**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**










**FORM
      10-KSB/A**


**(AMENDMENT
      NO. 3)**









x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 For the fiscal year ended - MARCH 31, 2006


OR


o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 For the transition period from





Commission
      file number 000-50601





**SYNUTRA
      INTERNATIONAL, INC.**





DELAWARE
              (State
                or Other jurisdiction
              of
                Incorporation or Organization)
            13-4306188
              I.
                R. S. Employer Identification No.





2275
      RESEARCH BLVD. SUITE 500


ROCKVILLE,
      MARYLAND 20850


301-840-3888





Securities
      registered pursuant to Section 12(b) of the Act:





TITLE
                OF EACH CLASS
            
            NAME
                OF EACH
              EXCHANGE
                ON WHICH REGISTEREDNONE
            
            NONE





Securities
      registered pursuant to Section 12(g) of the Act:





TITLE
                OF EACH CLASS
            COMMON
                STOCK $0.0001 Par Value





Indicate
                by check mark if the registrant is not required to file reports pursuant
                to Section 13 or Section 15(d) of the Exchange Act. YesoNoxIndicate
                by check mark whether the issuer (1) filed all reports required to
                be
                filed by Section 13 or 15(d) of the Exchange Act during the past
                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. YesxNooIndicate
                by check mark if no disclosure of delinquent filers in response to
                Item
                405 of Regulation S-B is not contained in this form, and no disclosure
                will be contained, to the best of registrant’s knowledge, in definitive
                proxy or information statements incorporated by referenced in Part
                III of
                this Form 10-KSB or any amendment to this Form 10-KSB.xIndicate
                by check mark whether the registrant is a shell company (as defined
                in
                Rule 12b-2 of the Exchange Act).
              YesoNox














State
      issuer’s revenues for its most recent fiscal year March 31, 2006: $132.69
      million.





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity as of June 15,
      2006: $435 million.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity:
      50,000,713 shares as of June 15, 2006.







**EXPLANATORY
      NOTE:**





We
      are
      filing this Amendment No. 3 to the Synutra International, Inc. (“we”, or the
“Company”) Annual Report on Form 10-KSB for the fiscal year ended March 31,
      2006, in response to comments issued by the staff of the Division of Corporation
      Finance of the Securities and Exchange Commission (“SEC”). SEC issued their
      comments to the Company on January 3, 2007 in connection with its review of
      the
      Company’s Annual Report on Form 10-KSB/A Amendment No. 2 for the fiscal year
      ended March 31, 2006 filed with SEC on November 13, 2006.





Based
      on
      comments and discussion with SEC, and after consultation with the Company’s
      independent registered public accounting firm, the Company amended this filing
      as follows to include, revise or omit information necessary to improve the
      disclosures:




·
            The
                Consolidated Statement of Change in Shareholders Equity for the year
                ended
                March 31, 2006 has been restated to retroactively reflect the cancellation
                of shares of common stock of Vorsatech.  ·
            The
                Consolidated Statement of Income for the years ended March 31, 2006
                and
                2005 has been restated to reclassify certain sales (and related costs)
                of
                nutritional supplement ingredients, anhydrous milk-fat, non-fat dry
                milk,
                and toll packaging and blending services as part of revenue and cost
                of
                sales instead of other income/(expenses). Related disclosures in
                Note 10
                and Note 18 to the Consolidated Financial Statements have been revised
                to
                explain the reclassification.  ·
            Disclosure
                has been added to Note 18 to the Consolidated FinancialStatements
                to explain how the Company determined the value of the 2,879,500
                shares
                issued as transaction costs.  ·
            Disclosures
                have been added to Item 6 MD&A to describe and quantify certain
                underlying material activities that generate income statement variances
                between periods.  ·
            Disclosure
                has been added to Note 7 to the Consolidated Financial Statements
                to
                elaborate upon how the Company evaluated the related parties and
                to
                provide supplemental information describing the economic substance
                of each
                of these entities.  ·
            Disclosures
                have been added to Note 3 (N) to the Consolidated Financial Statements
                to
                clearly describe the return rights of distributors and retailers.
                Related
                disclosures have been revised to resolve a confusion that had mixed
                the
                discussion of a sales expense provision together with product return
                policy discussions.  ·
            Disclosure
                has been revised in Note 2 to the Consolidated Financial Statements
                to
                correct an inaccurate wording which indicated that Qingdao Women
                and
                Children Nutrition Research Co., Ltd. was consolidated as of March
                31,
                2005.  ·
            Disclosure
                has been added to Note 1 to the Consolidated Financial Statements
                and the
                Overview sections of Item 1 Description of Business and Item 6 MD&A to
                clarify the voting interest in Sheng Zhi Da Dairy Group Corporation
                and
                Beijing Honnete held by Mr. Zhang and Ms. Meng as of December 31,
                2003.




Except
      as
      described above, all other information is unchanged and reflects the disclosures
      made at the time of the original filing of Form 10-KSB and this Form 10-KSB/A
      does not otherwise reflect events occurring after the original filing of Form
      10-KSB or otherwise modify or update these disclosures. Accordingly, this Form
      10-KSB/A should be read in conjunction with our filings with the Securities
      and
      Exchange Commission subsequent to the filing of the original Form
      10-KSB.













**TABLE
      OF CONTENTS**





PART
                IITEM
                1.
            DESCRIPTION
                OF BUSINESS
            1PART
                IIITEM
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            19ITEM
                7.
            FINANCIAL
                STATEMENTS
            31PART
                IIIITEM
                13.
            EXHIBITS
            32SIGNATURES









i




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**Overview**





Through
      its wholly owned subsidiary, Synutra Inc., an Illinois corporation (“Synutra
      Illinois”), Synutra International, Inc. (the “Company” or “Synutra”) owns all of
      the equity interests of six companies in the People’s Republic of China,
      (“China” or the “PRC”), each engaged in different stages of the production,
      marketing, packaging and development of dairy based nutritional products in
      China for infants, children, pregnant women and nursing mothers, and other
      adults under the brand names of Super, U-Smart, U-Strong, and National
      Standards. Approximately 90% of the revenue for the fiscal year ended March
      31,
      2006 was from pediatric products and the rest from adult and other products.
      In
      September 2005, Synutra launched a new rice cereal product line, and in March
      2006 the Company launched new premium infant formula products and line
      extensions. As supplemental foods to infant and children formula products,
      management believes that rice cereal products possess significant market
      potential. The new premium products and line extensions were designed to capture
      the fastest growing segment of the infant formula market in China. At the same
      time, Synutra also began to make and sell non-fat dry milk as well as anhydrous
      milk-fat.





Qingdao
      Sheng Yuan Dairy Co., Ltd. is engaged in the sales and marketing of dairy based
      nutritional products for infants, children and adults under its brand names
      of
      Super, U-Smart, U-Strong, and National Standards. Qingdao Sheng Yuan Dairy
      Co.,
      Ltd. was formed in January 1998 by Sodiaal Industrial Co. Ltd (55%) and Beijing
      Honnete Dairy Co., Ltd. (45%) an affiliate of Mr. Liang Zhang, the Company’s
      Chief Executive Officer. In December 2003, Sodiaal Industrial Co.Ltd transferred
      15% of its ownership to Beijing Honnete Dairy Co., Ltd, and transferred 40%
      of
      its ownership to Synutra Illinois. In February 2004, Beijing Honnete Dairy
      Co.,
      Ltd, transferred 60% of his ownership to Sheng Zhi Da Dairy Corporation, In
      February 2005, Sheng Zhi Da Dairy Corporation transferred 60% of its ownership
      to Synutra Illinois, resulting in a 100% of ownership of Qingdao Sheng Yuan
      Dairy Co., Ltd. by Synutra Illinois.





Qingdao
      ST George Dairy Co., Ltd. is engaged in the production, packaging, shipping
      and
      distribution of all of Synutra’s products. Qingdao ST George Dairy Co., Ltd. was
      formed in September 2001 by Synutra Illinois. In March 2004 Synutra Illinois
      transferred 75% of Qingdao St George Dairy Co., Ltd ownership to Sheng Zhi
      Da
      Dairy Corporation and Synutra Illinois retained 25% of the company. In February
      2005 Sheng Zhi Da Dairy Corporation transferred all of its ownership in Qingdao
      St. George Dairy Co., Ltd. (75%) to Synutra Illinois, resulting in a 100%
      ownership of Qingdao St. George Dairy Co., Ltd by Synutra Illinois.





Beian
      Yi
      Pin Dairy Co., Ltd. (“Beian”) is engaged in the production and processing of
      adult dairy based nutritional products and various milk powder products. Beian
      Yi Pin Dairy Co., Ltd. was formed In June 2004,by Sheng Zhi Da Dairy Corporation
      and Synutra Illinois-. In January 2005, Sheng Zhi Da Dairy Corporation
      transferred 71.26% of its ownership in Beian to Synutra Illinois, resulting
      in a
      100% ownership of Beian Yi Pin Dairy Co., Ltd. by Synutra Illinois





Luobei
      Sheng Yuan Dairy Co., Ltd. (“Loubei”) is engaged in the production and
      processing of Synutra’s products for infants and children under the brand names
      U-Smart, U-Strong, and National Standards under the “Sheng Yuan” label. Loubei
      was formed in April 2001 by Mr. Liang Zhang, and Ms. Xiu Qing Meng. In June
      2003, Mr. Zhang transferred 67% of his ownership to Sheng Zhi Da Dairy
      Corporation. In January 2005, Ms. Xiu Qing Meng transferred 33% of her ownership
      to Synutra Illinois , Sheng Zhi Da Dairy Corporation transferred 67% of its
      ownership to Synutra Illinois, resulting in a 100% ownership of Luobei Sheng
      Yuan Dairy Co., Ltd by Synutra Illinois.





