connection with the September 2011 Private Placements, the Investors shall receive an aggregate of 34,000 shares of the Company’s common stock as a loan origination fee (the “Investor Shares”). In addition, the Company’s obligations under the September 2011 Notes are secured by a pledge of an aggregate of 340,000 shares of the Company’s common stock made by Yang Yong Shan, the Company’s Chief Executive Officer, pursuant to a Pledge Agreement.

In consideration for its services in connection with the September 2011 Private Placements, the Company has (a) paid a placement agent (the “Placement Agent”) a commission of 10% of the gross proceeds from the September 2011 Private Placements, and (b) has agreed to issue the Placement Agent 34,000 shares of the Company’s common stock (the “Placement Agent Shares”).

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

Forward Looking Statements

This Quarterly Report on Form 10-Q (“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 Form 10-Q 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 9495.29% (including milk powder products we produce on a contract basis for third parties), 32.1% and 2.70% of our sales, respectively. Through our network of over 1,200 salespeople, our products are distributed throughout 20 provinces in the People’s Republic of China (“PRC”), and sold in over 6,500 retail outlets.

Our 30 products are marketed under two brand names:

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

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

The Chinese government has initiated programs to promote milk consumption and is providing incentives to increase dairy production. The dairy market is one of the fastest growing markets in the PRC. It has been growing at a rate of 14% per year over the past six years, according to the National Bureau of Statistics of China, 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, according to the Dairy Association of China, has grown even faster in recent years, at a rate of 20%-30% per year. Currently, it is estimated that demand for infant formula in the PRC outstrips supply by at least 2-to-1.

~~Only~~We ~~holders~~have ofreceived anthe ~~Infant~~required &permits ~~Baby~~to ~~Formula~~manufacture ~~Milk~~our ~~Powder~~products ~~Production~~at ~~Permit~~our ~~from~~two ~~the~~production ~~State~~facilities. ~~General~~Because ~~Administration~~ of ~~Quality~~our ~~Supervision,~~close ~~Inspection~~proximity ~~and~~to ~~Quarantine~~our sources of ~~the~~fresh ~~PRC~~milk, ~~(“AQSIQ”)~~we are ~~permitted~~able to ~~produce~~complete ~~formula~~the ~~milk~~production ~~powder~~process in ~~the~~approximately ~~PRC. We~~30-35 ~~have~~hours, ~~received~~which ~~Infant~~is &faster ~~Baby~~than ~~Formula~~competitors ~~Milk~~of ~~Powder~~ours ~~Production~~that ~~Permits~~are ~~for~~not ~~both~~similarly ~~of our production facilities~~situated.

1820

Because of our close proximity to our sources of fresh milk, we are able to complete the production process in approximately 30-35 hours, which is faster than competitors of ours that are not similarly situated. In 2009 and 2010, while our new production facility was being constructed and equipped, our annual production capacity at our existing production facility, located in Beian City, Heilongjiang Province, PRC, remained at approximately 9,000 tons. In November 2010, we completed construction and equipping of the first production line at our new production facility, located in Hailun City, Heilongjiang Province, PRC. In March 2011, we received authorization from the PRC government to commence production at our new facility in Hailun City. This new facility currently has one production line, which we believe has the capacity to produce ~~over~~approximately 910,000 tons of milk powder annually, giving us a total annual production capacity of ~~over~~approximately 1819,000 tons.

In the second quarter of 2011, management implemented its strategy to consolidate production of all of our infant formula products at our new state-of-the-art facility in Hailun City, rather than incurring the costs to upgrade our production facility in Beian City to meet increased government standards. We will continue to manufacture other milk powder, rice powder and soybean powder products at the Beian City production facility.

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

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

Heilongjiang Beian Nongken Changxing Lvbao Dairy Limited Liability Company, a PRC company (“Lvbao”), which handles production of our products at our production facility in Beian City; and

Hailun Xinganling Dairy Co., Ltd., a PRC company (“HXD”), which handles production of our products at our new production facility in Hailun City.

Recent Developments

~~Commercialization~~September of2011 ~~Organic~~Private ~~Product Line~~Placement

In ~~June~~September ~~2009~~2011, we ~~started~~entered tointo ~~develop~~Securities anPurchase ~~organic~~Agreements ~~baby~~with ~~formula~~certain ~~line~~accredited ~~for~~investors (the ~~high-end~~“September ~~market. After~~2011 16Investors”), ~~months~~pursuant ofto ~~monitoring~~which ~~and~~we ~~subsequent~~may ~~product~~offer ~~testing, our organic farming operation~~ and ~~production~~sell, ~~line~~in ~~were~~one ~~approved~~or bymore ~~China's~~closings ~~Guangdong~~to ~~Zhongjiang~~occur ~~Certification~~on ~~Co. In~~or ~~January~~prior ~~2011,~~to weOctober ~~entered into a supplier agreement with a Guangdong-based pharmacy chain~~31, ~~Si Ming Yao Ye~~2011, ~~for~~Convertible ~~our~~Promissory ~~recently-launched~~Notes ~~Xing~~in Anthe ~~Ling~~principal ~~"Organic"~~amount ~~infant formula. Initial stocking orders~~ of ~~Xing~~up ~~An Ling "Organic" shipped from our Guangdong distributors~~ to ~~230~~an ~~stores~~aggregate of ~~the approximate 2~~$500,000, ~~store~~with ~~pharmacy~~an ~~chain~~interest ~~based~~rate ~~in the province. Xing An Ling "Organic" will be positioned in the infant and baby product aisles~~ of ~~the~~15% ~~chain~~per ~~and~~annum ~~compete against international and local organic brands on~~ (the ~~shelves~~“2011 ~~of the chain~~Offering”). ~~Organic infant formulas are considered a premium product category in China and mostly marketed in tier one and two Chinese cities like Guangzhou.~~

~~Commencement~~In ofconnection ~~Production~~with atthe ~~Hailun~~2011 ~~City Production Facility~~Offering:

In· ~~November~~on ~~2010,~~September ~~we completed construction and equipping of the first production line at our new production facility in Hailun City. Currently~~20, ~~this new facility has one production line~~2011, ~~which~~ we ~~believe~~sold ~~has~~one ~~the~~September ~~capacity~~2011 toInvestor ~~produce~~a ~~over~~Convertible ~~9,000~~Promissory ~~tons~~Note ofin ~~milk~~the ~~powder~~principal ~~annually. This~~amount ~~first phase~~ of ~~this project has cost us an aggregate of approximately~~ $~~22.0 million~~250, including land use rights, construction expenses and equipment costs. A second production line can be added at this new facility, which we believe would enable us to produce in excess of an additional 9,000 ~~tons~~(the of“Initial ~~milk powder per year. Although there can be no assurance that we will add a second production line to our new facility~~Note”), wewith ~~currently intend to do so. If we were to add~~ a ~~second~~stated ~~production~~maturity ~~line~~date ~~at this new facility, we believe it would enable us to produce over 9,000 additional tons~~ of ~~milk~~September ~~powder per year~~20, ~~giving~~2012 ~~us a total annual production capacity of over 27,000 tons of milk powder. We expect~~ (the ~~cost~~“Initial toPlacement”); ~~add a second production line at our Hailun City production facility to be approximately $15.0 million. We plan to fund the second production line with a combination of retained earnings~~ and, to the extent necessary, funds raised from the capital market through private or public equity offerings, private or public debt offerings and/or equipment lease transactions. There can be no assurance that any additional financing will become available to us, and if available, on terms acceptable to us.

19· on September 30, 2011, we sold two additional September 2011 Investors Convertible Promissory Notes in the aggregate principal amount of $90,000 (the “Additional Notes” and, together with the Initial Note, the “September 2011 Notes”), with a stated maturity date of September 30, 2012 (the “Additional Placement” and, together with the Initial Placement, the “September 2011 Private Placements”).

We used the proceeds from the September 2011 Private Placements primarily for repayment of certain existing indebtedness and expenses. In connection with the September 2011 Private Placements, the September 2011 Investors shall receive an aggregate of 34,000 shares of our common stock as a loan origination fee (the “Investor Shares”). In addition, our obligations under the September 2011 Notes are secured by a pledge of an aggregate of 340,000 shares of our common stock made by Yang Yong Shan, our Chief Executive Officer.

In consideration for its services in connection with the September 2011 Private Placements, we (a) paid a placement agent (the “Placement Agent”) a commission of $34,000, and (b) have agreed to issue the Placement Agent 34,000 shares of the Company’s common stock (the “Placement Agent Shares”).

For more information regarding the September 2011 Notes see “—Promissory Notes—The September 2011 Notes”.

Restructuring of Outstanding Loans

Second Amendment to December 24, 2009 Securities Purchase Agreement

On August 30, 2011, we, and the investors (the “December 2009 Investors”) in our December 2009 private placement of promissory notes in the aggregate principal amount of $1,750,000, as previously amended on December 24, 2010 (the “December 2009 Notes”), and three-year warrants to purchase an aggregate of 536,809 shares of our common stock, at an exercise price of $1.63 per share (the “December 24, 2009 Warrants”), entered into a second amendment (the “Second Amendment”) to the purchase agreement, dated December 24, 2009, under which the December 2009 Notes and December 24, 2009 Warrants had been originally issued.

Pursuant to the Second Amendment, among other things:

the maturity date of the indebtedness represented by the December 2009 Notes was further extended from February 22, 2011 to December 31, 2011;

effective as of February 23, 2011, the interest rate on the indebtedness represented by the December 2009 Notes increased from 10% to 15% per annum;

accrued and unpaid interest on the indebtedness represented by the December 2009 Notes, in the aggregate amount of $225,103, was paid to the December 2009 Investors (representing the full amount of interest payable through December 31, 2011);

amended and restated promissory notes (the “Amended December 2009 Notes”) were issued to the December 2009 Investors in exchange for the cancellation of the original December 2009 Notes;

the exercise price of the December 24, 2009 Warrants was reduced from $1.63 per share to $1.00 per share, subject to adjustment under certain circumstances;

amended and restated warrants (the “Amended December 24, 2009 Warrants”) were issued to the December 2009 Investors in exchange for the cancellation of the December 24, 2009 Warrants;

a loan extension fee in an aggregate amount of $50,000 is to be paid to the December 2009 Investors on or before December 31, 2011;

the December 2009 Investors (i) waived any “Event of Default” resulting from (A) our failure to pay any principal and/or interest when due pursuant the terms of the December 2009 Notes, and/or (B) any cross-default pursuant the terms of the December 2009 Notes, and (ii) rescinded their written notice of default and their written demand for the shares pledged by Yang Yong Shan, our Chairman, Chief Executive Officer and President; and

our obligations under the Amended December 2009 Notes continued to be secured by a pledge of 5,883,329 shares of our common stock held by Yang Yong Shan, our Chairman, Chief Executive Officer and President.

