The financial and business analysis in this Annual Report on Form 10-KSB (the "Report") provides information we believe is relevant to an assessment and understanding of our financial condition and results of operations. The following discussion should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 7 of this Report.

Overview

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

Our products are marketed under two brand names:

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

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

The Chinese government has initiated programs to promote milk consumption and is providing incentives to increase dairy production. The dairy market today in China is over $13.0 billion and is expected to grow at a rate of 15% per year for the foreseeable future. We focus on the infant formula segment of the market, which is expected to grow even faster, at a rate of approximately 17% through 2010. Currently, it is estimated that demand for infant formula in China outstrips supply by at least 2-to-1.

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

Because of our close proximity to its sources of fresh milk, we are able to complete the production process in approximately 30 hours, which is faster than competitors of ours that are not similarly situated. We produced approximately 7,000 tons of milk powder at our facility in Be'ian City, Heilongjiang Province, PRC in fiscal 2007, up from approximately 5,000 tons in fiscal 2006. In 2008, by adding a third shift to the existing two shifts working schedule, we plan on producing approximately 9,000 tons of milk powder. In addition, we are about to begin construction of a new production facility, which will enable us to produce an additional 9,000 tons of milk powder in fiscal 2009. As a result, we believe we will have the capacity to produce over 20,000 tons of milk powder per year by fiscal 2010. It is expected that our production of rice powder and soymilk powder will also increase in volume, while continuing to comprise approximately 3% and 2% of our overall sales, respectively.

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

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

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

Recent Developments

Reverse Merger, Private Placements and Related Transactions

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

Simultaneously with the Reverse Merger, we sold 1,333,333 units of our securities to John V. Winfield, consisting of: (i) 1,333,333 shares of our common stock, $.001 par value per share ("Common Stock"), (ii) warrants to purchase 266,667 shares of our Common Stock, at an exercise price of $0.94 per share ("Warrant W-1"), and (iii) warrants to purchase 1,333,333 shares of our Common Stock, at an exercise price of $1.50 per share ("Warrant W-2"), for an aggregate purchase price of $1,000,000 (the "First Offering"). In addition, we sold 2,061,227 units of our securities to certain additional "accredited investors" (the "Initial Purchasers"), consisting of (i) 2,061,227 shares of our Common Stock, (ii) warrants to purchase 412,245 of our Common Stock at an exercise price of $2.04 per share (the "Class A Warrants"), and (iii) warrants to purchase 2,061,227 of our common stock, at an exercise price of $3.26 per share (the "Class B Warrants"), for an aggregate purchase price of $3,359,800 (the "Initial Placement of the Second Offering"). The rights and obligations under Warrant W-1, Warrant W-2, the Class A Warrants, and the Class B Warrants are further described in "- Liquidity and Capital Resources - Warrants" below.

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

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

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

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

Trends and Uncertainties

Narrowing of Gap in Milk Consumption

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

Industry Growth

The dairy market today in China is over $13.0 billion. According to the website of China National Bureau of Statistics, between 2000 to 2005 the dairy industry in China experienced an average growth of 16% per year. English-language copies of the reports of the China National Bureau of Statistics are available on its website, free of charge, at www.stats.gov.cn/english. The dairy industry in China is projected to grow at rate of 15% per year from 2006 to 2012, to reach $32 billion by 2012.

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

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

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

· Increased popularity and acceptance of infant formula products.

Supply of Infant Formula

It is estimated that the demand for infant formula in China outstrips supply by at least 2-to-1. Production capacity has been the bottle neck for our growth in recent years because production has not been able to keep up with demand. Management has determined to build a new production facility with annual production capacity of 9,000 tons of milk powder, which is expected to start production in 2009. We expect that this increase in production capacity of approximately 130% will result in the doubling of our sales revenues, with a corresponding increase in cost of goods sold and sales and administrative expenses. Management will need to raise $10 million - $15 million to fund the construction of new production facility. We have no commitments for financing we may need to complete the construction of our new processing facility. There can be no assurance that that any additional financing will become available to us, and if available, on terms acceptable to us.

Product Pricing and Raw Material Supply

Historically we have been able to obtain raw milk and other raw materials to meet our production needs. The price of raw milk is affected by regional market in Heilongjiang China while other raw materials are affected by global markets. We expect that the raw materials we require to produce our products will continue to be available to us we grow. However, we believe the recent worldwide increases in the cost and availability of commodities, such as rice and oil, will lead to increases in prices for such commodities. To some extent, we will be able to increase the prices for our products to pass on higher raw material costs to consumers. However, there is no guarantee that we will be able to raise prices to the full extent necessary to cover rises in costs for raw materials, which could have a negative material impact on our financial condition and results of operations.