Qingdao
      Mother and Infant Nutrition Research Company Limited is engaged in the research
      and development of various nutritional products for both infants and children
      as
      well as pregnant and lactating women. Qingdao Mother and Infant Nutrition
      Research Company Limited was formed in April 2004 by -Sheng Zhi Da Dairy
      Corporation (80%) and Ms. Xiu Qing Meng (20%). In May 2005, Sheng Zhi Da Dairy
      Corporation transferred 80% of its ownership to Synutra Illinois and Ms. Xiu
      Qing Meng transferred 20% of her ownership to Synutra Illinois, resulting in
      a
      100% ownership of Qingdao Mother and Infant Nutrition Research Company Limited
      by Synutra Illinois.





1


Chabei
      Sheng Yuan Dairy Co., Ltd. is engaged in the production and processing of all
      of
      Synutra’s products under the brand names Super, U-Smart, U-Strong, and National
      Standards. Chabei Sheng Yuan Dairy Co., Ltd. was formed in February 2002, by
      Ms,
      Xiu Qing Meng (20%) and Sheng Zhi Da Dairy Corporation (80%). In March 2005,
      Ms.
      Xiu Qing Meng transferred 20% of her ownership to Synutra Illinois and Sheng
      Zhi
      Da Dairy Corporation transferred 80% of its ownership to Synutra Illinois,
      resulting in a 100% ownership of Chabei Sheng Yuan Dairy Co., Ltd. by Synutra
      Illinois. In August 2005, Chabei Sheng Yuan Diary Co., Ltd. was merged with
      Zhangjiakou Sheng Yuan Diary Co., Ltd. Zhangjiakou Sheng Yuan Diary Co., Ltd.
      emerged as the surviving entity from the merger.




Zhangjiakou
      Sheng Yuan Dairy Co., Ltd. (“Zhangjiakou”) is engaged in the production and
      processing of all of Synutra’s products under the brand names Super, U-Smart,
      U-Strong, and National Standards. Zhangjiakou Sheng Yuan Dairy Co., Ltd. was
      formed in March 2004 by Sheng Zhi Da Dairy Corporation(40%) and Synutra
      Illinois(60%). In March 2005, Sheng Zhi Da Dairy Corporation transferred 40%
      of
      its ownership to Synutra Illinois, resulting in Synutra Illinois owing 100%
      of
      Zhangjiakou.





As
      of
      December 31, 2003, Mr. Zhang and Ms. Meng held 80% and 18.8%, respectively,
      of
      Beijing Honnete Diary Co., Ltd. They also held 71.43% and 14.29%, respectively,
      of the voting interest in Sheng Zhi Da Dairy Group Corporation at December
      31,
      2003.





On
      July
      15, 2005, pursuant to a Share Exchange Agreement dated as of June 14, 2005
      among
      the Company, Thomas Braun, Beams Power Investment Limited, Strong Gold Finance
      Ltd and Synutra Illinois, the Company issued 48,879,500 shares of its common
      stock in exchange for all of the issued and outstanding shares of Synutra
      Illinois that owned all the registered capital of the six subsidiaries (the
      “Exchange”). As a result of this Exchange, Synutra Illinois became a wholly
      owned subsidiary of the Company.





On
      September 9, 2005 the Company changed its name to Synutra International, Inc.





**THE
      INDUSTRY**





There
      are
      about 18 million new babies born each year in China according to the National
      Statistics Bureau of the PRC. Synutra’s management initially estimated that an
      average infant in China consumes approximately 30 kilograms per year of dairy
      products and that infants generally consume dairy based formula products for
      approximately 2.5 years. Therefore Synutra’s management has estimated the
      potential market demand for infant formula products per year in China to be
      approximately 1.35 million tons. Based on Chinese industry statistics,
      management has calculated that the actual production volume of infant formula
      dairy products was more than 260,000 tons in 2005. Therefore, management
      believes that there is still potential for growth in demand for infant formula
      dairy products in China. Synutra’s management estimates that the total market
      size of dairy based nutritional products for infants and children in terms
      of
      sales in China was about US$1.8 billion during 2005, representing a 5% growth
      rate over the past year. Currently, the sales growth has been mainly derived
      from increasing demand from medium size urban areas.





The
      alternative to using infant formula is the choice to breastfeed. Synutra’s
      management believes that Chinese woman generally only breastfeed babies for
      the
      first six months of an infant’s life. After the first 6 months, management of
      Synutra believes that there are several reasons why mothers may choose to use
      infant formula over breastfeeding: first, many mothers have to go back to work
      after 6 months making breastfeeding harder to manage, and second, the current
      infant formula products available in the Chinese market do provide adequate
      nutritional value and, therefore, mothers are more likely to be comfortable
      using formula as an adequate breast milk substitute.





2


In
      addition, China’s consumer market has rapidly developed in recent years and this
      has created a greater demand for more modern food products. Increased income
      levels have allowed consumers to buy better quality and more sophisticated
      food
      products, particularly in the baby food sector. Because of the One Child Policy,
      where most Chinese families are only allowed by the state to have a single
      child, parents and extended families tend to lavish a great deal of time, money
      and attention on the child. The demand for better quality products has come
      from
      parents being able to afford to spend more on feeding their babies and for
      better quality of products and a greater variety of foods, in order to give
      the
      child a better balanced diet. This demand is also leading to the development
      of
      more products containing added nutrients, including various essential fatty
      acids, vitamins and minerals.





According
      to China’s National Statistics Bureau, about 70% of the 18 million babies per
      year are born in rural areas where access to and availability of infant formula
      products are limited or these products were less affordable. In 2004 the milk
      powder market in rural China was estimated at about $500 million, representing
      a
      20% per annum growth, largely due to increases in rural income. As the Chinese
      economy progresses, Synutra’s management estimates that the total infant formula
      market could reach 4 million tons per year in the next decade, representing
      significant increases in the market.





According
      to a study by A.C. Nielson, a U.S. market research organization, in 2004 the
      top
      ten producers sold about 90% (by revenue) of the products sold in China, among
      which the foreign producers sold approximately 67% (by revenue) of the products,
      with the balance by Chinese producers.





In
      recent
      years, there has been increasing demand in China for high-end/premium infant
      formula products due to increasing consumer awareness on brand image and
      nutritional value of the products and services offered by the producers. In
      addition to generic food industry regulations, the Chinese government introduced
      in 2003 regulations for infant and child food manufacturers, specifying
      standards of company size and scale of production, technical expertise and
      suitability of production facilities (such as the good manufacturing practice
      standards). As such, the barrier to entry in the infant formula industry has
      increased, and Synutra’s management believes that many small scale infant
      formula producers have ceased operations in light of the new regulations.





There
      is
      no available market study for the adult dairy based nutritional products.
      According to management of Synutra, the current estimated market size of adult
      dairy based nutritional products is about 500,000 tons in volume and
      US$1.5billion in sales during 2004. The management of Synutra estimates that
      approximately 70% of the current manufacturers in this market were originally
      milk powder manufacturers, with the rest of the market consisting of infant
      formula manufacturers who have expanded their manufacturing into adult dairy
      nutritional products. Management of Synutra believes that infant formula
      manufacturers may have better technology, know-how, brand image and compliance
      capability to expand into the adult market compared to those solely milk powder
      producers.





**SYNUTRA
      PRODUCTS**





**Products**





Synutra
      products include a broad line of pediatric and adult nutritionals. These
      products are mostly sold through distributors, or directly to consumers,
      sometimes on the recommendation of physicians or other health care
      professionals.





Synutra’s
      pediatric nutritional products which accounted for about 90% of Synutra’s 2005
      revenue, are marketed and sold under the “Sheng Yuan” label with brand
      designations including Super, U-Smart, U-Strong , and National Standard.
      Synutra’s pediatric nutritional product lines, which include infant formulas as
      well as rice cereal products, cover the full range of pricing tiers in the
      China
      marketplace. Synutra’s premium product line of Super series was launched in mid
      2005 and has experienced the fastest growth among all Synutra pediatric product
      lines. The U-Smart series products form Synutra’s flagship product line and are
      priced and marketed as the mid-to-high end infant formula segment of the Chinese
      market in terms of its quality and pricing. The U-Strong and National Standard
      brands among the pediatric lines target the mid to lower priced market segment,
      largely in less developed markets. Synutra also sells and markets adult dairy
      based nutritional products under the “Sheng Yuan” label, which accounted for
      about 10% of its 2005 revenue.





3


In
      2004,
      Synutra’s infant formula products were ranked number 8 in China among all
      manufacturers in terms of revenue (based on market study conducted by
      A.C.Nielson) and number 3 among only Chinese manufacturers (based on the same
      study).