In consideration for its services in connection with the consummation of the transactions contemplated by the Second Amendment, we entered into a letter agreement with a consultant (the “Consultant”), pursuant to which we (a) paid the Consultant a cash fee in the amount of $105,000; (b) issued the Consultant amended and restated warrants to purchase 44,643 shares of our common stock at a reduced exercise price of $1.00 per share, subject to adjustment under certain circumstances (the Amended Consultant Warrants”); (c) issued the Consultant additional three-year warrants to purchase 75,000 shares of our common stock, at an exercise price of $1.00 per share, subject to adjustment under certain circumstances (the “Additional Consultant Warrants; and (d) are to pay the consultant an additional cash fee in the amount of $26,250 on or before December 31, 2011.

First Amendment to June 24, 2009 Loan Agreement

On August 30, 2011, we, and a lender (the “June 2010 Lender”), entered into a first amendment (the “First Amendment”) to the loan agreement, dated June 24, 2010, under which a promissory note in the principal amount of $800,000 (the “June 2010 Note”) had been originally issued to the June 2010 Lender.

Pursuant to the First Amendment, among other things:

the maturity date of the indebtedness represented by the June 2010 Note was extended from June 24, 2011 to June 24, 2012; and

an amended and restated promissory note (the “Amended June 2010 Note”) was issued to the June 2010 Lender in exchange for the cancellation of the original June 2010 Note.

Third Amendment to June 12, 2008 Securities Purchase Agreement

On August 31, 2011, we, and the holder (the “June 2008 Investor”) of a promissory note in the principal amount of $1,716,411, as previously amended on December 31, 2008 and December 31, 2009 (the “June 2008 Note”), entered into a third amendment (the “Third Amendment”) to the purchase agreement under which the June 2008 Note had originally been issued.

Pursuant to the Third Amendment:

the maturity date of the indebtedness represented by the June 2008 Note was further extended from December 31, 2010 to December 31, 2012;

effective as of December 31, 2010, the interest rate on the indebtedness represented by the June 2008 Note increased from 10% to 15% per annum;

commencing on September 1, 2011, and continuing until such time as accrued and unpaid interest in the aggregate amount of $343,282 (the “Accrued Interest”), representing the full amount of accrued and unpaid interest payable on the indebtedness represented by the June 2008 Note for the period from January 1, 2010 through August 31, 2011, has been paid by us to the June 2008 Investor, we shall pay $50,000 (or such lesser amount of Accrued Interest as is then remaining) to the June 2008 Investor on the first day of each month, to be applied against such Accrued Interest, subject to a forty-five (45) day cure period;

an amended and restated promissory note (the “Amended June 2008 Note”) was issued to the June 2008 Investor in exchange for the cancellation of the June 2008 Note;

the exercise price of 150,000 warrants to purchase shares of our common stock, which we originally issued to the June 2008 Investor on June 12, 2008 (the “June 2008 Warrants”), was reduced from $1.63 per share to $1.00 per share, subject to adjustment under certain circumstances;

the expiration date of the June 2008 Warrants was extended to December 31, 2013;

amended and restated warrants (the “Amended June 2008 Warrants”) were issued to the June 2008 Investor in exchange for the cancellation of the June 2008 Warrants;

the exercise price of 526,506 warrants to purchase shares of our common stock, which we originally issued to the June 2008 Investor on December 31, 2009 (the “December 31, 2009 Warrants”), was reduced from $1.63 per share to $1.00 per share, subject to adjustment under certain circumstances;

the expiration date of the December 31, 2009 Warrants was extended to December 31, 2013;

amended and restated warrants (the “Amended December 31, 2009 Warrants”) were issued to the June 2008 Investor in exchange for the cancellation of the December 31, 2009 Warrants;

a loan extension fee in the amount of $17,164 is to be paid to the June 2008 Investor on or before December 31, 2012;

the June 2008 Investor (i) waived any “Event of Default” resulting from our failure to pay any principal and/or interest when due pursuant to the terms of the June 2008 Note, and (ii) rescinded any oral and/or written notice of default delivered to us in connection therewith; and

the number of shares of our common stock pledged by Yang Yong Shan, our Chairman, Chief Executive Officer and President, to secure our obligations under the Amended June 2008 Note was increased from 2,104,950 shares to 4,000,000 shares.

Expiration of Warrants

Issued and outstanding warrants to purchase an aggregate of 3,360,019 shares of our common stock, which were originally issued in connection with the private placements we consummated in October 2007, have recently expired, as follows:

On August 2, 2011, 833,811 warrants (originally issued on October 9, 2007), exercisable at $1.50 per share, expired unexercised;

On August 2, 2011, 981,747 warrants (originally issued on October 9, 2007), exercisable at $3.26 per share, expired unexercised; and

On August 12, 2011, 1,544,461 warrants (originally issued on October 19, 2007), exercisable at $3.26 per share, expired unexercised.

Advances from Our Chairman

In the second quarter of 2011, Yang Yong Shan, our Chairman, Chief Executive Officer and President made interest-free advances to us in the aggregate amount of $440,782. We used these funds for repayment of certain existing indebtedness and expenses. This amount is repayable to Mr. Yang on demand.

Trends and Uncertainties

Economic Downturn

The worldwide economic downturn and market instability, which began in 2008, have made the business climate more volatile and more costly. Although all of our business operations are currently conducted in the PRC, our general business strategy, as well as our results of operations and financial condition, may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve from current levels, it may make it difficult, if not impossible, for us to obtain debt or equity financing on acceptable terms at a time when we wish to do so. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon our expansion plans. We do not expect this economic downturn to have a significant effect on our business or operations in the near future. However, we cannot predict the timing or duration of any economic slowdown or recession or the timing or strength of a subsequent recovery, worldwide, or in the specific markets we serve. If the markets for our products significantly deteriorate due to these economic effects, our business, financial condition and results of operations may be materially and adversely affected.

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 of its populous, the government views increased dairy production as a means of improving employment in rural areas thus improving social stability. The programs are designed to narrow the significant gap between the PRC’s per capita milk consumption of 15 kg per person and the global average of 100 kg per person. We believe this initiative will continue to provide us with growth opportunities.

Industry Growth

The dairy market is one of the fastest growing markets in the PRC. It has been growing at a rate of 14% per year over the past six years, according to the National Bureau of Statistics of China, and is expected to grow at a rate of 15% per year for the foreseeable future. On its website, the Dairy Association of China estimates that the infant formula market segment, which is the market segment we target, has grown even faster in recent years, at a rate of 20%-30% per year. We believe the following three factors are the main drivers of the infant formula market:

Increased household income made infant formula more affordable in the PRC;

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

Increased popularity and acceptance of infant formula products.

Based on these factors, we expect to see significant growth in our business and operations now that we have commenced production at our new production facility in Hailun City. However, a slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.

Supply of Infant Formula

It is estimated that the demand for infant formula in the PRC outstrips supply by at least 2-to-1. In recent years, our production capabilities have not been able to keep up with demand for our products. In March 2011, we received authorization from the PRC government to begin production at our new facility in Hailun City, which we believe will enable us to increase our annual production capacity of milk powder by ~~over~~approximately 910,000 tons. We expect that this increase in production capacity of approximately ~~100~~111% will result in ~~the~~corresponding ~~doubling~~increases ofin 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 sufficient raw milk and other raw materials to meet our production needs. The price of raw milk is affected by regional market in Heilongjiang Province, PRC, 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 readily available to us for the foreseeable future. In ~~addition~~2011, the prices of certain raw materials we use to produce our products have increased, and we expect them to continue to increase, due to inflation. We believe we will be able to increase the prices of ~~the~~our products to pass on any higher raw ~~materials~~material wecosts ~~use~~to consumers. However, there is no guarantee that we will ~~stay~~be ~~relatively~~able ~~stable~~to ~~for~~raise prices to the ~~foreseeable~~full ~~future~~extent necessary to cover rises in costs for raw materials, which could have a negative material impact on our financial condition and results of operations.

Brand Name and Product Quality

There are more than 30 brand names of infant formula products sold in the PRC. Most of our international and larger competitors 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 in the industry, including us, have been focusing on less developed second and third tier 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. We plan to continue to focus on penetrating less-competitive second and third tier cities.

Organic Label Milk Products

In February 2008, we obtained organic label certification from Guangdong Zhongjiang Certification Co., Ltd. In June 2009, we started to develop an organic baby formula line for the high-end market. To meet the standards for an organic product, we were required to maintain a herd of 527 organic-fed cows that were closely monitored by certification authorities to ensure they met the rigid organic farming standards. After 16 months of monitoring and subsequent product testing, our organic farming operation and production line were approved by China's Guangdong Zhongjiang Certification Co. In January 2011, we entered into a supplier agreement with a Guangdong-based pharmacy chain, Si Ming Yao Ye, for our recently-launched Xing An Ling "Organic" infant formula. Initial stocking orders of Xing An Ling "Organic" shipped from our Guangdong distributors to 230 stores of the approximate 2,000 store pharmacy chain based in the province. We use the “China Organic Product” seal on our organic formula packaging and in associated marketing materials. We believe that, similar to the growth of the organic milk market in the U.S., organic milk products will be popular in the PRC. Over time, we believe our proposed organic product line will help increase our revenues.

Factors Affecting Raw Milk Production

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

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

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

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

Contamination of Milk Powder Products Produced in the PRC

In mid-2008, a number of milk powder products produced within the PRC were found to contain unsafe levels of tripolycyanamide, also known as melamine, sickening thousands of infants. This prompted the Chinese government to conduct a nationwide investigation into how the milk powder was contaminated, and caused a worldwide recall of certain milk powder products produced within the PRC. On September 16, 2008, China’s AQSIQ revealed that it had tested samples from 175 dairy manufacturers, and published a list of 22 companies whose products contained melamine. We passed the emergency inspection and were not included on AQSIQ’s list. The contraction in the Chinese milk powder industry caused by this crisis has lead to increased demand for our products. However, we cannot be certain that the illnesses caused by contamination in the milk powder industry, whether or not related to our products, will not lead to decreased demand for milk powder products produced within the PRC, thereby having a material adverse effect on our business.

Subcontracting

Our subcontracting arrangements consist of producing milk powder products on a contract basis for third parties, which then resell such products under their own brand names. In mid-2010, in anticipation of our completion of the first production line at the Hailun City facility, management determined to increase subcontracting activities once again. The primary reason for this increase was to help absorb excess production capacity at our new production facility. As we increase sales of our higher margin products in the future, management will continue to assess its subcontracting activities.

