The aim of this study was to explore possibilities of utilization of animal feed grade damaged wheat (ADW) in lamb feeding, and assess the effect of ADW and its aflatoxin on intake, growth, haematology, blood biochemical constituents and immunological status. The ADW is a slightly mouldy feed resource, which is not suitable for human consumption. The experimental ADW contained dry matter (DM) 964, organic matter 974, crude protein 153, cellulose 205 and lignin 24, and starch 732 g/kg DM. ADW also contained aflatoxin B1 50 microg/kg due to mould infestation. Thirty-five weaner lambs (90 +/- 15 days of age and 16.1 +/- 0.82 kg body weight) in a randomized design were fed for 91 days on one of four composite feed mixtures (roughage to concentrate ratio of 25:75) containing 0, 118, 235, 353 or 470 g/kg ADW, which replaced equal amounts of maize and at these inclusion levels ADW replaced 0%, 25%, 50%, 75% and 100% maize in lamb diets respectively. Dry matter intake (DMI) was similar in different level of ADW fed lambs but ADW inclusion linearly (p = 0.016) reduced DMI. Average daily gain (g/day) was higher (p = 0.038) in lambs fed 353 g ADW diet. Haematological attributes viz. WBC, haemoglobin (Hb) and mean corpuscular volume did not affect by ADW feeding whereas it increased haematocrit, mean cell Hb and decreased neutrophil, RBC counts and mean cell Hb concentration. Blood glucose and urea-N increased whereas albumin and protein level reduced by ADW feeding. ADW feeding of lambs did not affect serum IgG level. The activities of serum aspartate aminotransferase, alkaline phosphates and acid phosphates were not affected, whereas alanine aminotransferase increased linearly (p = 0.001) with increasing levels of ADW. It is concluded that ADW containing aflatoxin B1 50 microg/kg DM can safely be incorporated in growing lamb feeding up to 353 g/kg diet without affecting growth and cellular immunity, however ADW may induce a transient alteration of hepatic enzymatic activities. Further aflatoxin content of the diet should be kept within permissible limits of respective country.