Among
      Synutra’s pediatric lines, the Super series premium infant formula product
      contains DHA/ARA, (docosahexanoic acid and arachidonic) acid, long-chain
      poly-unsaturated fatty acids found


in
      breast
      milk that may aid in the development of an infant’s brain, eyes and nervous
      system. Studies have suggested that DHA- and ARA-fortification can bring some
      of
      the nutritional benefits of breast milk to formula-fed babies. Synutra’s
      mainstay “U-Smart” formula product line also contains DHA/ARA fortification and
      is priced slightly lower than the premium Super series product. Synutra sells
      a
“U-Strong” specialty formula for infant and children that contains calcium
      fortification and is moderately priced. Finally, Synutra sells a “National
      Standard” infant and child formula that meets national regulatory standards in
      formulation and nutritional value which is sold at a lower and more affordable
      price.





Following
      its fast-growing Super high-end product line, Synutra launched in March 2006
      the
      U-Smart Gold series to capitalize on the broad U-Smart brand appeal while
      capturing the fastest growing premium product sector.





Each
      of
      the “Super,” “U-Smart,” “U-Strong” and “National Standard” lines have multiple
      stages of formulation designed to meet nutritional requirements in various
      stages of babies and children’s lives that help to promote healthy development.
“U-Smart, Stage 1,” for example, is designed for newborns up to 6 months of age;
“U-Smart, Stage 2,” for babies of 6 to 18 months; and “U-Smart, Stage 3” is for
      toddlers of 1 to 3 years of age. The “Super,” “U-Strong,” and “National
      Standard” products have the similar stages of product formulations. A Stage Zero
      product in the Super or U-Smart line is a formula that caters to pregnant women
      and lactating mothers with a special formulation designed to help meet the
      demanding nutritional requirements during pregnancy and nursing periods.





Synutra
      sells formulated milk powder products that are marketed for the elderly and
      women, students, and young adults under the Sheng Yuan label. These products
      come in formulations that are developed to address health concerns of various
      age group consumers, such as those of middle-aged and elderly consumers in
      cardiologic health, diabetic conditions, and calcium deficiency. Synutra also
      has a product specially designed for young adults to address their needs in
      calcium and other nutrients fortifications. In the adult formulated milk powder
      area, Synutra offers a range of products in whole milk powder, calcium plus,
      and
      a sweet powder, targeting a broader market.





Management
      of Synutra believes that the market for adult formulated milk powder will be
      a
      growth area for the Company as it leverages its existing sales and marketing
      channels for its infant formula, brand recognition and expertise in Synutra’s
      infant formula business to grow sales and increase the number of product lines
      in the adult nutrition business.





The
      bulk
      of Synutra pediatric and adult nutritional products comes in three type of
      retail packaging: a tin canister, a standup/display pouch, or a sealed pack
      in a
      box. All packaging labels carry compliant product information, nutritional
      profile, user instructions, product tracing data and shelf life date, product
      certification status, quality control and assurance remarks, manufacturer
      contact information, as well as customer service information. Select pediatric
      and adult products are also retail-packaged in single use sizes.





Although
      most of the company’s sales consist of its branded products, it also pursues
      private-label opportunities for certain like kind products. Synutra works with
      its private-label customers to develop customized formulations of products
      on an
      as needed basis. Synutra also utilizes excess capacity to provide toll packaging
      and toll drying services to OEM customers.





4




**Production
      and Processing**





*Raw
      Materials* .
      Synutra’s business depends on obtaining adequate raw materials. A key ingredient
      is fresh fluid milk. The Company has met its needs by purchasing fluid milk
      on
      the open market in established dairy regions in northern and northeastern China.
      Synutra negotiates the purchase price of milk with many dairy farmers and
      cooperatives on the basis of milk quality and other terms and conditions. In
      certain cases, Synutra has worked in partnership with local government economic
      development and poverty reduction programs available to fresh milk suppliers
      to
      help finance portions of their herd. Synutra provides targeted loans to
      suppliers who are located in the regions where Synutra’s manufacturing plants
      are located.. Currently about 30% of Synutra’s fresh milk suppliers take
      advantage of these financing programs. As such, these loans sustain the
      suppliers through demand fluctuations and therefore add to stability and
      availability of its fresh milk supply. Through this ongoing public-private
      partnership program, Synutra had extended financing to over 100 qualified dairy
      farmers in the Chabei ranch region of Hebei province. The aggregate amount
      of
      such loans by Synutra is currently at approximately RMB 9 million (USD $1.2
      million).





The
      other
      key ingredient used in manufacturing infant formula products is de-mineralized
      whey protein powder that is used to reconstitute dairy-based formula to make
      it
      more like human milk. Synutra obtains all of it s supply of whey protein powder
      on an arm’s length terms from Beijing Honnete Dairy Co., Ltd., a large volume
      trader of processed dairy products in China.   Beijing Honnete Dairy Co.,
      Ltd., a company controlled by Liang Zhang, the Company’s Chief Executive
      Officer, currently supplies about 70% of China’s whey protein powder.





Synutra
      has entered into a licensing agreement with Martek Biosciences Corporation
      to
      supply Synutra with Martek’s formulation of the DHA and ARA fatty acids for
      incorporation into Synutra’s products. As noted above, these fatty acids are
      considered beneficial to infant brain and vision development. Martek’s fatty
      acids are the only FDA approved products on the market that are considered
      to be
      safe for use in infant formulas. This licensing agreement provides Synutra
      with
      rights to market its products (infant formulas fortified with Martek DHA and
      ARA
      fatty acids) with label reference to their FDA GRAS status of such, at a given
      purchasing price, and with periodic royalty payments with rates that diminish
      over 25 years to end up with no royalty due at the end of that period.





*Processing* .
      Three
      of Synutra’s subsidiaries, Zhangjiakou, Luobei, and Beian, currently process and
      manufacture the full range of formulated milk powder products that are designed
      and marketed as infant and child formulas, and other adult nutritional
      supplements. Synutra continuously monitors its inventory and product mix against
      forecasted demand and schedules production processing accordingly. Synutra
      has
      established processing systems that employ advanced and up-to-date procedures
      and formulation schemes. A typical Synutra manufacturing process includes
      collection and preparation of fresh milk, and mixing in the whey protein and
      other nutrients to the specifications of product formulas. The mixture is then
      sterilized, condensed and spray-dried. Then the resulting powder will be checked
      to ensure proper granule size. Extensive quality control testing occurs before,
      during, and after the manufacturing process as described in “Research and
      Development” below. Synutra uses commercial strength 25KG poly kraft bags for
      packaging before shipping the formula products to its retail packaging and
      distribution facilities. Synutra maintains cold storage facilities at each
      of
      these three manufacturing subsidiaries to store fluid milk for specified
      durations. All of Synutra’s manufacturing plants are equipped with in house
      laboratories for production and quality assurance and quality control purposes.
      Synutra’s Zhangjiakou plant has an installed annual production capacity of
      22,000 tons; the Luobei plant has a capacity of 3,000 tons a year; and Beian,
      another 3,000 tons. Synutra believes it has sufficient capacity for
      manufacturing its products for the foreseeable future.





*Packaging* .
      One of
      Synutra’s subsidiaries, Qingdao ST George Dairy Co., Ltd., currently serves as
      the main packaging plant which receives from Synutra’s manufacturing facilities
      commercially packaged products and repackages them into retail size container
      tins or stand-up display pouches. This packaging facility currently also
      provides inventory control and logistics management, as well as product quality
      monitoring and product development assistance. The packaging plant also
      maintains certain dry blending capabilities whereby certain pre-packaging
      product modification and formulation adjustments can be performed to address
      its
      private label customer needs. The packaging plant currently has an installed
      capacity of 20,000 tons per year.





5




*Distribution* .
      Synutra’s packaging subsidiary also serves as its national distribution center
      in China. Synutra employs trucking companies locally and nationally to
      distribute retail packaged products to various regional and provincial
      distribution centers. Synutra is currently only distributing its products in
      China. Synutra has not finalized any plans to grow the business and sales
      outside of China but it is currently considering future distribution of its
      products to countries in South Asia and Southeast Asia.





**RESEARCH
      AND DEVELOPMENT**





All
      of
      Synutra’s product formulations have been developed internally and are
      proprietary. Synutra currently owns and manages 8 registered trademarks of
      its
      brand names in China, 1 registered trademark in Hong Kong, and **** 1 **** registered
      trademark in the U.S., in addition to another 8 trademark applications that
      are
      pending approval. **** Key
      employees of Synutra who have access to proprietary formulations are required
      to
      sign non-disclosure agreements. Synutra uses internal procedures and safeguards
      to protect the confidentiality of its information. In fiscal year 2006, Synutra
      spent an estimated RMB 5 million on research and development.





Synutra
      places primary importance on quality and has established a quality control
      system and food safety managing systems for the purchase of raw materials,
      fresh
      milk checks, production, packaging, storing, transporting, as well as after
      sales service. Synutra places testing equipment or implements control procedures
      at each stage of production including at the purchase of raw materials to ensure
      the highest ingredients and product quality as well as product safety. Every
      step of production, transportation and storage has strict internal regulation
      and is consistently monitored by highly trained employees. Each employee has
      been specifically trained for quality control purposes. Synutra has been
      increasing its investment in quality control equipment and training. During
      fiscal year 2006, Synutra spent approximately RMB 1 million in quality control
      equipment and training.