Outstanding Debt

We have incurred substantial indebtedness through loans made to us ~~during the past 36 months~~ by certain investors and lenders. Our agreements with these investors and lenders, and the promissory notes we issued in connection with such agreements, contain various covenants, including, in certain instances, cross-default provisions. These loan covenants may negatively affect our business, financial condition, operating results and cash flows in many ways, including:

increasing the cost, or limiting the availability of, additional financing for working capital, acquisitions or other purposes, including our plans to install a second production line at our new facility in Hailun City;

limiting the ways in which we can use our cash flow, much of which may have to be used to satisfy debt; and

adversely affecting our ability to respond to changing business or economic conditions.

Historically, we have not been able to repay certain of our loans as they have come due. InWe ~~fact,~~plan ~~outstanding~~to ~~promissory~~repay ~~notes in~~ the ~~aggregate~~loans ~~principal~~with ~~amount~~a combination of ~~$3,466,411~~retained ~~are~~earnings ~~currently~~and, ~~past~~to ~~due. We~~the ~~are~~extent ~~currently~~necessary, ~~negotiating~~funds ~~with~~raised from the ~~lenders~~capital ~~for~~market ~~extensions~~through ofprivate ~~the~~or ~~maturity~~public ~~dates~~equity ofand/or ~~the~~debt ~~applicable promissory notes~~offerings. However, there can be no assurance that weany additional financing will bebecome ~~able~~available to ~~extend~~us, ~~the~~and ~~maturity~~if ~~dates~~available, ~~of these notes~~ on terms acceptable to us~~, if at all~~. ~~In May 2011, we received demands for payment from the holders of certain of these promissory notes, in the aggregate principal amount of $1,750,000.~~

Results of Operations

Three-Month Period Ended ~~March~~June 3130, 2011 Compared to Three-Month Period Ended ~~March~~June 3130, 2010

The following summarizes changes in our operations for the three months ended ~~March~~June 3130, 2011 and 2010. Net income increased by $4346,~~274~~765,~~721,~~ from ~~a loss of~~ $21,~~296~~283,~~644~~946 in the three months ended ~~March~~June 3130, 2010, to ~~income of~~ $1,~~978~~630,~~077~~711 for the three months ended ~~March~~June 3130, 2011. The increase in net income during the three months ended ~~March~~June 3130, 2011, as compared to the same time period in the prior year, was ~~primarily~~ due to ~~our~~a ~~non-cash~~decrease ~~charge for liquidated damages~~ in ~~the~~our ~~amount~~selling ofand ~~approximately~~administrative ~~$5,022,000~~expenses inas ~~the~~well ~~three~~as ~~months~~other ~~ended~~factors ~~March~~further ~~31,~~described ~~2010, which we did not incur in the first quarter of the current year~~below.

Sales and Cost of Goods Sold

	For the Three Months Ended March 31,
		For the Three Months Ended June 30,
	~~2011~~	2011		~~2010~~		2010
Sales	$	~~14,679,052~~$	14,487,068	$	~~14,252,856~~	$	13,309,502
Cost of Goods Sold		~~7,489,607~~	7,634,895		~~7,153,772~~		6,794,707
Gross Profit	$	~~7,189,445~~$	6,852,173	$	~~7,099,084~~	$	6,514,795

Sales. Sales volume decreased by 128 metric tons, or 4.9%, to 2,471 metric tons for the three months ended March 31, 2011, from 2,599 metric tons for the three months ended March 31, 2010. Sales revenues increased by $426,196, or 3.0%, from $14,252,856 in the three months ended March 31, 2010, to $14,679,052 for the three months ended March 31, 2011. The increase in sales revenue was due to an increase in the average selling price for our products, by $457 per metric ton, as compared to the three months ended March 31, 2010, resulting from our increased production of our high end product line in the first quarter of 2011.28

Sales. Sales volume decreased by ~~product~~203 ~~line~~metric tons, or 8. A3%, ~~break-down~~period ofon ~~our~~period, ~~sales~~to 2,250 metric tons for the three months ended June 30, 2011, from 2,453 metric tons for the three months ended June 30, 2010. Sales revenues increased by ~~product~~$1,177,566, ~~line~~or 8.8%, from $13,309,502 in the three months ended June 30, 2010, to $14,487,068 for the three months ended ~~March~~June 3130, 2011. The increase in sales was primarily due to an increase in the average selling price of $1,013 per metric ton for our products, offset by the reduction in volume for all of our products of 203 metric tons, resulting from a slow-down in production during the quarter to comply with new product packaging standards required by the PRC government, and ~~2010~~to isimplement asour ~~follows:~~strategy to consolidate production of all of our infant formula products at our new state-of-the-art facility in Hailun City, rather than incurring the costs to upgrade our production facility in Beian City to meet increased government standards.

	Three Months Ended March 31,
	2011						2010						Period-on-period
Product category	Quantity (tons)		$ Amount		% of sales		Quantity (tons)		$ Amount		% of sales		Qty. Variance
Milk powder		2,001		13,216,590		90.0		1,958		12,424,193		87.2		43
Rice powder		77		455,847		3.1		78		444,587		3.1		(1	)
Soybean powder		234		397,487		2.7		233		382,471		2.7		1
Subcontracting		159		609,128		4.2		330		1,001,605		7.0		(171	)
Total		2,471		14,679,052		100.0		2,599		14,252,856		100.0		(128	)

Sales by product line. A break-down of our sales by product line for the three months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30,
	2011						2010						Period-on-period
Product category	Quantity (tons)		$ Amount		% of sales		Quantity (tons)		$ Amount		% of sales		Qty. Variance

Milk powder		1,741		12,778,372		88.2		1,822		11,517,627		86.5		(81	)
Rice powder		50		298,797		2.1		72		408,453		3.1		(22	)
Soybean powder		171		295,549		2.0		218		356,712		2.7		(47	)
Subcontracting		288		1,114,350		7.7		341		1,026,710		7.7		(53	)
Total		2,250		14,487,068		100.0		2,453		13,309,502		100.0		(203	)

There were various changes to the break-down of sales among our product lines over the three months ended ~~March~~June 3130, 2011, as we ~~slightly~~decreased ~~increased~~production ~~milk~~in ~~powder~~most ~~production,~~all ~~but~~lines ~~attempted~~due to ~~adjust~~a ~~our~~change ~~sales~~in ~~mix~~packaging torequirements ~~higher~~instituted ~~margin~~by ~~products~~the PRC government in May 2011. Milk powder accounted for 9088.02% of ~~first~~our second quarter 2011 sales mix, at an average selling price of $67,~~605~~340 per metric ton, as compared to 8786.25% of ~~first~~our second quarter 2010 sales mix, at an average selling price of $6,~~345~~321 per metric ton. ~~The increase in sales price per metric ton for milk powder resulted from our continued shift to increase production of our high end product line in the first quarter of 2011.~~ Rice powder accounted for 32.1% of our sales mix for the three months ended ~~March~~June 3130, 2011, at an average selling price of $5,~~920~~976 per metric ton, as compared to 3.1% of our sales mix in the three months ended ~~March~~June 3130, 2010, at an average selling price of $5,~~700~~673 per metric ton. Soybean powder ~~remained~~accounted atfor 2.70% of our sales mix for the three months ended ~~March~~June 3130, 2011, at an average selling price of $1,~~699~~728 per metric ton, as compared anto ~~average~~2.7% ~~selling price~~ of ~~$1,642~~our ~~per~~sales ~~metric~~mix ~~ton~~ in ~~2010. We decreased our subcontract production during~~ the three months ended ~~March~~June 3130, ~~2011 to 4.2% of the sales mix~~2010, at an average selling price of $31,~~831~~636 per metric ton,. Our assubcontract ~~compared~~production toaccounted for 7.07% of ~~the~~our sales mix infor the three months ended ~~March~~June 3130, ~~2010~~2011, at an average ~~sales~~selling price of $3,~~035~~869 per metric ton~~. In the short-term~~, weas ~~expect~~compared ~~subcontracting~~ to ~~increase~~7.7% ~~as a percentage~~ of our ~~total~~ sales, asmix wefor ~~increase~~the ~~subcontracting~~three ~~activities~~months toended ~~help~~June ~~absorb~~30, ~~excess~~2010, ~~production~~at ~~capacity~~an ataverage ~~our~~sales ~~new~~price ~~production~~of ~~facility~~$3,011 inper ~~Hailun~~metric ~~City~~ton.

A breakdown of our average selling price by product line for the three months ended ~~March~~June 3130, 2011 and 2010 is as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,
Average selling prices	2011			~~2010~~	2010		~~Variance~~	Variance
	$			$	$		$	$		%
Milk powder		~~6,605~~	7,340		~~6,345~~	6,321		~~260~~	1,019	416.1
Rice powder		~~5,920~~	5,976		~~5,700~~	5,673		~~220~~	303	35.93
Soybean powder		~~1,699~~	1,728		~~1,642~~	1,636		57	92	3.5.6
Subcontracting		~~3,831~~	3,869		~~3,035~~	3,011		~~796~~	858	2628.25
Total – all products		5,941			5,484			457		8.3
All products			6,439			5,426			1,013	18.7

Cost of Goods Sold. Cost of goods sold increased by $335,835, or 4.7%, from $7,153,772 in the three months ended March 31, 2010, to $7,489,607 for the three months ended March 31, 2011. This increase was directly related to our increased production and increased cost of raw materials during the three months ended March 31, 2011. Overall our cost per metric ton increased by $278, or 10.1%, to $3,031 per metric ton in the three months ended March 31, 2011, as compared to $2,753 per metric ton in three months ended March 31, 2010, due to decreases in the price of raw materials we use to produce our products. We believe the prices of the raw materials we use will stay relatively stable for the foreseeable future.29

ACost ~~breakdown~~of Goods Sold. Cost of goods sold increased by $840,188, or 12.4%, from $6,794,707 in the three months ended June 30, 2010, to $7,634,895 for the three months ended June 30, 2011. This increase was related to an increase in the cost of ~~sales~~fresh milk by ~~product~~approximately 11% and a shift in production to our new production line ~~for~~during the three months ended ~~March~~June 3130, 2011. Overall ~~and~~our cost per metric ton increased by $623, or 22.5%, to $3,393 per metric ton in the three months ended June 30, 2011, as compared to $2,770 per metric ton in three months ended June 30, 2010, due to increases in the price of raw materials we use to produce our products and increased depreciation expense from the use of the new facility. We expect that the raw materials we require to produce our products will continue to increase in the short-term due to inflation. We believe we will be able to increase the prices of our products to pass on any higher raw material costs to consumers. However, there is asno ~~follows:~~guarantee that we will be able to raise prices to the full extent necessary to cover rises in costs for raw materials, which could have a negative material impact on our financial condition and results of operations.