Brand Name and Product Quality

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

Organic Label Milk Products

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

Factors Affecting Raw Milk Production

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

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

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

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

Results of Operations

Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31, 2006

The following summarizes changes in our operations for the fiscal years ended periods ended December 31, 2007 and 2006. Net income increased by approximately $0.9 million, or approximately 33.3%, from approximately $2.7 million in the fiscal year ended December 31, 2006 to approximately $3.6 million for the fiscal year ended December 31, 2007. This increase in net income is attributable to the increase in sales of approximately $10.8 million, partially offset by increases in cost of goods sold of approximately $7.0 million and total operating expenses of approximately $2.9 million.

Sales and Cost of Goods Sold

                                        For the Fiscal Years Ended
                                               December 31,
                                           2007              2006

                 Sales                $   29,618,008     $ 18,816,499
                 Cost of Goods Sold       19,064,905       12,102,136
                 Gross Profit         $   10,553,103     $  6,714,363

Sales. Sales volume increased by 2,469 metric tons or 45.2%, period on period to 7,930 metric tons for the fiscal year ended December 31, 2007 from 5,461 metric tons for the fiscal year ended December 31, 2006. As a result, sales revenues increased by $10,801,509, or 57.4%, from $18,816,499 in the fiscal year ended December 31, 2006 to $29,618,008 for the fiscal year ended December 31, 2007. This increase was due to the following factors:

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

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

· We raised the price of our products during the fiscal year ended December 31, 2007, resulting in an increase of the average selling price for all by products of $290 per metric ton or 8.4% over fiscal year 2006.

Sales by product line. A break-down of our sales by product line for the years ended December 31, 2007 and 2006 is as follows:

                                                     Fiscal Year Ended December 31,
                                         2007                                               2006                           Period-on-period
                      Quantity                                           Quantity                            % of                Qty.
Product category       (tons)          $ Amount        % of sales         (tons)          $ Amount           sales             Variance

Milk powder                5,245       22,821,548             77.0            3,965        15,191,073            80.7                   1,280
Rice powder                  200          985,746              3.3              137           323,617             1.7                      63
Soybean powder               404          641,053              2.2              224           627,187             3.4                     180
Subcontracting             2,081        5,169,661             17.5            1,135       2,674,622 1            14.2                     946
Total                      7,930       29,618,008            100.0            5,461        18,816,499           100.0                   2,469

There were various changes to the break-down of sales among our product lines over the fiscal year ended December 31, 2007 as we increased production in all lines but attempted to adjust our sales mix to higher margin products. Soybean powder only accounted for 2.2% of our sales mix for the fiscal year 2007 at an average selling price of $1,587 per metric ton as compared to 3.4% of our sales mix in fiscal year 2006 at an average selling price of $2,800 per metric ton. Milk powder accounted for 77% of fiscal year 2007 sales mix at an average selling price of $4,351 per metric ton as compared to 80.7% of fiscal year 2006 at an average selling price of $3,831 per metric ton. We increased our subcontract production during fiscal year 2007 to 17.5% of the sales mix at an average selling price of $2,484 per metric ton as compared to 14.2% of the sales mix in fiscal year 2006 at an average sales price of $2,356 per metric ton.

A breakdown of our average selling price by product line for the years ended December 31, 2007 and 2006 is as follows:

                                        Fiscal Year Ended
                                           December 31,
Average selling prices      2007        2006             Variance
                               $           $          $             %
Milk powder                  4,351       3,831          520        13.6
Rice powder                  4,929       2,362        2,567       108.7
Soybean powder               1,587       2,800       (1,213 )     (43.3 )
Subcontracting               2,484       2,356          128         5.4
Total                        3,735       3,446          289         8.4

Cost of Goods Sold. Cost of goods sold increased by $6,962,769, or 57.5%, from $12,102,136 in the fiscal year ended December 31, 2006 to $19,064,905 for the fiscal year ended December 31, 2007. This increase was directly related to an increase in sales during fiscal year of 57.5%. Overall our cost per metric ton increased by $188, or 8.5% to $2,404 per metric ton in the fiscal year ended December 31, 2007 as compared to $2,216 per metric ton in fiscal year ended December 31, 2006.

A breakdown of cost of sales by product line for the years ended December 31, 2007 and 2006 is as follows:

                                              Fiscal Year Ended December 31,
                                     2007             2006                Variance
                                       $                $               $              %
Cost of sales
Milk powder                        13,909,783        9,391,933       4,517,850        48.1
Rice powder                           399,497          458,061         (58,564 )     (12.8 )
Soybean powder                        419,621          284,247         135,374        47.6
Subcontracting                      4,336,004        1,967,895       2,368,109       120.3
                                   19,064,905       12,102,136       6,962,769        57.5

Cost per units sold(per ton)
Milk powder                             2,652            2,368             284        12.0
Rice powder                             1,997            3,344          (1,346 )     (40.3 )
Soybean powder                          1,039            1,269            (230 )     (18.1 )
Subcontracting                          2,084            1,734             350        20.2
Average cost per unit sold              2,404            2,216             188         8.5

Gross Profit. Gross profit was $10,553,103, or 35.6% of our sales for the fiscal year ended December 31, 2007, compared to gross profit of $6,714,363, or 35.7% for the fiscal year ended December 31, 2006. During the fiscal year ended December 31, 2007 our gross margin on rice powder increased 101% due to an increase in the average sales price of 108.7% from and a 40.3 % decrease in the cost per metric ton from the fiscal year ended December 31, 2006. The gross margin for soybean powder declined 20.2% to 34.5% in fiscal year 2007 as compared to 54.7% in fiscal year 2006 due to decline in the average sales price of 43.3% in fiscal year 2007 as compared to fiscal year 2006.