Synutra
      engages in constant product refinement and new product development for dairy
      based formulations, as well as other forms of foods and nutritional supplements.
      One key aspect of product refinement, for example, is prolonging product
      shelf-life and improvement in product sensory profile. Synutra’s research and
      development team has developed micro-encapsulations of various fatty acids
      that
      help to slow the fatty acid’s oxidation in the products that reduces shelf-life
      and gives stale tastes. In new product development, Synutra seeks to extend
      its
      new product pipeline well into the next 3 to 5 years with formulations and
      product concepts in dairy based formula products as well as other nutritional
      food products and supplements. Synutra has developed a variety of delivery
      systems such as orally delivered supplements in a pill format and single use
      packages which provide the formula in easy to use single packages that are
      easy
      to carry instead of a canister that provides multiple servings of formula and
      is
      relatively bulky.





**SALES
      AND MARKETING**





Synutra
      generally sells nutritional products directly to retailers and wholesalers,
      in
      addition to health care facilities and government agencies. Currently, primary
      marketing efforts for nutritional products are directed at extending retail
      coverage in terms of geography and market tiers. Additional efforts are made
      toward securing the recommendation of Synutra's brand of products by physicians
      or other health care professionals. In addition, certain nutritional products
      are also promoted through direct to consumer marketing efforts. Super and
      U-Smart retail products are also promoted directly to the public by consumer
      advertising. These products are generally sold directly to retailers and
      wholesalers.





Synutra
      has a sales network throughout 24 provinces and municipalities, covering 259
      regional cities, more than 800 counties, and close to 13,000 townships. The
      sales group is divided into 2 sub-national regions, Southern and Northern China.
      The Southern China region covers in the aggregate 10 provincial sales regions,
      including Hubei, An’hui, Yuedong, Yuexi, Sichuan, Chongqing, Hunan, Jiangxi,
      Yungui and Fujian. The Northern China region covers Heiji, Liaoning, Jinji,
      Henan, Ludong, Luxi, Xibei, Jiangsu, Zhejiang, and Beijing. Each provincial
      sales region covers 8 to 20 city sales areas which act as an operation unit,
      while each city sales area covers 3 to 20 county sales areas which act as an
      operation unit. The sales team consists of a regional manager for each of the
      Northern and Southern China sales regions, plus an additional 20 provincial
      and
      200 city managers throughout China. In addition, Synutra hires for each city
      sales manager approximately 25 temporary consultants who are located at retail
      stores throughout China. Synutra hires and trains these consultants to work
      at
      specific stores for a limited period of time to provide specific information
      about its products directly to the consumers. Synutra uses a “portfolio” sales
      approach so that all sales personnel have the ability to sell Synutra’s entire
      product line. As of March 2006, Synutra retain a total sales force of
      approximately to 1,400 employees with a layered management structure, along
      with
      about 7,000 commissioned field nutrition consultants or retail site promoters.





6




Synutra
      works with 388 first tier regional and city distributors, about 800 second
      tier
      sub-distributors, and more than 46,000 retail shops or points of sale that
      work
      directly with Synutra’s sales team. The first tier distributors normally have
      exclusive distribution rights in the respective regions and cities to distribute
      Synutra products, and are also responsible for developing the second tier
      sub-distributors in their own region and cities. Synutra typically signs an
      annual contract with each of its distributors, which establish a range of sales
      obligations for the individual distributors and the respective pricing range.
      The retail sales personnel located at the store level are engaged on a short
      term basis and are compensated based on commissions for sales. Synutra intends
      to expand its sales organization into additional provinces, cities and
      municipalities that it does not currently serve.





Synutra
      maintains and plans to grow a specialized marketing and sales team of close
      to
      400 trained employees to work in areas of brand promotion, medical promotion
      and
      hospital brand recognition for its products (except for products for infants
      of
      less than 6 months of age). Synutra has established a national customer service
      call center providing live and toll-free information support to customers and/or
      potential customers in prenatal, nursing, baby care education, product
      information, and complaint and dispute resolution.





Synutra’s
      principal customers are supermarkets and retail stores. No single Synutra
      customer accounts for more than 10% of Synutra’s sales.





Synutra’s
      marketing efforts include advertisements though TV, consumer magazines, radio,
      catalogue, and the internet, as well as field promotion activities with
      supermarket chains, and entertainment companies targeting the children’s market.
      These included a 2005 campaign in partnership with the Walt Disney Company
      that
      was targeted to 100,000 consumers, and a 2006 Super Baby Photo Contest in
      conjunction with the nationally recognized internet portal company Sohu.com
      that
      was targeted to 200,000 consumers. The total marketing expense for year 2005
      was
      more than 10% of gross revenue.





**GOVERNMENT
      REGULATION**





A
      number
      of key local and national government agencies are involved in approval for
      manufacturers in the infant formula market in China, including the Industry
      and
      Commerce Management and Administration (ICMA) Bureau, the Taxation Registration
      Office, Health and Hygiene Permitting Office (HHP), and the State Food and
      Drug
      Administration Bureau (SFDA).





In
      2003,
      the State Food and Drug Administration Bureau promulgated regulations requiring
      that all infant formula manufacturers and distributors must obtain SFDA permits
      before engaging in business activities involving nutritional products for infant
      and children. There are a number of criteria that include employees must be
      certified and qualified by the SFDA, the production facilities must have
      adequate equipment and facility space, the facilities must have a certain level
      of technology advancement, and the facilities must meet with the good
      manufacturing practice (GMP) standard. SFDA field offices are charged with
      review and approval of all nutritional products of manufacturers intended for
      infant and children. In order to manufacture, sell and market infant formula
      in
      China, each manufacturer must have a Product Registration Number (ICMA), the
      Health and Hygiene Permit Number (HHP) and the Infant and Children Food
      Production Permit Number (SFDA). Synutra has complied with all applicable
      regulations and permits for each of its products, and all of Synutra’s products
      carry certification marks issued by SFDA and other relevant government agencies.





7




In
      1981,
      the World Health Organization (WHO) and the United Nations Children’s Fund
      (UNICEF) jointly established the *International
      Code of Marketing of Breast-milk Substitutes* ,
      in
      order to sustain and encourage more breastfeeding of infants. The Code has
      set
      clear guidelines and restrictions on the marketing of infant formulas (defined
      as breast-milk substitute formulated for infants up to and between 4 and 6
      months of age). As a member state to both organizations, China ascribes to
      the
      Code and the government promulgated in 1991 the *China
      Code of Marketing of Breast-milk Substitutes (Draft)* ,
      which
      places strict limitations on ways of advertising, promoting, and marketing
      infant formulas (as defined by WHO) in China. These restrictions specifically
      prevent manufacturers, distributors, and marketers of infant formulas from
      giving free samples, promotional discounts, donating equipment, funding, and
      information to healthcare and medical organizations under conditions that serve
      promotional purposes, and from advertising in a broad range of media outlets.
      The practice of these codes and rules are aimed at stemming the decline in
      the
      population’s breastfeeding rate. In the years since it entered the business,
      Synutra has strived to stay compliant with these codes and restrictions. All
      Synutra infant formula products are labeled and accompanied with instructional
      materials that disclose in prominent fashions that “breastfeeding is always your
      best choice for you and your baby,” and that “we recommend you to breastfeed
      whenever appropriate and possible.” Synutra abides by all other guidelines and
      restrictions against marketing infant formula products outside of the
      established codes and rules.





**COMPETITION**





Competition
      for Synutra’s products is generally other diversified consumer and health care
      manufacturers. Competitive factors include consumer advertising, formulation,
      packaging, scientific innovation, and price. There are many brands that hold
      significant market share, individually or in the aggregate in the market.
      Synutra’s principal competitors can be classified generally into three groups.
      The first are foreign manufacturers which concentrate mainly on the food
      business with a wide selection of product lines, including Nestle, a Swiss
      manufacturer and distributor of starter and follow-up formulas, milk, cereals,
      oral supplements and performance foods marketed under Nestlé brands such as
      Carnation. Another competitor of this type is Numico, a Dutch manufacturer
      of
      baby foods, whose infant formula products are marketed in China under the brand
      name of Dumex. The second group includes foreign manufacturers who come into
      the
      China market with their parent companies’ pharmaceutical businesses, such as
      Bristol Meyers Squib’s Mead Johnson, a US manufacturer and distributor of the
      Enfamil family of formulas, Abbot Laboratories’ Ross Products Division, a US
      manufacturer and distributor of infant formulas marketed under the brand names
      of Similac and Enfalac family of formulas, and Wyeth, a US manufacturer and
      distributor of infant formula sold under private label brands. The third group
      consists of domestic manufacturers who generally focus on agricultural product
      processing, including Sanlu, a Chinese manufacturer and distributor of dairy
      products under the Anmum brand, and Yili, a Chinese manufacturer and distributor
      of liquid and powdered milk under the Yili brand. Both Sanlu and Yili are
      competitors in the lower priced products.





**EMPLOYEES**





Synutra
      currently employs approximately 1890 full-time personnel in all its facilities,
      with about 80 management staff and research and development personnel, about
      500
      production personnel and more than 1,300 sales and marketing personnel. An
      additional approximately 7,000 part-time workers provide their services on
      a
      commission basis and are located at retail customer sites. Synutra’s employees
      are not represented by a labor organization or covered by a collective
      bargaining agreement. Synutra has not experienced work stoppages and believes
      that its relationship with its employees is good.