24A breakdown of cost of sales by product line for the three months ended June 30, 2011 and 2010 is as follows:

Three Months Ended March 31,

Three Months Ended June 30,

2011

2010

Variance

Cost of sales

Milk powder

6,~~556~~289,~~012~~235

5,~~821~~471,~~847~~288

~~734~~817,~~165~~947

1214.69

Rice powder

~~178~~117,~~761~~178

~~174~~136,~~348~~936

4(19,~~413~~758

)

2(14.54

)

Soybean powder

~~276~~205,~~029~~246

~~265~~257,~~605~~202

10(51,~~424~~956

)

3(20.92

)

Subcontracting

~~478~~1,~~805~~023,236

~~891~~929,~~972~~281

~~(413~~93,~~167~~955

)

~~(46~~10.31

)

Total

7,~~489~~634,~~607~~895

76,~~153~~794,~~772~~707

~~335~~840,~~835~~188

412.74

Cost per units sold(per ton)

Milk powder

3,~~276~~612

23,~~973~~003

~~303~~609

1020.23

Rice powder

2,~~322~~344

21,~~235~~902

87442

323.92

Soybean powder

1,~~180~~200

1,~~140~~180

4020

31.57

Subcontracting

3,~~011~~553

2,~~703~~725

~~308~~828

1130.4

Average cost per unit sold

3,~~031~~393

2,~~753~~770

~~278~~623

1022.15

Gross Profit. Gross profit was $76,~~189~~852,~~445~~173, or 4947.03% of our sales for the three months ended ~~March~~June 3130, 2011, as compared to gross profit of $76,~~099~~514,~~084~~795, or 4948.89% of sales, for the three months ended ~~March~~June 3130, 2010. During the three months ended ~~March~~June 3130, 2011, our gross margin on milk powder decreased to 50.48%, from 5352.15% in the same period of the prior year, due to ana 14.9% increase in ~~the~~cost ~~average~~per ~~sales~~metric ~~price~~ton of our products ~~of 4.1%~~, ~~while~~offset ~~there~~by ~~was~~an ~~a 10.2%~~ increase in ~~the~~average ~~cost~~selling ~~per~~price ~~metric~~of ~~ton from the three months ended March 31, 2010~~16. 1%. The gross margin for ~~subcontracting~~rice ~~increased~~powder ~~10.~~decreased 5.7% to 2160.48% in the three months ended ~~March~~June 3130, 2011, as compared to 1066.95% in the three months ended ~~March~~June 3130, 2010, due to an increase in the average ~~sales~~cost ~~price~~per ton of 2623.2% ~~in the three months ended March 31~~, ~~2011,~~partially ~~as compared to the same period in 2010,~~ offset by an increase in ~~the~~average ~~cost~~selling ~~per~~price ~~ton~~ of 115.43% in the three months ended ~~March~~June 3130, 2011 as compared to the same period in 2010.

~~A breakdown of gross margin by product line for the three months ended March 31, 2011 and 2010 is as follows:~~30

	Three Months Ended March 31,
	2011				2010				Period-on-period
Product category	$ Amount		Gross Margin %		$ Amount		Gross Margin %		Margin Variance
Milk powder		6,660,578		50.4		6,602,346		53.1		(2.7	)
Rice powder		277,086		60.8		270,239		60.8		-
Soybean powder		121,458		30.6		116,866		30.6		-
Subcontracting		130,323		21.4		109,633		10.9		10.5
Total		7,189,445		49.0		7,099,084		49.8		0.8

A breakdown of gross margin by product line for the three months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30,
	2011				2010				Period-on-period
Product category	$ Amount		Gross Margin %		$ Amount		Gross Margin %		Margin Variance

Milk powder		6,489,137		50.8		6,046,339		52.5		(1.7	)
Rice powder		181,619		60.8		271,517		66.5		(5.7	)
Soybean powder		90,303		30.6		99,510		27.9		2.7
Subcontracting		91,114		8.2		97,429		9.5		(1.3	)
Total		6,852,173		47.3		6,514,795		48.9		(1.6	)

Operating Expenses

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2011		2010
Operating Expenses
Selling and administrative expenses	$	3,~~825~~810,~~619~~069	$	34,~~902~~004,~~390~~280
Liquidated damages		-		5,021,669
Depreciation and amortization		85,271		51,724
Depreciation and amortization		244,537		51,228
Total operating expenses	$	3,895,340	$	4,056,004
Total operating expenses	$	4,070,156	$	8,975,287

25Selling Expenses. Selling expenses overall decreased by $172,107, or 5.5%, from $3,119,519 in the three months ended June 30, 2010, to $2,947,412 for the three months ended June 30, 2011. The major factor in the decrease in our selling expenses was a reduction in our advertising expense of $442,233, or 99.9%, to $587 in 2011, from $442,820 in 2010, due to a decreased marketing campaign in 2011 to allow for the change in packaging. This decrease was partially offset by increases in:

~~Selling~~· ~~Expenses.~~Promotion ~~Selling~~ expenses ~~decreased overall by $55~~,~~925,~~ or 1.8%, from $3,146,037 in the three months ended March 31, 2010, to $3,090,112 for the three months ended March 31, 2011. The major factor in the decrease in selling expenses was that advertising expenses decreased by $~~263~~113,~~577~~047, or 7417.32%, to $91770,~~165~~422 in 2011, from $~~354~~657,~~742~~375 in 2010, ~~due~~as towe aincreased ~~change in~~ our direct marketing ~~campaign~~as incompared ~~2011~~to 2010.

~~This~~· ~~decrease~~Outdoor ~~was~~promotion ~~partially~~expenses, ~~offset~~ by ~~the~~$33,892, ~~following~~or ~~factors:~~13.2%, to $290,948 in 2011, from $257,056 in 2010, as a result of increased marketing using outdoor promotion in 2011.

· ~~Promotion~~Selling salary expenses, ~~increased~~ by $9862,~~033~~745, or 1410.40%, to $~~777~~689,~~303~~329 in 2011, from $~~679~~626,~~270~~584 in 2010, as we increased ~~the promotion portion of~~ our direct marketing campaign asin ~~compared to 2010~~2011.

· Selling salary expenses increased by $44,268, or 6.7%, to $706,766 in 2011, from $662,498 in 2010, as a result of our increased marketing campaign in 2011.

· Travel expense increased by $19,740, or 6.4%, to $325,938 in 2011, from $306,198 in 2010, as a result of our increased sales activity.

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

Administrative Expenses. Administrative expenses decreased by $2022,~~846~~102, or 2.85%, from $~~756~~884,~~353~~761 in three months ended ~~March~~June 3130, 2010, to $~~735~~862,~~507~~659 for the three months ended ~~March~~June 3130, 2011. The major factors in the decrease in administrative expenses ~~were~~are as follows:

· ~~Salary~~Decrease of salary and stock option expenses ~~decreased~~of by $~~147~~121,~~734~~595, ~~or 39.7%,~~ to $~~224~~108,~~145~~792 in 2011, from $~~371~~230,~~879~~387 in 2010, ~~because of higher compensation expense recognized in 2010~~ as a result of no additional stock options being granted insince late 2009.

· ~~Travel~~Decrease ~~expenses~~in ~~decreased~~travel byexpenses of $2543,~~132~~836, ~~or 41.8%,~~ to $3426,~~986~~183 in 2011, from $6070,~~118~~019 in 2010, as a result of ~~decrease~~decreased ~~in the amount of~~ travel during 2011.

~~These~~· ~~decreases~~Decrease ~~were~~in ~~partially~~investor ~~offset~~relations byexpenses ~~an increase~~ of $~~162~~97,~~346~~864, into ~~consulting~~$1,594 ~~expense as compared with 2010 and an increase~~ in ~~legal~~2011, ~~and~~from ~~accounting expenses of~~ $599,~~170~~458 asin ~~compared with~~ 2010., ~~The~~as ~~increase~~a inresult ~~consulting~~of ~~expense~~decreased ~~resulted from our~~ use of ~~a new consultant for~~ investor ~~relations~~relation ~~and other~~ services induring 2011.

~~Liquidated Damages. The company recorded $5,021,669 in liquidated damages during the three months ended March~~ 31, 2010 due to our extension of the expiration dates of warrants we previously issued to satisfy certain registration rights provisions. There was no similar expense in the first fiscal quarter of 2011.

These decreases were partially offset by an increase of $160,902 in consultation expense as compared with 2010 and an increase in legal and accounting expenses of $129,758 as compared with 2010.

Provision for Income Taxes

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,
	2011		2010
Provision for Income Taxes
Current	$	~~958~~934,~~036~~089	$	~~421~~391,~~499~~243
Deferred		-		-
	$	~~958~~934,~~036~~089	$	~~421~~391,~~499~~243

26Provision for Income Taxes. Income taxes increased by $542,846, or 138.7%, from $391,243 for the three months ended June 30, 2010, to $934,089 for the three months ended June 30, 2011. This increase was due to the increase in our taxable income in our operating subsidiaries.

~~Provision~~Six-Month ~~for~~Period ~~Income~~Ended ~~Taxes.~~June ~~Income taxes increased by $536~~30,~~537,~~ or2011 ~~127.3%,~~Compared ~~from $421,499 for the three months ended March 31, 2010,~~ to ~~$958,036~~Six-Month ~~for~~Period ~~the~~Ended ~~three~~June ~~months ended March 31~~30, 2011. This increase was due to the increase in our taxable income in our operating subsidiaries and the expiration of the fifty percent reduction in the tax rate of XAL as of the first quarter of 2011.2010

The following summarizes changes in our operations for the six months ended June 30, 2011 and 2010. Net income increased by $4,621,486, from a loss of $1,012,698 in the six months ended June 30, 2010, to income of $3,608,788 for the six months ended June 30, 2011. The increase in net income during the six months ended June 30, 2011, as compared to the same time period in the prior year, was due to liquidated damages we incurred during the prior year in connection with the extension of the expiration dates of certain of our issued and outstanding warrants offset by other factors as further described below.

Sales and Cost of Goods Sold

	For the Six Months Ended June 30,
	2011		2010
Sales	$	29,166,120	$	27,562,358
Cost of Goods Sold		15,124,502		13,948,479
Gross Profit	$	14,041,618	$	13,613,879

Sales. Sales volume decreased by 331 metric tons, or 6.6%, period on period, to 4,721 metric tons for the six months ended June 30, 2011, from 5,052 metric tons for the six months ended June 30, 2010. Sales revenues increased by $1,603,762, or 5.8%, from $27,562,358 in the six months ended June 30, 2010, to $29,166,120 for the six months ended June 30, 2011. This increase was due to an increase in the average selling price for all of our products, by $722 per metric ton, as compared to the six months ended June 30, 2010, partially offset by a decrease in the quantity of products we sold resulting from a slow-down in production to comply with new product packaging standards required by the PRC government, and to implement our strategy to consolidate production of all of our infant formula products at our new state-of-the-art facility in Hailun City, rather than incurring the costs to upgrade our production facility in Beian City to meet increased government standards.