A breakdown of gross margin by product line for the years December 31, 2007 and 2006 is as follows:

                                   Fiscal Year Ended December 31,
                                2007                             2006                   Period-on-period
                                        Gross                            Gross               Margin
Product category      $ Amount        Margin %        $  Amount        Margin %             Variance

Milk powder            8,911,766            39.0       5,799,140             38.2                     0.8
Rice powder              586,248            59.5        (134,445 )          (41.5 )                 101.0
Soybean powder           221,432            34.5         342,940             54.7                   (20.2 )
Subcontracting           833,657            16.1         706,727           1 26.4                   (10.3 )
Total                 10,553,103            35.6       6,714,363             35.7                    (0.1 )

Operating Expenses

                                              For the Fiscal Years Ended
                                                     December 31,
                                                 2007              2006
          Operating Expenses
          Selling expenses                  $    5,331,489      $ 3,481,631
          Administrative                         1,492,642          458,870
          Depreciation and amortization             51,066           37,915
          Total operating expenses          $    6,875,197      $ 3,978,416

Selling Expenses. Selling expenses overall increased by approximately $1.8 million, or approximately 51.4%, from approximately $3.5 million in fiscal year ended December 31, 2006 to approximately $5.3 million for the fiscal year ended December 31, 2007. The major factors in the increase in selling expenses are as follows:

· Selling salaries increased by $408,888 or 43.4% to $1,350,434 in 2007 from 941,546 in 2006 as we added 97 employees to our sales staff.

· Travelling expenses incurred by the sales staff increased by $304,742 or 78.8% to $691,541 in 2007 from $386,799 in 2006, this increase was also from the expansion of the sales network.

· Transportation expenses increased by $227,718 or 61.3% to $599,290 in 2007 from $371,572 in 2006 as a result of shipping more product in 2007 as compared to 2006.

· Sales staff office expenses increased by $100,574 or 67.2% to $250,224 in 2007 from $149,650 in 2006 as a result of the increase in the sales staff and network.

· Shop management fees increased by $109,957 or 257.2% to $152,701 in 2007 from $42,744 in 2006 as we increased our sales network.

Rather than using a wholesaler, our sales people deal directly with the retail outlets. This business model has higher sales expenses compared to the traditional business model, but creates better profit margins for us. For a more complete discussion regarding the costs and profits of our retail sales model, see "Business - Company Strategy - Market Strategy - Sales Channel."

Administrative Expenses. Administrative expenses increased by approximately $1.0 million, or approximately 200.0%, from approximately $0.5 million in fiscal year ended December 31, 2006 to approximately $1.5 for the fiscal year ended December 31, 2007. The major factors in the increase in administrative expenses are as follows:

· Consultant expenses related to the reverse merger and acquisition of $450,000 in 2007 not incurred in 2006.

· Liquidated damages incurred in 2007 of $215,299 from registration rights agreements not incurred in 2006.

· Increase of administrative salaries of $76,657 or 74.3% to 179,876 in 2007 from $103,218 in 2006, as a result of our hiring of four additional administrative personnel during 2007.

· Increase in entertainment expenses of $46,538 or 61.9% to $121,610 in 2007 from $75,071 in 2006 due to increased travel and entertainment by administrative personnel to develop financing and funding for the Company's growth.

· Increase of travel expenses of $18,596 or 19.4% to $114,231 in 2007 from $95,635 in 2006 due to the increase in travel by administrative personnel to develop financing and funding for the Company's growth.

· Increase of office expenses of $22,926 or 33.7% to $91,038 in 2007 from $68,112 in 2007 due to the increase in administrative personnel and increased costs.

Provision for Income Taxes

                                   For the Fiscal Years Ended
                                          December 31,
                                    2007                2006
Provision for Income Taxes
Current                        $      118,325       $      39,349
Deferred                                    -                   -
                               $      118,325       $      39,349

Provision for Income Taxes. Income taxes increased by $78,976, or approximately 200.7%, from $39,349 in fiscal year ended December 31, 2006 to $118,325 for the fiscal year ended December 31, 2007. This increase was due to the increase in our pre-tax income.

Liquidity and Capital Resources

Uses of Capital

                                                                  For the Fiscal Years Ended
. . .