**PRODUCTION
      FACILITIES AND PROPERTY**





Currently,
      there are three production facilities and one packaging facility located in
      different areas of China. The total production areas encompass about 40,000
      square meters, with total production capacity of 30,000 tons of dairy products
      per year, and 20,000 tons of installed and 30,000 tons of potentially available
      packaging capacity.





8




All
      the
      production facilities are built based on the GMP standard, with advanced
      equipment imported from Europe. All of Synutra’s manufacturing facilities have
      passed ISO9000, ISO14000, HACCP series qualification.





Synutra’s
      headquarters are located at Qingdao with over 1600 square meters of owned office
      space. It also has leased office space at Beijing of around 1000 square meters.
      Synutra Illinois leases an executive office in Rockville, Maryland, USA.





**DOING
      BUSINESS IN CHINA**





**CHINA’S
      ECONOMY**





Management
      believes that an important factor in understanding the Company’s business is
      China’s rapid economic growth. According to China’s Statistics Bureau, China’s
      GDP growth rate for 2003, 2004 and 2005 was 9.3%, 9.5% and 9.4% respectively.





Looking
      forward, GDP growth in China is forecasted between 8% and 9% in 2006. According
      to the National Statistics Bureau, real GDP growth in the first quarter of
      2006
      was 10.2%. 2006 is the first year of Chinese government’s “Eleventh Five-Year
      Plan”, during which period China’s national economy is expected to maintain its
      high growth rate. Over the long term, China’s accession to the World Trade
      Organization (WTO) has accelerated the capital flow to China from other
      developed countries.




**ECONOMIC
      REFORM ISSUES**





Although
      the Chinese government owns the majority of productive assets in China, in
      the
      past several years the government has implemented economic reform measures
      that
      emphasize decentralization and encourage private economic activity. Because
      these economic reform measures may be inconsistent or ineffectual, there are
      no
      assurances that:





·
            We
                will be able to capitalize on economic reforms;





·
            The
                Chinese government will continue its pursuit of economic reform policies;





·
            The
                economic policies, even if pursued, will be successful;





·
            Economic
                policies will not be significantly altered from time to time; and





·
            Business
                operations in China will not become subject to the risk of
                nationalization.




Negative
      impact upon economic reform policies or nationalization could result in a total
      investment loss in our common stock.





Since
      1979, the Chinese government has reformed its economic systems. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      improved. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      in the disparities in per capita wealth between regions within China, could
      lead
      to further readjustment of the reform measures. This refining and readjustment
      process may negatively affect our operations.





To
      date
      reforms to China’s economic system have not adversely impacted our operations
      and are not expected to adversely impact operations in the foreseeable future;
      however, there can be no assurance that the reforms to China’s economic system
      will continue or that we will not be adversely affected by changes in China’s
      political, economic, and social conditions and by changes in policies of the
      Chinese government, such as changes in laws and regulations, measures which
      may
      be introduced to control inflation, changes in the rate or method of taxation,
      imposition of additional restrictions on currency conversion and remittance
      abroad, and reduction in tariff protection and other import restrictions.




9




**RISK
      FACTORS**





Our
      business faces many risks. The risks described below may not be the only risks
      we face. Additional risks that we do not yet know of, or that we currently
      think
      are immaterial, may also impair our business operations or financial results.
      If
      any of the events or circumstances described in the following risks actually
      occurs, our business, financial condition or results of operations could suffer
      and the trading price of our common stock could decline.





**Risks
      Related to Our Business**





**Synutra
      is subject to intense competition in which it may not be able to compete
      effectively.**





Synutra’s
      business is subject to intense competition, changes in consumer preferences
      and
      local economic conditions. Most of these competitors have longer operating
      histories and significantly greater financial, technical, marketing and other
      resources than Synutra has any may be able to respond more quickly than it
      scan
      to new or changing opportunities and customer requirements. Increased
      competition can reduce sales for Synutra. To be successful, it must continue
      to:





·
            promote
                its brands successfully;·
            anticipate
                and respond to new consumer trends;·
            develop
                new products and markets and to broaden brand portfolios in order
                to
                compete effectively with lower priced products;·
            improve
                productivity; and·
            respond
                effectively to changing prices for their raw materials.




The
      willingness of consumers to purchase Synutra’s brands depends in part on local
      economic conditions. In periods of economic uncertainty, consumers tend to
      purchase more private label and other economy brands, and the volume of its
      products could suffer accordingly.





**Mothers
      may not use Synutra’s infant formula products and elect to breastfeed their
      babies.**





Synutra’s
      results of operations will be affected by the number of mothers who choose
      not
      to use its products and choose to breastfeed their babies. There is data
      available that suggests that breastfeeding a baby has many health benefits
      for
      the baby. Breastfeeding in infancy is likely to reduce the risk of
      cardiovascular disease-in adult life as well as helping a baby develop a strong
      immune system. Mother’s milk has all the nutrients that a baby requires and some
      babies may have difficulty absorbing the nutrients from infant formula and
      may
      suffer side effects from the supplemental nutrients provided in formula. Some
      mothers may have trouble breastfeeding and therefore infant formula is the
      next
      best alternative. However, to the extent that popular literature, cultural
      pressure and medical advice advocate that mothers breastfeed their babies,
      there
      could be a reduced demand for Synutra’s products and its revenues could be
      adversely affected.





**Strengthening
      brand portfolios through increased education and awareness.**





One
      element of the growth strategy of Synutra is to strengthen its brand portfolios
      through active programs of consumer education and awareness of its products.
      Synutra intends to improve communications to its customers about the nutritional
      value and quality of its products. There can be no assurance that it will be
      successful in this growth strategy and that sales volume will be
      increased.





10




**Synutra
      must identify changing consumer preferences and develop and offer products
      to
      meet their preferences.**





Consumer
      preferences evolve over time and the success of Synutra’s products depends on
      Synutra’s ability to identify the tastes and nutritional needs of its customers
      and to offer products that appeal to their preferences. Synutra introduces
      new
      products and improved products from time to time and incurs significant
      development and marketing costs. If Synutra’s products fail to meet consumer
      preference, then Synutra’s strategy to grow sales and profits with new products
      will be less successful.





**If
      Synutra does not achieve the appropriate cost structure in the highly
      competitive industry, its profitability could decrease.**





Synutra’s
      success depends in part on its ability to achieve the appropriate cost structure
      and be efficient in a highly competitive industry. Synutra’s products are
      marketed in the premium branded market, however, it may not be successful in
      marketing these products at a higher price point. Synutra is currently
      implementing profit-enhancing initiatives that impact its marketing, sales,
      operations and information systems functions. These initiatives include:
      elimination of duplicative costs and overhead; consolidation of selected plants
      and support functions; efforts to streamline and improve Synutra’s ability to do
      business with its customers, and distributors and brokers. If Synutra does
      not
      continue to manage costs and achieve additional efficiencies, its
      competitiveness and profitability could decrease.





**Synutra
      may be subject to product liability claims and product recalls, which could
      negatively impact its profitability.**





Synutra
      sells products for human consumption, which involves risks such as product
      contamination or spoilage, product tampering and other adulteration of its
      products. Synutra may be subject to liability if the consumption of any of
      its
      products causes injury, illness or death. In addition, Synutra will voluntarily
      recall products in the event of contamination or damage. A significant product
      liability judgment or a widespread product recall may negatively impact
      Synutra’s profitability for a period of time depending on product availability,
      competitive reaction and consumer attitudes. Even if a product liability claim
      is unsuccessful or is not fully pursued, the negative publicity surrounding
      any
      assertion that Synutra’s products caused illness or injury could adversely
      affect Synutra’s reputation with existing and potential customers and its
      corporate and brand image. Synutra does not have liability insurance with
      respect to product liability claims. Any product liabilities claims could have
      a
      material adverse effect on its business, operating results and financial
      condition.





**Commodity
      price increases will increase operating costs and may reduce profits.**





Synutra
      uses many different commodities including fresh milk, whey protein powder and
      energy. Commodities are subject to price volatility caused by commodity market
      fluctuations, supply and demand, currency fluctuations, and changes in
      governmental agricultural programs. Commodity price increases will result in
      increases in raw material costs and operating costs. Synutra may not be able
      to
      increase its product prices to offset these increased costs; and increasing
      prices may result in reduced sales volume and profitability. It does not fully
      hedge against changes in commodity prices and its hedging strategies may not
      work as planned.




**Synutra
      may not be able to sustain market acceptance for its services and products.**





Synutra
      has established limited brand recognition in China. Failure to establish a
      brand
      and presence in the marketplace on a timely basis could adversely affect its
      financial condition and operating results. Moreover, Synutra cannot be sure
      that
      it will successfully complete the development and introduction of new products
      or product enhancements or that any new products developed will achieve
      acceptance in the marketplace. It may also fail to develop and deploy new
      products and product enhancements on a timely basis. In addition, currently
      Synutra only sells its products in China. It may seek to expand its distribution
      to India and Southeast Asia. There can be no assurance that Synutra will be
      able
      to expand its distribution in the future or that any such expansion will be
      successful. Furthermore, there can be no assurance that any expansion will
      not
      have a material adverse effect on the operating results of Synutra, particularly
      while it is implementing such expansion and the costs associated with any
      expansion.