Sales by product line. A break-down of our sales by product line for the six months ended June 30, 2011 and 2010 is as follows:

	Six Months Ended June 30,
	2011						2010						Period-on-period
Product category	Quantity (tons)		$ Amount		% of sales		Quantity (tons)		$ Amount		% of sales		Qty. Variance
Milk powder		3,742		25,994,962		89.0		3,780		23,941,820		86.8		(38	)
Rice powder		127		754,644		2.6		150		853,040		3.1		(23	)
Soybean powder		405		693,036		2.4		451		739,183		2.7		(46	)
Subcontracting		447		1,723,478		6.0		671		2,028,315		7.4		(224	)
Total		4,721		29,166,120		100.0		5,052		27,562,358		100.0		(331	)

There were various changes to the break-down of sales among our product lines over the six months ended June 30, 2011, as production decreased in all lines, but we attempted to adjust our sales mix to higher margin products. Milk powder accounted for 89.0% of the 2011 sales mix, at an average selling price of $6,947 per metric ton, as compared to 86.8% in 2010, at an average selling price of $6,334 per metric ton. Rice powder accounted for 2.6% of our sales mix for the six months ended June 30, 2019, at an average selling price of $5,942 per metric ton, as compared to 3.1% of our sales mix in the six months ended June 30, 2010, at an average selling price of $5,687 per metric ton. Soybean powder accounted for 2.4% of our sales mix for the six months ended June 30, 2011, at an average selling price of $1,711 per metric ton, as compared to 2.7% of our sales mix in the six months ended June 30, 2010, at an average selling price of $1,639 per metric ton. We decreased our subcontract production during the six months ended June 30, 2011 to 6.0% of the sales mix, at an average selling price of $3,856 per metric ton, as compared to 7.4% of the sales mix in the six months ended June 30, 2010, at an average sales price of $3,023 per metric ton.

A breakdown of our average selling price by product line for the six months ended June 30, 2011 and 2010 is as follows:

	Six Months Ended June 30,
Average selling prices	2011		2010		Variance
	$		$		$		%
Milk powder		6,947		6,334		613	9.7
Rice powder		5,942		5,687		255	4.5
Soybean powder		1,711		1,639		72	4.4
Subcontracting		3,856		3,023		833	27.6
All products		6,178		5,456		722	13.2

Cost of Goods Sold. Cost of goods sold increased by $1,175,923, or 8.4%, from $13,948,479 in the six months ended June 30, 2010, to $15,124,502 for the six months ended June 30, 2011. This increase was related to an increase in the cost of fresh milk by approximately 11% and a shift in production to our new production line during the six months ended June 30, 2011. Overall our cost per metric ton increased by $443, or 16.0%, to $3,204 per metric ton in the six months ended June 30, 2011, as compared to $2,761 per metric ton in six months ended June 30, 2010, due to increases in the price of raw materials we use to produce our products. We expect that the raw materials we require to produce our products will continue to increase in the short-term due to inflation. We believe we will be able to increase the prices of our products to pass on any higher raw material costs to consumers. However, there is no guarantee that we will be able to raise prices to the full extent necessary to cover rises in costs for raw materials, which could have a negative material impact on our financial condition and results of operations.

A breakdown of cost of sales by product line for the years ended June 30, 2011 and 2010 is as follows:

	Six Months Ended June 30,
	2011		2010		Variance
	$		$		$			%
Cost of sales
Milk powder		12,845,247		11,293,235		1,552,012		13.7
Rice powder		295,939		311,284		(15,345	)	(4.9	)
Soybean powder		481,275		522,807		(41,532	)	(7.9	)
Subcontracting		1,502,041		1,821,253		(319,212	)	(17.5	)
Total		15,124,502		13,948,579		1,175,923		8.4

Cost per units sold(per ton)
Milk powder		3,433		2,988		445		14.9
Rice powder		2,330		2,075		255		12.3
Soybean powder		1,188		1,159		29		2.5
Subcontracting		3,360		2,714		646		23.8
Average cost per unit sold		3,204		2,761		443		16.0

Gross Profit. Gross profit was $14,041,618, or 48.1% of our sales for the six months ended June 30, 2011, as compared to gross profit of $13,613,879, or 49.4%, for the six months ended June 30, 2010. During the six months ended June 30, 2011, our gross margin on milk powder decreased to 50.6%, from 52.8% in the same period of the prior year, due to an increase in the cost per metric ton of 14.9%, partially offset by a 9.7% increase in the average selling price from the six months ended June 30, 2010. The gross margin for soybean powder increased 1.3% to 30.6% in the six months ended June 30, 2011, as compared to 29.3% in the six months ended June 30, 2010, due to an increase in the average selling price of 4.4% in the six months ended June 30, 2011 as compared to the same period in 2010.

A breakdown of gross margin by product line for the years June 30, 2011 and 2010 is as follows:

	Six Months Ended June 30,
	2011				2010				Period-on-period
Product category	$ Amount		Gross Margin %		$ Amount		Gross Margin %		Margin Variance

Milk powder		13,149,715		50.6		12,648,685		52.8		(2.2	)
Rice powder		458,705		60.8		541,756		63.5		(2.7	)
Soybean powder		211,761		30.6		216,376		29.3		1.3
Subcontracting		221,437		12.8		207,062		10.2		2.6
Total		14,041,618		48.1		13,613,879		49.4		(1.5	)

Operating Expenses

	For the Six Months Ended June 30,
	2011		2010
Operating Expenses
Selling and administrative expenses	$	7,635,688	$	7,906,670
Liquidated damages		-		5,021,669
Depreciation and amortization		329,808		102,952
Total operating expenses	$	7,965,496	$	13,031,291

Selling Expenses. Selling expenses overall decreased by $228,033, or 3.6%, from $6,265,556 in the six months ended June 30, 2010, to $6,037,523 for the six months ended June 30, 2011. The major factor in the decrease in selling expenses was a decrease in advertising expense by $705,810, or 88.5%, to $91,752 in 2011, from $797,562 in 2010, due to our switch to more of a direct marketing campaign in 2011. This decrease was partially offset by increase in:

Promotion expenses, by $211,080, or 15.8%, to $1,547,725 in 2011, from $1,336,645 in 2010, as we conducted more direct marketing as compared to 2010.

Outdoor promotion expenses, by $41,848, or 7.9%, to $573,289 in 2011, from $531,441 in 2010, as we shifted our marketing campaign in 2010.

Selling salary expenses, by $107,014, or 8.3%, to $1,396,095 in 2011, from $1,289,081 in 2010, as a result of our increased sales in 2011.

Administrative Expenses. Administrative expenses decreased by $42,949, or 2.6%, from $1,641,114 in six months ended June 30, 2010, to $1,598,165 for the six months ended June 30, 2011. The major factors in the decrease in administrative expenses are as follows:

Decrease in salary and stock option expenses of $269,329, to $332,937 in 2011, from $602,266 in 2010, as a result of no additional stock options being granted since late 2009.

Decrease in travel expenses of $68,968, to $61,169 in 2011, from $130,137 in 2010, as a result of decreased travel during 2011.

Decrease in investor relations expenses of $95,226, to $30,332 in 2011, from $125,558 in 2010, as a result of decrease in use of investor relation professional services during 2011.

These increases were partially offset by an increase of $323,249 in consultation expenses as compared with 2010 and an increase in legal and accounting expenses of $134,928 as compared with 2010.

Liquidated Damages. We recorded $5,021,669 in liquidated damages during the six months ended June 30, 2010, as a result of the extension of warrants previously issued by us to satisfy certain registration rights provisions. There was no similar non-cash charge for liquidated damages in the same period in 2011. See Note 17 of the Notes to Condensed Consolidated Financial Statements for additional information.

Provision for Income Taxes

	For the Six Months Ended June 30,
	2011		2010
Provision for Income Taxes
Current	$	1,892,125	$	812,742
Deferred		-		-
	$	1,892,125	$	812,742

Provision for Income Taxes. Income taxes increased by $1,079,383, or 132.8%, from $812,742 for the six months ended June 30, 2010, to $1,892,125 for the six months ended June 30, 2011. This increase was due to the increase in our taxable income in our operating subsidiaries.

Liquidity and Capital Resources

Uses of Capital

	For the Three Months Ended March 31,
	For the Six Months Ended June 30,
	2011			2010
Net cash provided by (used in) operating activities	$	(275,429	)	$	2,560,421
Net cash provided by operating activities	$	4,781,829		$	3,797,949
Net cash (used in) investing activities		(427,183	)		(9,569,697	)
Net cash used in investing activities	$	(846,486	)	$	(11,709,446	)
Net cash provided by (used in) financing activities	$	(236,354	)	$	-
Net cash (used in) provided by financing activities	$	(39,175	)	$	5,625,284

Net Cash Provided By ~~(Used In)~~ Operating Activities. For the ~~three~~six months ended ~~March~~June 3130, 2011, $~~275~~4,~~429~~781,829 was ~~used~~provided inby operating activities, compared with $23,~~560~~797,~~421~~949 provided by operating activities for the ~~three~~six months ended ~~March~~June 3130, 2010. Our net cash flows provided from operating activities during 2010 increased due to the following factors:

· Operations provided $13,~~978~~608,~~077~~788 of net cash during the ~~three~~six months ended ~~March~~June 3130, 2010.

· Trade accounts receivable ~~increased~~decreased by $~~238~~1,~~317~~637,602, due to ~~the~~ increased ~~sales~~collections during the period.

· Inventory increased by $~~193~~22,~~748~~703, due to adjustments ~~from~~required in connection with our increased sales of our products during the current period.

· Other current assets increased by $~~742~~994,~~214~~197, primarily due ~~the~~to ~~increase~~increased inadvances ~~our~~to ~~level~~milk ~~of production during 2010~~suppliers.

· Accounts payable and accrued expenses decreased by $1684,~~389,765~~577 at ~~March~~June 3130, 2011, due to ~~payments~~our toreduction ~~vendors~~of certain payables.

Net Cash Used In Investing Activities. For the ~~three~~six months ended ~~March~~June 3130, 2011, we used $~~427~~846,~~183~~486 in investing activities, compared with $911,~~569~~709,~~697~~446 used in investing activities for the ~~three~~six months ended ~~March~~June 3130, 2010. The ~~$427,183~~net cash used was primarily for the construction and equipping of our new production facility.