11




**If
      Synutra fails to comply with the many laws applicable to its business, it may
      incur significant fines and penalties.**





Synutra’s
      facilities and products are subject to many laws and regulations administered
      by
      the Industry and Commerce Management and Administration (ICMA) Bureau, the
      Taxation Registration Office, Health and Hygiene Permitting Office (HHP), and
      the State Food and Drug Administration Bureau (SFDA) relating to the processing,
      packaging, storage, distribution, advertising, labeling, quality, and safety
      of
      food products. Synutra’s failure to comply with applicable laws and regulations
      could subject it to administrative penalties and injunctive relief, civil
      remedies, including fines, injunctions and recalls of its products. It is
      possible that change to such laws, more rigorous enforcement of such laws or
      Synutra’s current or past practices, could have a material adverse effect on
      Synutra’s business, operating results and financial condition. Further,
      additional environmental, health or safety issues relating to matters that
      are
      not currently known to management may result in unanticipated liabilities and
      expenditures.





**Synutra’s
      quarterly revenues, operating results and profitability will vary from quarter
      to quarter, which may result in volatility of its stock price.**





Synutra’s
      quarterly revenues, operating results and profitability have varied in the
      past
      and are likely to vary significantly from quarter to quarter. This may lead
      to
      volatility in its stock price. The factors that are likely to cause these
      variations may include the introduction of new products or services by Synutra
      or its competitors and a combination of the other adverse developments as
      discussed in these risk factors.





**Nondisclosure
      agreements with employees and others may not adequately prevent disclosure
      of
      trade secrets and other proprietary information.**





In
      order
      to protect Synutra’s proprietary technology and processes, it also relies in
      part on nondisclosure agreements with its employees, licensing partners,
      consultants, agents and other organizations to which it discloses its
      proprietary information. These agreements may not effectively prevent disclosure
      of confidential information and may not provide an adequate remedy in the event
      of unauthorized disclosure of confidential information. In addition, others
      may
      independently discover trade secrets and proprietary information, and in such
      cases it could not assert any trade secret rights against such party. Costly
      and
      time-consuming litigation could be necessary to enforce and determine the scope
      of its proprietary rights, and failure to obtain or maintain trade secret
      protection could adversely affect its competitive business position. Since
      Synutra relies on trade secrets and nondisclosure agreements, in addition to
      patents, to protect some of its intellectual property (such as its infant
      formula), there is a risk that third parties may obtain and improperly utilize
      its proprietary information to its competitive disadvantage.





**Synutra
      does not have long term contracts with its fresh milk suppliers.**





Synutra
      typically has not entered into written long terms agreements with its fresh
      milk
      suppliers. As a result, suppliers may, without notice or penalty, terminate
      their relationship with Synutra at any time. Synutra typically purchases fresh
      milk from multiple dairy farmers and cooperatives without long term contract
      arrangements. Failure to receive fresh milk in a timely manner could have a
      material adverse effect on Synutra’s business, operating results and financial
      condition.





**Synutra
      does not have long term contracts with its customers.**





Synutra
      typically has not entered into written long terms agreements with customers.
      As
      a result, customers may, without notice or penalty, terminate their relationship
      with Synutra at any time. In addition, even if customers should decide to
      continue their relationship with Synutra, there can be no guarantee that they
      will purchase the same amounts of products as in the past. Any loss of a
      customer, or decrease in the volume of products purchased by a customer could
      have a material adverse effect on Synutra’s business, operating results and
      financial condition.




12




**Loss
      of key executives and failure to attract qualified management could limit growth
      and negatively impact operations.**





Synutra
      depends highly upon its senior management team. It will continue to depend
      on
      operations management personnel with industry experience. At this time, Synutra
      does not know the availability of such experienced management personnel or
      how
      much it may cost to attract and retain such personnel. The loss of the services
      of any member of senior management or the inability to hire experienced
      operations management personnel could have a material adverse effect on the
      operations and financial condition of Synutra.





**The
      lack of public company experience of Synutra’s management could impair its
      ability to comply with legal and regulatory requirements.**





Synutra’s
      management team has historically operated its business as a privately-owned
      company. The individuals who now constitute Synutra’s senior management have
      never had responsibility for managing a publicly-traded company. Such
      responsibilities will include complying with federal securities laws and making
      required disclosures on a timely basis. There can be no assurance that its
      management will be able to effectively and timely implement programs and
      policies that adequately respond to such increased legal, regulatory compliance
      and reporting requirements.





**Failure
      to effectively respond to product and business crises could negatively impact
      brand image, business reputation, and results.**





In
      times
      of possible market crisis involving any of Synutra’s products, Synutra
      management may not be able to respond to such events in a timely and effective
      manner. Such failure and/or inadequacy could occur due to the growth of
      management and having many layers of management within Synutra’s management
      structure as the company grows. For example, one of Synutra’s competitors did
      not respond quickly to a localized consumer complaint over a test result of
      out-of-spec iodine levels has resulted in damage to this brand image and may
      have had a material adverse effect on its results of operations. If Synutra’s
      management does not respond quickly and appropriately to any quality control
      issues or customer complaints, it could have a material adverse effect on its
      results of operations and financial condition.





**RISKS
      ASSOCIATED WITH DOING BUSINESS IN CHINA**





**The
      Chinese Legal System**





The
      practical effect of the People's Republic of China legal system on Synutra’s
      business operations in China can be viewed from two separate but intertwined
      considerations. First, as a matter of substantive law, the Foreign Invested
      Enterprise laws provide significant protection from government interference.
      In
      addition, these laws guarantee the full enjoyment of the benefits of corporate
      articles and contracts to Foreign Invested Enterprise participants. These laws,
      however, do impose standards concerning corporate formation and governance,
      which are not qualitatively different from the general corporation laws of
      the
      several provinces. Similarly, the accounting laws of the People's Republic
      of
      China mandate accounting practices that are not entirely consistent with US
      Generally Accepted Accounting Principles. The Chinese accounting laws require
      that an annual "statutory audit" be performed in accordance with the People's
      Republic of China accounting standards and that the books of account of Foreign
      Invested Enterprises be maintained in accordance with Chinese accounting laws.
      Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise
      Law
      requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
      reports and statements to designated financial and tax authorities, at the
      risk
      of business license revocation.





13




Second,
      while the enforcement of substantive rights may appear less clear than United
      States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned
      Enterprises are Chinese registered companies which enjoy the same status as
      other Chinese registered companies in business-to-business dispute resolution.
      Therefore, as a practical matter, although no assurances can be given, the
      Chinese legal infrastructure, while different in operation from its United
      States counterpart, should not present any significant impediment to the
      operation of Foreign Invested Enterprises.





**Changes
      in the laws and regulations in The Peoples Republic of China may adversely
      affect Synutra’s ability to conduct its business.**





As
      Chinese corporations, all of Synutra’s operating subsidiaries are subject to the
      Company Law of The Peoples Republic of China and more specifically to the
      Foreign Company provisions of the Company Law and the Law on Foreign Capital
      Enterprises of the People's Republic of China. Additionally, as a food
      manufacturing company, Synutra is subject to the laws and regulations from
      Health and Hygiene Permitting Office (HHP), and the State Food and Drug
      Administration Bureau (SFDA). Changes in existing laws or new interpretations
      of
      such laws may have a significant impact on our methods and costs of doing
      business. For example, new legislative proposals for product pricing, approval
      criteria and manufacturing requirements may be proposed and adopted. Such new
      legislation or regulatory requirements may have a material adverse effect on
      our
      financial condition, results of operations or cash flows. In addition, we will
      be subject to varying degrees of regulation and licensing by governmental
      agencies in The Peoples Republic of China. There can be no assurance that the
      future regulatory, judicial and legislative changes will not have a material
      adverse effect on Synutra’s Chinese operating subsidiaries, that regulators or
      third parties will not raise material issues with regard to its Chinese
      subsidiaries or its compliance or non-compliance with applicable laws or
      regulations or that any changes in applicable laws or regulations will not
      have
      a material adverse effect on our operations.





**Economic
      reform issues may have an adverse impact on the business.**





Although
      the Chinese government owns the majority of productive assets in China, in
      the
      past several years the government has implemented economic reform measures
      that
      emphasize decentralization and encourage private economic activity. Because
      these economic reform measures may be inconsistent or ineffectual, there are
      no
      assurances that:





·
            Synutra
                will be able to capitalize on economic reforms;·
            The
                Chinese government will continue its pursuit of economic reform policies;·
            The
                economic policies, even if pursued, will be successful;·
            Economic
                policies will not be significantly altered from time to time; and·
            Business
                operations in China will not become subject to the risk of
                nationalization.




Negative
      impact upon economic reform policies or nationalization could result in a total
      investment loss in Synutra’s common stock.





Since
      1979, the Chinese government has reformed its economic systems. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      improved. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      in the disparities in per capita wealth between regions within China, could
      lead
      to further readjustment of the reform measures. This refining and readjustment
      process may negatively affect Synutra's operations.





14




Over
      the
      last few years, China's economy has registered a high growth rate. Recently,
      there have been indications that rates of inflation have increased. In response,
      the Chinese government recently has taken measures to curb this excessively
      expansive economy. These measures have included restrictions on the availability
      of domestic credit, reducing the purchasing capability of certain of its
      customers, and limited re-centralization of the approval process for purchases
      of some foreign products. These austerity measures alone may not succeed in
      slowing down the economy's excessive expansion or control inflation, and may
      result in severe dislocations in the Chinese economy. The Chinese government
      may
      adopt additional measures to further combat inflation, including the
      establishment of freezes or restraints on certain projects or markets.