Net Cash (Used In) Provided By Financing Activities. For the ~~three~~six months ended ~~March~~June 3130, 2011, ~~$236,354~~there was $39,175 used in financing activities, compared with no$5,625,284 ~~cash~~provided ~~used~~by in financing activities for the ~~three~~six months ended ~~March~~June 3130, 2010. WeDuring ~~made~~2011, we received advances from our Chairman in the aggregate amount of $440,782, offset by payments onwe made in the ~~sale-leaseback~~amount of $479,957 related to the Sale and Leaseback Transaction described in “—Liquidity and Capital Resources—General” below. We raised $296,408 through the exercise of warrants during the ~~three~~six months ended ~~March~~June 3130, ~~2011~~2010, in connection with the consummation of warrant tender offers. We also completed the Sale and Leaseback Transaction described in “—Liquidity and Capital Resources—General” below, which provided $5,006,340 during the six months ended June 30, 2010.

2736

General

Cash and cash equivalents at ~~March~~June 3130, 2011 ~~decreased~~increased by approximately 424.79% to $1621,~~327~~396,~~220~~775, from $17,131,274 at December 31, 2010. Working capital ~~increased~~decreased from ~~approximately~~ $24.4,373,846 ~~million~~ at December 31, 2010, to ~~approximately~~ $~~26.5~~17,761,669 ~~million~~ at ~~March~~June 3130, 2011, ~~including~~due ~~cash~~to ~~generated~~a ~~from~~reduction ~~operations~~in advances to equipment suppliers (and a corresponding increase in property, plant and equipment) related to our completion of the equipping of our first production line at out new facility. 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 believe that a lack of adequate production capacity has been a significant impediment to our ability to increase our revenue in recent years. 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 through the opening of our new production facility, and increasing both sales staff and advertising expenditures.

In March 2011, we received authorization from the PRC government to commence production at our new production facility in Hailun City. The new facility currently has one production line, which we believe has the capacity to produce ~~over~~approximately 910,000 tons of milk powder annually. This first phase of this project has cost us an aggregate of approximately $22.0 million, including land use rights, construction expenses and equipment costs.

The new facility has the capacity to handle a second production line. Although there can be no assurance we will add a second production line to our new facility, we currently intend to do so. If we were to add a second production line at this new facility, we believe it would enable us to produce ~~over~~approximately 910,000 additional tons of milk powder per year, giving us a total annual production capacity of over 2729,000 tons of milk powder. We believe the cost to add a second production line would be an additional $15.0 million. Although there can be no assurance we will add a second production line to our new facility, we plan to fund the second production line with a combination of retained earnings and, to the extent necessary, funds raised from the capital market through private or public equity offerings, private or public debt offerings and/or equipment lease transactions. We currently have no sources for the additional financing we would need to add a second production line at 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.

Historically we relied primarily on investments by our Chief Executive Officer and shareholders, and bank loans, to meet our cash and capital expenditures. However, as the amount of our capital expenditures increases, we expect to depend more on the capital markets to raise funds through private and public offerings of equity and/or debt. There can be no assurance that any future financing will be available to us when needed, and on commercially reasonable terms.

In fiscal 2009, we raised approximately $7.7 million through the sale of promissory notes and exercise of warrants. We used these funds for the construction and equipping of our new production facility and for general working capital purposes.

In fiscal 2010, we:

· we received $296,408 from the exercise of warrants;

entered into a loan agreement with an unrelated third party, pursuant to which we borrowed $1,180,000, at an interest rate of 10% per annum; and

2837

consummated a sale and leaseback transaction with Fenghui Leasing Co., Ltd. (“Fenghui”), pursuant to which, among other things Fenghui purchased certain equipment from HXD, for a purchase price of approximately $5,161,176, and Fenghui leased the equipment back to HXD for 36 monthly payments of approximately $164,124 (a total of approximately $5,908,464), a commission fee of $154,835, and a refundable deposit of $774,176 (the “Sale and Leaseback Transaction”).

We applied ~~these~~the proceeds from these transactions to completing the first production line of our new production facility and to general working capital purposes.

~~Currently~~So far, ~~we spend approximately 8%-12% of total revenues on advertising and promotional efforts throughout the year. We spent approximately $6.1 million on advertising and promotion~~ in fiscal ~~2010. We currently expect to spend an aggregate of approximately $6.0 million on advertising and promotion in fiscal~~ 2011, ~~of which~~ we ~~have already spent approximately $1.3 million during the three months ended March 31, 2011.~~:

received advances from our Chairman in the aggregate amount of $440,782; and

sold Convertible Promissory Notes in the aggregate principal amount of $340,000 to certain accredited investors. We are used these proceeds primarily for repayment of certain existing indebtedness and expenses.

Currently, we spend approximately 8%-12% of total revenues on advertising and promotional efforts throughout the year. We spent approximately $6.1 million on advertising and promotion in fiscal 2010. We currently expect to spend an aggregate of approximately $6.0 million on advertising and promotion in fiscal 2011, of which we have already spent approximately $2.5 million during the six months ended June 30, 2011.

Registration Rights and Liquidated Damages

We entered into Registration Rights Agreements with the investors (the “October 2007 Investors”) in the private placements we consummated in October 2007 (the “October 2007 Private Placements”), 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 SEC (the “Registration Statement”) covering the resale of (i) the shares of common stock purchased in the October 2007 Private Placements (the “Purchased Shares”), and (ii) the common stock issuable upon exercise of the October 2007 Warrants (collectively (i) and (ii), 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 SEC, within one hundred eighty (180) calendar days after the Filing Date, and (ii) keep the Registration Statement continuously effective until all of the Registrable Securities have been sold, or may be sold without volume restrictions pursuant to Rule 144.

Pursuant to the Registration Rights Agreements, we were required to pay liquidated damages to the holders of the Purchased Shares if (i) we failed to file the Registration Statement on or before the Filing Date, (ii) the SEC did 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 SEC) (the “Effectiveness Date”), (iii) we failed to request acceleration of effectiveness within five (5) business days of a notice of no further review from the SEC, (iv) we failed to respond to the SEC 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 ninety (60) days in any period of 365 consecutive days for any reason. The liquidated damages accumulate at the rate of one and one-half percent (1.5%) of the purchase price paid by the October 2007 Investors for units of our securities purchase in the October 2007 Private Placements for each thirty (30) day period during which a registration default is continuing; provided, however, that (i) we would not be liable for liquidated damages with respect to any warrants or shares of common stock underlying the warrants, and (ii) in no event would we be liable for liquidated damages in excess of 1.5% of the aggregate purchase price of the securities purchased in the October Offerings in any 30 day period, and (iii) the maximum aggregate liquidated damages payable to any of the October 2007 Investors shall be 20% of the aggregate purchase price paid by such purchaser. The Registration Rights Agreements further required that if we failed to pay any partial liquidated damages in full within seven days after the date payable, we will pay interest thereon at a rate of 15% per annum, until such amounts, plus all such interest thereon, are paid in full.

2938

We did not satisfy these registration requirements and, as a result, accrued a total of $1,201,998 in liquidated damages and $172,900 in interest. As of October 5, 2009, we issued an aggregate of 775,833 shares in full payment of the liquidated damages and interest.

On January 28, 2010, a Registration Statement we filed to register the Registrable Securities for resale was declared effective by the SEC. Pursuant to Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”), we must now file a post-effective amendment to the Registration Statement (“Post-Effective Amendment”) to update the financial statements and other information included in the Registration Statement, and to eliminate or modify information regarding the selling stockholders listed in the Registration Statement. We plan to file the Post-Effective Amendment as soon as practicable.

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

The Renminbi is currently not a freely convertible currency, and the restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC, or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, SAFE, regulates the conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. See the discussion in Risk Factors commencing on page 16 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “Form 10-K”) for more information.

Warrants

As of the date hereof, we have outstanding exercisable warrants to purchase an aggregate of 84,~~108~~977,~~651~~006 shares of our common stock, of which:

· ~~833~~1,~~811~~332,958 are exercisable at a price of $1.5000 per share;

· 2975,~~233,891~~933 are exercisable at a price of $1.63 per share;

1,717,600 are exercisable at a price of $1.65 per share;

875,515 are exercisable at a price of $2.04 per share;

75,000 are exercisable at a price of $2.61 per share; and

·If ~~2,372,834~~all of these warrants are ~~exercisable~~exercised, atwe awill ~~price~~receive gross proceeds of approximately $~~3.26~~7,739,570, ~~per~~although ~~share~~there can be no assurance that any of these warrants will be exercised.

If all of the vested warrants are exercised, we will receive gross proceeds of approximately $17,443,238, although there can be no assurance that any of these warrants will be exercised.

Promissory Notes

The September 2011 Notes

The September 2011 Notes have a principal balance of $340,000 and mature on the one-year anniversary of their date of issuance. The principal bears interest at a rate of 15% per annum, which is also payable on maturity. Upon the maturity of the September 2011 Notes, by acceleration or otherwise, interest on unpaid amounts shall thereafter be payable at the default interest rate of 17% per annum, until the obligation is paid in full. We may from time-to-time prepay any amount due under the September 2011 Notes, in whole or in part, without penalty. The principal amount of the September 2011 Notes, and any accrued and unpaid interest thereon, may be converted into such number of shares of common stock of the Company as is determined by dividing the amount to be converted by a price equal to the greater of (i) $1.00, or (ii) 75% of the offering price for the securities we offer in our next offering of equity securities which results in cumulative gross offering proceeds of at least $2,000,000. Upon the occurrence of an “Event of Default” under the terms of the September 2011 Notes, the entire unpaid principal balance of the September 2011 Notes, together with any accrued and unpaid interest thereon, shall become due and payable, without presentment, demand, protest or notice of any kind.

Advances from Our Chairman

In the second quarter of 2011, Yang Yong Shan, our Chairman, Chief Executive Officer and President made interest-free advances to us in the aggregate amount of $440,782. This amount is repayable to Mr. Yang on demand.

The December 2010 Term Loan Note

The promissory note we issued in connection with a loan transaction we consummated in December 2010 (the “December 2010 Term Loan Note”), has a principal balance of $380,000 and bears interest at a rate of 10% per annum, which is also payable on maturity. The December 2010 Term Loan Note has a stated maturity date of December 1, 2011. Upon the maturity of the December 2010 Term Loan Note, by acceleration or otherwise, interest on unpaid amounts shall thereafter be payable at the rate of 12% per annum default interest, until the obligation is paid in full. Any regular interest or default interest not paid when due under the December 2010 Term Loan Note shall be added to the principal of the December 2010 Term Loan Note. We may from time-to-time prepay any amount due under the December 2010 Term Loan Note, in whole or in part, without penalty. The entire unpaid principal balance, together with accrued interest, shall become due and payable, without presentment, demand, protest, notice of protest or other notice of dishonor of any kind upon the occurrence of an “Event of Default,” as defined in our Loan Agreement with the lender.