To
      date
      reforms to China's economic system have not adversely impacted Synutra's
      operations and are not expected to adversely impact operations in the
      foreseeable future; however, there can be no assurance that the reforms to
      China's economic system will continue or that Synutra will not be adversely
      affected by changes in China's political, economic, and social conditions and
      by
      changes in policies of the Chinese government, such as changes in laws and
      regulations, measures which may be introduced to control inflation, changes
      in
      the rate or method of taxation, imposition of additional restrictions on
      currency conversion and remittance abroad, and reduction in tariff protection
      and other import restrictions.





**Synutra
      may have difficulty establishing adequate management, legal and financial
      controls in The Peoples Republic of China.**





The
      People’s Republic of China historically has been deficient in Western style
      management and financial reporting concepts and practices, as well as in modern
      banking, computer and other control systems. Synutra may have difficulty in
      hiring and retaining a sufficient number of qualified employees to work in
      The
      Peoples Republic of China. As a result of these factors, it may experience
      difficulty in establishing management, legal and financial controls, collecting
      financial data and preparing financial statements, books of account and
      corporate records and instituting business practices that meet Western
      standards.





**Capital
      outflow policies in The Peoples Republic of China may hamper Synutra’s ability
      to remit income to the United States.**





The
      People’s Republic of China has adopted currency and capital transfer
      regulations. These regulations may require that Synutra comply with complex
      regulations for the movement of capital. In order to comply with these
      regulations it may have to revise or change the banking structure of the company
      or its subsidiaries Although management believes that Synutra is currently
      in
      compliance with these regulations, should these regulations or the
      interpretation of them by courts or regulatory agencies change it may not be
      able to remit all income earned and proceeds received in connection with its
      operations to the U.S.





**It
      will be extremely difficult to acquire jurisdiction and enforce liabilities
      against Synutra’s officers, directors and assets based in The Peoples Republic
      of China.**





Because
      all of directors and most of Synutra’s executive officers, including Liang
      Zhang, the chairman of the Board of Directors and Chief Executive Officer,
      are
      Chinese citizens and reside in China it may be difficult, if not impossible,
      to
      acquire jurisdiction over these persons in the event a lawsuit is initiated
      against Synutra and/or its officers and directors by a stockholder or group
      of
      stockholders in the U.S. Furthermore, because the majority of its assets are
      located in The Peoples Republic of China it would also be very difficult to
      access those assets to satisfy an award entered against Synutra in U.S. court.





**Synutra
      may face obstacles from the political system in The Peoples Republic of China.**





Foreign
      companies conducting operations in The Peoples Republic of China face
      significant political, economic and legal risks. The political system in The
      Peoples Republic of China, including a strong bureaucracy, may hinder Western
      investment. Another obstacle to foreign investment is corruption. There is
      no
      assurance that Synutra will be able to obtain recourse, if desired, through
      The
      Peoples Republic of China’s less developed judicial systems.




15




**RISKS
      RELATED TO THE COMPANY’S COMMON STOCK**





**The
      Company’s stock is thinly traded, so you may be unable to sell your shares at or
      near the quoted bid prices if you need to sell a significant number of your
      shares.**





The
      shares of the Company’s common stock are thinly-traded on the OTC Bulletin
      Board, meaning that the number of persons interested in purchasing its common
      shares at or near bid prices at any given time may be relatively small or
      non-existent. This situation is attributable to a number of factors, including
      the fact that the Company is a small company which is relatively unknown to
      stock analysts, stock brokers, institutional investors and others in the
      investment community that generate or influence sales volume, and that even
      if
      it came to the attention of such persons, they tend to be risk-averse and may
      be
      reluctant to follow the Company. As a consequence, there may be periods of
      several days or more when trading activity in the shares is minimal or
      non-existent, as compared to a seasoned issuer which has a large and steady
      volume of trading activity that will generally support continuous sales without
      an adverse effect on share price. The Company cannot give you any assurance
      that
      a broader or more active public trading market for its common shares will
      develop or be sustained, or that current trading levels will be sustained.
      Due
      to these conditions, the Company can give you no assurance that you will be
      able
      to sell your shares at or near bid prices or at all if you need money or
      otherwise desire to liquidate your shares.





**You
      may have difficulty selling the Company’s shares because they are deemed “penny
      stocks”.**





Since
      the
      Company’s common stock is not currently listed on the Nasdaq Stock Market, if
      the trading price of its common stock remains below $5.00 per share, trading
      in
      its common stock will be subject to the requirements of certain rules
      promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”), which require additional disclosure by broker-dealers in connection with
      any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
      equity security that has a market price of less than $5.00 per share, subject
      to
      certain exceptions). Such rules require the delivery, prior to any penny stock
      transaction, of a disclosure schedule explaining the penny stock market and
      the
      risks associated therewith and impose various sales practice requirements on
      broker-dealers who sell penny stocks to persons other than established customers
      and accredited investors (generally defined as an investor with a net worth
      in
      excess of $1,000,000 or annual income exceeding $200,000 individually or
      $300,000 together with a spouse). For these types of transactions, the
      broker-dealer must make a special suitability determination for the purchaser
      and have received the purchaser’s written consent to the transaction prior to
      the sale. The broker-dealer also must disclose the commissions payable to the
      broker-dealer, current bid and offer quotations for the penny stock and, if
      the
      broker-dealer is the sole market-maker, the broker-dealer must disclose this
      fact and the broker-dealer’s presumed control over the market. Such information
      must be provided to the customer orally or in writing before or with the written
      confirmation of trade sent to the customer. Monthly statements must be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks. The additional burdens
      imposed upon broker-dealers by such requirements could discourage broker-dealers
      from effecting transactions in the Company’s common stock, which could severely
      limit the market liquidity of the common stock and the ability of holders of
      the
      common stock to sell their shares.





**Anti-takeover
      provisions in the Company’s certificate of incorporation could affect the value
      of its stock.**





The
      Company’s Certificate of Incorporation contains certain provisions that could be
      an impediment to a non-negotiated change in control. In particular, without
      stockholder approval, the Company can issue up to 20,000,000 shares of preferred
      stock with rights and preferences determined by the Company’s Board of
      Directors. These provisions could make a hostile takeover or other
      non-negotiated change in control difficult, so that stockholders would not
      be
      able to receive a premium for their common stock.





16


**Potential
      issuance of additional common and preferred stock could dilute existing
      stockholders.**





The
      Company is authorized to issue up to 250,000,000 shares of common stock. To
      the
      extent of such authorization, the Company’s Board of Directors has the ability,
      without seeking stockholder approval, to issue additional shares of common
      stock
      in the future for such consideration as the Board of Directors may consider
      sufficient. The issuance of additional common stock in the future will reduce
      the proportionate ownership and voting power of the common stock offered hereby.
      The Company is also authorized to issue up to 20,000,000 shares of preferred
      stock, the rights and preferences of which may be designated in series by the
      Board of Directors. Such designation of new series of preferred stock may be
      made without stockholder approval, and could create additional securities which
      would have dividend and liquidation preferences over the common stock offered
      hereby. Preferred stockholders could adversely affect the rights of holders
      of
      common stock by:





·
            exercising
                voting, redemption and conversion rights to the detriment of the
                holders
                of common stock;·
            receiving
                preferences over the holders of common stock regarding or surplus
                funds in
                the event of its dissolution or liquidation;·
            delaying,
                deferring or preventing a change in control of the Company; and·
            discouraging
                bids for its common stock.




**The
      Company’s existing directors, executive officers and principal stockholders hold
      a substantial amount of its common stock and may be able to prevent other
      stockholders from influencing significant corporate decisions.**





As
      of
      June 15, 2006, the Company’s directors and executive officers and their
      affiliates beneficially own approximately 92% of its outstanding common stock,
      based on the most recent filings by such parties with the Securities and
      Exchange Commission as of that date. These stockholders, if they act together,
      may be able to direct the outcome of matters requiring approval of the
      stockholders, including the election of its directors and other corporate
      actions such as:





·
            its
                merger with or into another company;·
            a
                sale of substantially all of its assets; and·
            amendments
                to its certificate of incorporation.




The
      decisions of these stockholders may conflict with its interests or those of
      the
      Company’s other stockholders.





**Substantial
      sales of common stock could cause stock price to fall.**





As
      of
      June 15, 2006, the Company had outstanding 50,000,713 shares of common stock,
      of
      which approximately 48,907,415 shares were “restricted securities” (as that term
      is defined under Rule 144 promulgated under the Securities Act of 1933, as
      amended). Only approximately 1,093,298 shares are currently freely tradable
      shares. These 48,907,415 shares of restricted stock are eligible for public
      resale under Rule 144. Although Rule 144 restricts the number of shares that
      any
      one holder can sell during any three-month period under Rule 144, because more
      than one stockholder holds these restricted shares, a significant number of
      shares could legally be sold commencing in one year. No prediction can be made
      as to the effect, if any, that sales of the shares subject to Rule 144 sales
      commencing in one year, or the availability of such shares for sale, will have
      on the market prices prevailing from time to time. Nevertheless, the possibility
      that substantial amounts of common stock may be sold in the public market may
      adversely affect prevailing market prices for its common stock and could impair
      its ability to raise capital through the sale of its equity securities.