Sale and Leaseback Transaction

In connection with the Sale and Leaseback Transaction (described above), our wholly-owned subsidiary, HXD, entered into a Sale and Leaseback Agreement with Fenghui, pursuant to which, among other things:

Fenghui purchased certain milk powder processing equipment located at our new milk powder processing facility (the “Equipment”) from HXD, for a purchase price of approximately $5,161,176;

Fenghui leased the Equipment back to HXD for 36 months in return for monthly payments of approximately $164,124 (a total of approximately $5,908,464), a commission fee of $154,835, and a refundable deposit of $774,176; and

We issued to Fenghui three-year warrants to purchase 934,600 shares of the Company’s common stock, at an exercise price of $1.65 per share.

See Note 16 of the Notes to our consolidated financial statements for additional information concerning the Sale and Leaseback Transaction.

The Amended June 2010 Term Loan Note

AThe promissory note we issued in connection with the June 2010 Term Loan, as amended (the “Amended June 2010 Term Loan Note”), has a principal balance of $800,000. The interest rate on the Amended June 2010 Term Loan Note is 10% per annum and is payable on maturity. The Amended June 2010 Term Loan Note has a stated maturity date of June 24, ~~2011~~2012. Upon the maturity of the Amended June 2010 Term Loan Note, by acceleration or otherwise, interest on unpaid amounts shall thereafter be payable at the rate of 12% per annum, until the obligation is paid in full. Any regular interest or default interest not paid when due under the Amended June 2010 Term Loan Note shall be added to the principal of the Amended June 2010 Term Loan Note. We may from time-to-time prepay any amount due under the Amended June 2010 Term Loan Note, in whole or in part, without penalty. The entire unpaid principal balance, together with accrued interest, shall become due and payable, without presentment, demand, protest, notice of protest or other notice of dishonor of any kind upon the occurrence of an “Event of Default,” as defined in our Loan Agreement with the lender.

31The Amended December 2009 Notes

The promissory notes we originally issued in connection with the private placement we consummated in December 2009, as amended on December 24, 2010 and August 30, 2011 (the “Amended December 2009 Notes”), have an aggregate principal balance of $1,750,000 and a stated maturity date of December 31, 2011. The Amended December 2009 Notes had an interest rate of 10% through February 22, 2011, and currently bear interest at a rate of 15% per annum. We have prepaid all interest due under the Amended December 2009 Notes. So long as we have any obligations under the Amended December 2009 Notes, there are limitations on our ability to: (a) pay dividends or make other distributions on our capital stock; (b) redeem, repurchase or otherwise acquire any of our securities; (c) create, incur or assume any liability for borrowed money; (d) sell, lease or otherwise dispose of any significant portion of our 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. The entire unpaid principal balance, together with accrued interest, shall become due and payable, without presentment, demand, protest, notice of protest or other notice of dishonor of any kind upon the occurrence of an “Event of Default,” as defined in the Amended December 2009 Notes. Our repayment of amounts due under the Amended December 2009 Notes is secured by a pledge of an aggregate of 5,883,329 shares of our common stock beneficially owned by Yang Yong Shan, our Chairman, Chief Executive Officer and President.

The promissory notes we originally issued in connection with the private placement we consummated in December 2009 (the “December 2009 Notes”), as amended on December 24, 2010, which matured on February 22, 2011, have an aggregate principal balance of $1,750,000. The December 2009 Notes had an interest rate of 10% through February 22, 2011 (which interest we have paid in full), and currently bear interest at a rate of 15% per annum. So long as we have any obligations under the December 2009 Notes, there are limitations on our ability to: (a) pay dividends or make other distributions on our capital stock; (b) redeem, repurchase or otherwise acquire any of our securities; (c) create, incur or assume any liability for borrowed money; (d) sell, lease or otherwise dispose of any significant portion of our 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. Our repayment of amounts due under the December 2009 Notes is secured by a pledge of an aggregate of 5,883,329 shares of our common stock beneficially owned by Yang Yong Shan, our Chairman, Chief Executive Officer and President. We are currently negotiating extensions of the maturity dates of the December 2009 Notes, although there can be no assurance that the noteholders will agree to extend the maturity dates of the December 2009 Notes on terms acceptable to us, if at all. In May 2011, we received demand for payment from the holders of the December 2009 Notes.41

The Amended November 2009 Term Loan Note

The promissory note we issued in connection with a loan transaction we consummated in November 2009, as amended on November 30, 2010 (the “Amended November 2009 Term Loan Note”), ~~as amended on November 30, 2010,~~ has a principal balance of $1,750,000 and bears interest at a rate of 10% per annum, which is also payable on maturity. The Amended November 2009 Term Loan Note has a stated maturity date of November 30, 2011. Upon the maturity of the Amended November 2009 Term Loan Note, by acceleration or otherwise, interest on unpaid amounts shall thereafter be payable at the rate of 12% per annum default interest, until the obligation is paid in full. Any regular interest or default interest not paid when due under the Amended November 2009 Term Loan Note shall be added to the principal of the Amended November 2009 Term Loan Note. We may from time-to-time prepay any amount due under the Amended November 2009 Term Loan Note, in whole or in part, without penalty. The entire unpaid principal balance, together with accrued interest, shall become due and payable, without presentment, demand, protest, notice of protest or other notice of dishonor of any kind upon the occurrence of an “Event of Default,” as defined in our Loan Agreement with the lender.

The Amended June 2008 Note

AThe promissory note we originally issued in connection with the private placement we consummated in June 2008, as amended on December 31, 2008, ~~and~~ December 31, 2009 and August 31, 2011 (the “Amended June 2008 Note”), which matured on December 31, 2010, has a principal balance of $1,716,411 (which amount includes interest accrued through December 31, 2009), and a stated maturity date of December 31, 2012. The Amended June 2008 Note had an interest rate of 8% through December 31, 2008, 10% through December 31, ~~2011~~2010, and currently bears interest at a rate of 15% per annum. Commencing on September 1, 2011, and continuing until such time as accrued and unpaid interest in the aggregate amount of $343,282 (the “Accrued Interest”), representing the full amount of accrued and unpaid interest payable on the indebtedness represented by the June 2008 Note for the period from January 1, 2010 through August 31, 2011, has been paid by us to the June 2008 Investor, we shall pay $50,000 (or such lesser amount of Accrued Interest as is then remaining) to the June 2008 Investor on the first day of each month, to be applied against such Accrued Interest, subject to a forty-five (45) day cure period. So long as we have any obligation under the Amended June 2008 Note, there are limitations on our ability to: (a) pay dividends or make other distributions on our capital stock; (b) redeem, repurchase or otherwise acquire any of our securities; (c) create, incur or assume any liability for borrowed money (except as is related to the completion of the construction of our new production facility); (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. ~~Our~~Upon ~~repayment~~the occurrence of ~~amounts~~any ~~due~~“Event of Default” under the Amended June 2008 Note, isunless ~~secured~~such byEvent aof ~~pledge~~Default ofshall anhave ~~aggregate~~been ofwaived 2in writing by the holder,~~104,950~~ ~~shares~~the ofholder ~~our~~may ~~common~~consider ~~stock~~the ~~beneficially~~Amended ~~owned~~June by2008 ~~Yang~~Note ~~Yong~~immediately ~~Shan~~due and payable, ~~our~~without ~~Chairman~~presentment, ~~Chief~~demand, ~~Executive~~protest ~~Officer~~or notice of any kind, and ~~President. We~~the ~~are~~holder ~~currently~~may ~~negotiating~~immediately anenforce ~~extension~~any and all of ~~the~~its ~~maturity~~rights ~~date~~and ofremedies provided in the Amended June 2008 Note, ~~although~~or ~~there~~any ~~can~~other beright noor ~~assurance~~remedy ~~that~~afforded ~~the~~by ~~noteholder~~law. Our ~~will~~repayment ~~agree~~of toamounts ~~extend~~due ~~the~~under ~~maturity date of~~ the Amended June 2008 Note onis ~~terms~~secured ~~acceptable~~by toa uspledge of an aggregate of 4,000,000 ifshares atof ~~all~~our common stock beneficially owned by Yang Yong Shan, our Chairman, Chief Executive Officer and President.

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Dividends

We have not paid any dividends. In all likelihood, we will use any 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, certain of our outstanding promissory notes contain restrictive covenants on our payment of dividends, as further described in “— Promissory Notes” above.

Contractual Obligations and Commercial Commitments

Our contractual obligations, as of ~~March~~June 3130, 2011, 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
Construction contract	$	~~490~~496,~~181~~643	$	~~490~~496,~~181~~643		-		-		-
Debt obligations		6,956,406		6,956,406		-		-		-
Debt Obligations		7,106,816		7,106,816		-		-		-
Capital leases		4,~~588~~132,~~882~~776		1,~~529~~033,~~628~~194	$	3,~~059~~099,~~254~~582		-		-
Operating leases		~~121~~62,~~323~~809		~~121~~62,~~323~~809		-		-		-
Total:	$	1211,~~156~~799,~~792~~044	$	98,~~097~~699,~~538~~462	$	3,~~059~~099,~~254~~582	$	-	$	-

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Inventory

Property and equipment

Intangible Assets

Revenue recognition

Earnings per share

Taxation

Warrants

Freestanding Financial Instruments with Characteristics of Both Liabilities and Equity

Retirement benefit costs

Stock Based Compensation

Fair value of financial instruments

Fair Value Measurements

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Board of Directors.

During the first three months of fiscal 2011, there were no significant changes in our critical accounting policies and estimates. You should refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2010 (“Form 10-K”) for a more complete discussion of our critical accounting policies and estimates.

Recently Enacted Accounting Standards

Refer to Note 3 to the Financial Statements included in Part I, Item 1 of this Form 10-Q, which discusses new accounting pronouncements we recently adopted, as well as accounting pronouncements recently issued or proposed but not yet required to be adopted.

Off-Balance Sheet Arrangements

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

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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 (“Exchange Act”) and are not required to provide the information under this item.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to provide reasonable assurance that the material information required to be disclosed by us in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of ~~March~~June 3130, 2011, our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of ~~March~~June 3130, 2011 as a result of the material weaknesses identified in our internal control over financial reporting. These material weaknesses are discussed in “Management’s Report on Internal Control over Financial Reporting” contained in our Form 10-K. Our management considers our internal control over financial reporting to be an integral part of our disclosure controls and procedures.

Our management has taken and is continuing to take the following actions to improve our internal controls over financial reporting, including actions to remediate the identified material weaknesses:

Require all members of our management and the finance department across all corporate entities to certify receipt of the Code of Business Conduct and Ethics by signature. Signed copies will be retained by our management. Thereafter, our management plans to periodically require signatories to acknowledge that they understand the contents of the Code of Business Conduct and Ethics, and whether they are aware of anyone in our company that might have violated some part of the Code.

Recruit an independent financial expert to the Board of Directors to chair an Audit Committee and formalize roles and responsibilities over our internal control over financial reporting for the Board and our management. Our management also plans to develop and implement a formal corporate internal audit capability, reporting directly to an independent Audit Committee, to provide effective oversight of our internal control over financial reporting.

Continue to engage the services of qualified consultants with China GAAP, U.S. GAAP and SEC reporting experience to support our financial reporting and SOX compliance requirements, including assistance with the following:

Remediating identified material weaknesses;

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Monitoring our internal control over financial reporting on an ongoing basis;

Managing our period-end financial closing and reporting processes; and

Identifying and resolving non-routine or complex accounting matters.

Complete the implementation of, and related training for, its IT policies and procedures related to access, change, data, and security management to ensure that all relevant financial information is secure, identified, captured, processed, and reported within the accounting system and spreadsheets supporting financial reporting.

Continue providing training to accounting personnel regarding our significant policies and procedures related to accounting, finance, and internal control to ensure that financial reporting competencies are strengthened.

Refine and implement procedures to ensure that our employees receive sufficient training and instruction with respect to our sales policies.

Our management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures, as well as its internal control over financial reporting, on an ongoing basis, and is committed to taking further action and implementing additional improvements, as necessary and as funds allow. However, our management cannot guarantee that the measures taken or any future measures will remediate the material weaknesses identified or that any additional material weaknesses or significant deficiencies will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.

Notwithstanding the material weaknesses described above, our management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements included in this annual report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Changes in Internal Control Over Financial Reporting

~~In March 2011, our executive officers and directors certified receipt of our Code of Business Conduct and Ethics by signature.~~ There were no ~~other~~ changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the interim period ended ~~March~~June 3130, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

None

Item 1A.

Risk Factors.

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

~~None~~September 2011 Private Placement

In September 2011, in connection with the September 2011 Private Placements, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—September 2011 Private Placement” above, which disclosure is incorporated herein by reference, we issued to the September 2011 Investors (a) duly executed September 2011 Notes in the aggregate principal amount of $340,000, and (b) 34,000 Investor Shares. For more information regarding the September 2011 Notes see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Promissory Notes—The September 2011 Notes”.

In addition, in partial consideration for its services in connection with the September 2011 Private Placements, we issued the Placement Agent 34,000 Placement Agent Shares.

We believe that the issuances of the September 2011 Notes, Investor Shares and Placement Agent Shares in connection with the September 2011 Private Placements are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering.

Restructuring of Outstanding Loans

Second Amendment to December 24, 2009 Securities Purchase Agreement

On August 30, 2011, in connection with the Second Amendment, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Restructuring of Outstanding Loans—Second Amendment to December 24, 2009 Securities Purchase Agreement” above, which disclosure is incorporated herein by reference, we issued to the December 2009 Investors (a) the Amended December 2009 Notes in the aggregate principal amount of $1,750,000, and (b) the Amended December 24, 2009 Warrants to purchase an aggregate of 536,809 shares of our common stock, at an exercise price of $1.63 per share. For more information regarding the Amended December 2009 Notes see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Promissory Notes—The Amended December 2009 Notes.”

In addition, in partial consideration for its services in connection with the consummation of the transactions contemplated by the Second Amendment, we issued the Consultant the Amended Consultant Warrants to purchase 44,643 shares of our common stock at $1.00 per share, and the Additional Consultant Warrants to purchase 75,000 shares of our common stock, at an exercise price of $1.00 per share.

We believe that the issuances of the Amended December 2009 Notes, Amended December 24, 2009 Warrants, Amended Consultant Warrants and Additional Consultant Warrants in connection with the Second Amendment are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering.

First Amendment to June 24, 2009 Loan Agreement

On August 30, 2011, in connection with the First Amendment, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Restructuring of Outstanding Loans—First Amendment to June 24, 2009 Loan Agreement” above, which disclosure is incorporated herein by reference, we issued to the June 2010 Lender the Amended June 2010 Note in the principal amount of $800,000. For more information regarding the Amended June 2010 Note see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Promissory Notes—The Amended June 2010 Note”.

We believe that the issuance of the Amended June 2010 Note in connection with the First Amendment is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering.

Third Amendment to June 12, 2008 Securities Purchase Agreement

On August 31, 2011, in connection with the Third Amendment, as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Restructuring of Outstanding Loans—Third Amendment to June 12, 2008 Securities Purchase Agreement” above, which disclosure is incorporated herein by reference, we issued to the June 2008 Investor (a) the Amended June 2008 Note in the principal amount of $1,716,411, (b) the Amended June 2008 Warrants to purchase shares of our common stock at an exercise price of $1.00 per share, and (c) the Amended December 31, 2009 Warrants to purchase 526,506 shares of our common stock at an exercise price of $1.00 per share. For more information regarding the Amended June 2008 Note see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Promissory Notes—The Amended June 2008 Note”.

We believe that the issuances of the Amended June 2008 Note, Amended June 2008 Warrants, and Amended December 31, 2009 Warrants in connection with the Third Amendment are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering.

Item 3. Defaults Upon Senior Securities.

~~Outstanding~~As of June 30, 2011, outstanding promissory notes in the aggregate principal amount of $34,~~466~~266,411 ~~are~~were ~~currently~~ past due. We ~~are~~have ~~currently~~since ~~negotiating~~restructured ~~with the lenders for extensions of the maturity dates of~~ these ~~promissory notes~~loans. ~~However, there can be no assurance that we will be able to extend the maturity dates of these notes on terms acceptable to us, if at all.~~ InFor ~~May~~more ~~2011~~information, wesee ~~received~~“Management’s ~~demands~~Discussion ~~for~~and ~~payment~~Analysis ~~from the holders~~ of ~~certain~~Financial ofCondition ~~these~~and ~~promissory~~Results ~~notes, in the aggregate principal amount~~ of ~~$1,750,000,~~Operations–Recent ~~which~~Developments” ~~matured in February 2011~~above.

For more information, see Note 14 to the Financial Statements included in Part I, Item 1 of this Form 10-Q.

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

~~Reference~~In isthe second fiscal quarter of 2011, Yang Yong Shan, our Chairman, Chief Executive Officer and President made interest-free advances to ~~the~~us ~~disclosure~~in ~~set~~the ~~forth~~aggregate ~~under~~amount ~~Part~~of II$440,782. ~~Item~~We 3used ~~above,~~the ~~which~~advances ~~disclosure~~for repayment of certain existing indebtedness and expenses. This amount is ~~incorporated~~repayable ~~herein~~to byMr. ~~reference~~Yang on demand.

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Item 6.

Exhibits

Exhibit No.		Description ~~of Exhibit~~
31.1		Certification of principal executive officer pursuant to Section 13a-14(a)*
4.1		Form of Amended and Restated Promissory Notes in the aggregate principal amount of $1,750,000, issued August 30, 2011 (originally issued on December 24, 2009, as previously amended on December 24, 2010) — Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
31.2		Certification of principal financial and accounting officer pursuant to Section 13a-14(a)*
4.2		Form of Amended and Restated Warrants to purchase 536,809 shares of the Company’s common stock, issued August 30, 2011 (originally issued on December 24, 2009) — Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
32.1		Certification of principal executive officer pursuant to Section 1350*
4.3		Amended and Restated Warrants to purchase 44,643 shares of the Company’s common stock, issued August 30, 2011 (originally issued on November 23, 2009, as previously amended August 12, 2010) — Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
32.2		Certification of principal financial and accounting officer pursuant to Section 1350*
4.4		Warrants to purchase 75,000 shares of the Company’s common stock, issued August 30, 2011— Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
4.5		Amended and Restated Promissory Note in the principal amount of $800,000, issued August 31, 2011 (originally issued June 24, 2010) — Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
4.6		Amended and Restated Promissory Note in the principal amount of $1,716,411, issued August 31, 2011 (originally issued June 12, 2008, as previously amended December 31, 2009 and December 31, 2010) — Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
4.7		Amended and Restated Warrants to purchase 150,000 shares of the Company’s common stock, issued August 31, 2011 (originally issued June 12, 2008, as previously amended on December 31, 2009) — Incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
4.8		Amended and Restated Warrants to purchase 526,506 shares of the Company’s common stock, issued August 31, 2011 (originally issued December 31, 2009) — Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
4.9		Form of Convertible Promissory Note in connection with the 2011 Offering — Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 26, 2011
10.1		Second Amendment to Securities Purchase Agreement, dated August 30, 2011 (originally dated December 24, 2009, as amended on December 24, 2010) — Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.2		Amended and Restated Pledge Agreement, dated August 30, 2011 (originally dated December 24, 2009) — Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011

*Filed herewith49

Exhibit No.		Description
10.3		Amended and Restated Irrevocable Payment Instruction, dated August 30, 2011 (originally dated December 24, 2009) — Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.4		Amended and Restated Put Agreement, dated August 30, 2011 (originally dated December 24, 2009) — Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.5		Letter Agreement, dated August 30, 2011— Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.6		First Amendment to Loan Agreement, dated August 30, 2011 (originally dated June 24, 2010) — Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.7		Third Amendment to Securities Purchase Agreement, dated August 31, 2011 (originally dated June 12, 2008, as amended on December 31, 2009 and December 31, 2010) — Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.8		Pledge Agreement, dated August 31, 2011— Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2011
10.9		Form of Securities Purchase Agreement in connection with the 2011 Offering — Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 26, 2011
10.10		Form of Pledge Agreement in connection with the 2011 Offering — Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 26, 2011
31.1		Certification of principal executive officer pursuant to Section 13a-14(a) — Filed herewith
31.2		Certification of principal financial and accounting officer pursuant to Section 13a-14(a) — Filed herewith
32.1		Certification of principal executive officer pursuant to Section 1350 — Filed herewith
32.2		Certification of principal financial and accounting officer pursuant to Section 1350 — Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EMERALD DAIRY INC.
Dated: May 23, 2011	By:	/s/ Yang Yong Shan
Dated: October 26, 2011	By:	/s/ Yang Yong Shan
		Yang Yong Shan Chairman, Chief Executive Officer and President
		Yang Yong Shan
Dated: May 23, 2011	By:	/s/ Shu Kaneko
		Chairman, Chief Executive Officer and
		Shu Kaneko Chief Financial Officer and Secretary
		President
Dated: October 26, 2011	By:	/s/ Shu Kaneko
		Shu Kaneko
		Chief Financial Officer and Secretary

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