17


**The
      market price of the Company’s stock may be adversely affected by market
      volatility.**




The
      market price of the Company’s common stock is likely to be volatile and could
      fluctuate widely in response to many factors, including:





·
            announcements
                of technological innovations by the Company or its competitors;·
            announcements
                of new products or new contracts by the Company or its competitors;·
            actual
                or anticipated variations in its operating results due to the level
                of
                expenses and other factors;·
            changes
                in financial estimates by securities analysts and whether its earnings
                meet or exceed such estimates;·
            conditions
                and trends in the baby food and other industries;·
            new
                accounting standards;·
            general
                economic, political and market conditions and other factors; and·
            the
                occurrence of any of the risks described in this 10-KSB/A.






18


**PART
        II**




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following is management’s discussion and analysis of certain significant factors
      that have affected our financial position and operating results during the
      periods included in the accompanying consolidated financial statements, as
      well
      as information relating to the plans of our current management. This report
      includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
      terminology are intended to identify forward-looking statements. Such statements
      are subject to certain risks and uncertainties, including the matters set forth
      in this report or other reports or documents we file with the Securities and
      Exchange Commission from time to time, which could cause actual results or
      outcomes to differ materially from those projected. Undue reliance should not
      be
      placed on these forward-looking statements that speak only as of the date
      hereof. We undertake no obligation to update these forward-looking statements.





19




The
      following discussion and analysis should be read in conjunction with our
      consolidated financial statements and the related notes thereto and other
      financial information contained elsewhere in this Form 10-KSB/A.




**SELECTED
      UNAUDITED QUARTERLY RESULTS OF OPERATIONS**





In
      the
      opinion of management, the accompanying unaudited quarterly financial
      information presented below includes all adjustments which management considers
      necessary to present fairly the results of its operations for the periods
      presented below in conformity with accounting principles generally accepted
      in
      the United States of America. This quarterly financial information has been
      prepared consistently with the accounting policies described in the accompanying
      audited consolidated financial statements for the year ended March 31,
      2006. The results of operations for the periods presented below are not
      necessarily indicative of the results of operations to be expected in the
      future.




**Fiscal
                Quarters Ended**(as
                Restated)**Fiscal
                Year
                2006**
            
            
            
            
            
            
            
            
            **Fiscal
                Year
                2005**(in
              thousands of US dollars except per share
              data)
            
            
            **05-Jun**
            
            
            **05-Sep**
            
            
            **05-Dec**
            
            
            **06-Mar**
            
            
            **04-Jun**
            
            
            **04-Sep**
            
            
            **04-Dec**
            
            
            **05-Mar**Revenue
            
            $
            21,164
            
            $
            30,171
            
            $
            43,805
            
            $
            37,551
            
            $
            11,176
            
            $
            15,071
            
            $
            18,512
            
            $
            18,693Gross
                Profit
            
            
            9,508
            
            
            14,548
            
            
            15,875
            
            
            17,338
            
            
            4,337
            
            
            6,299
            
            
            8,077
            
            
            9,567Operating
                expenses
            
            
            (7,932
            )
            
            (12,174
            )
            
            (11,531
            )
            
            (12,095
            )
            
            (6,042
            )
            
            (6,475
            )
            
            (4,510
            )
            
            (6,254
            )Income(loss)
                from operations
            
            
            1,576
            
            
            2,374
            
            
            4,344
            
            
            5,242
            
            
            (1,706
            )
            
            (176
            )
            
            3,567
            
            
            3,314Finance
                costs
            
            
            (415
            )
            
            (871
            )
            
            (299
            )
            
            (396
            )
            
            (256
            )
            
            (304
            )
            
            (380
            )
            
            (228
            )Subsidy
            
            
            604
            
            
            43
            
            
            66
            
            
            21
            
            
            
            
            
            
            
            
            271Interest
                income
            
            
            64
            
            
            40
            
            
            2
            
            
            131
            
            
            24
            
            
            23
            
            
            22
            
            
            75Other
                income/
              (expenses)
            
            
            (79
            )
            
            30
            
            
            (126
            )
            
            130
            
            
            (102
            )
            
            (61
            )
            
            (70
            )
            
            (58
            )Pre-tax
                income(loss)
            
            
            1,750
            
            
            1,615
            
            
            3,986
            
            
            5,129
            
            
            (2,040
            )
            
            (518
            )
            
            3,410
            
            
            3,103Income
                tax benefit
            
            
            (26
            )
            
            (279
            )
            
            (209
            )
            
            (932
            )
            
            (15
            )
            
            (23
            )
            
            (19
            )
            
            (31
            )Net
                income (loss) before minority interest
            
            
            1,724
            
            
            1,336
            
            
            3,777
            
            
            4,197
            
            
            (2,055
            )
            
            (540
            )
            
            3,391
            
            
            3,070Minority
                interest
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,339
            
            
            (1,018
            )
            
            (2,564
            )
            
            1,499net
                income (loss)
            
            $
            1,724
            
            $
            1,336
            
            $
            3,778
            
            $
            4,197
            
            $
            (716
            )
            $
            (1,560
            )
            $
            827
            
            $
            4,571Net
                income per share, diluted
            
            $
            0.04
            
            $
            0.03
            
            $
            0.08
            
            $
            0.08
            
            $$
            (0.02
            )
            $
            ($0.03
            )
            $
            0.02
            
            $
            0.10





20





**OVERVIEW**





**Overview**





Through
      its wholly owned subsidiary, Synutra Inc., an Illinois corporation (“Synutra
      Illinois”), Synutra International, Inc. (the “Company” or “Synutra”) owns all of
      the equity interests of six companies in the People’s Republic of China,
      (“China” or the “PRC”), each engaged in different stages of the production,
      marketing, packaging and development of dairy based nutritional products in
      China for infants, children, pregnant women and nursing mothers, and other
      adults under the brand names of Super, U-Smart, U-Strong, and National
      Standards. Approximately 90% of the revenue for the fiscal year ended March
      31,
      2006 was from pediatric products and the rest from adult and other products.
      In
      September 2005, Synutra launched a new rice cereal product line, and in March
      2006 the Company launched new premium infant formula products and line
      extensions. As supplemental foods to infant and children formula products,
      management believes that rice cereal products possess significant market
      potential. The new premium products and line extensions were designed to capture
      the fastest growing segment of the infant formula market in China. At the same
      time, Synutra also began to make and sell non-fat dry milk as well as anhydrous
      milk-fat.





Qingdao
      Sheng Yuan Dairy Co., Ltd. is engaged in the sales and marketing of dairy based
      nutritional products for infants, children and adults under its brand names
      of
      Super, U-Smart, U-Strong, and National Standards. Qingdao Sheng Yuan Dairy
      Co.,
      Ltd. was formed in January 1998 by Sodiaal Industrial Co. Ltd (55%) and Beijing
      Honnete Dairy Co., Ltd., (45%) an affiliate of Mr. Liang Zhang, the Company’s
      Chief Executive Officer. In December 2003, Sodiaal Industrial Co. Ltd
      transferred 15% of its ownership to Beijing Honnete Dairy Co., Ltd, and
      transferred 40% of its ownership to Synutra Illinois, In February 2004, Beijing
      Honnete Dairy Co., Ltd., transferred 60% of his ownership to Sheng Zhi Da Dairy
      Corporation ,In February 2005,Sheng Zhi Da Dairy Corporation transferred 60%of
      its ownership to Synutra Illinois, resulting in a 100% of ownership of Qingdao
      Sheng Yuan Dairy Co., Ltd. by Synutra Illinois.





Qingdao
      ST George Dairy Co., Ltd. is engaged in the production, packaging, shipping
      and
      distribution of all of Synutra’s products. Qingdao ST George Dairy Co., Ltd. was
      formed in September 2001 by Synutra Illinois. In March 2004 Synutra Illinois
      transferred 75% of Qingdao St George Dairy  Co.,
      Ltd
      ownership to Sheng Zhi Da Dairy Corporation and Synutra Illinois retained 25%
      of
      the company. In February 2005 Sheng Zhi Da Dairy Corporation transferred all
      of
      its ownership in Qingdao St. George Dairy Co., Ltd. (75%) to Synutra Illinois,
      resulting in a 100% ownership of Qingdao St. George Dairy Co., Ltd by Synutra
      Illinois.





Beian
      Yi
      Pin Dairy Co., Ltd. (“Beian”) is engaged in the production and processing of
      adult dairy based nutritional products and various milk powder products. Beian
      Yi Pin Dairy Co., Ltd. was formed In June 2004, by Sheng Zhi Da Dairy
      Corporation and Synutra Illinois-. In January 2005, Sheng Zhi Da Dairy
      Corporation transferred 71.26% of its ownership in Beian to Synutra Illinois,
      resulting in a 100% ownership of Beian Yi Pin Dairy Co., Ltd. by Synutra
      Illinois





Luobei
      Sheng Yuan Dairy Co., Ltd. (“Loubei”) is engaged in the production and
      processing of Synutra’s products for infants and children under the brand names
      U-Smart, U-Strong, and National Standards under the “Sheng Yuan” label. Loubei
      was formed in April 2001 by Mr. Liang Zhang, and Ms. Xiu Qing Meng. In June
      2003, Mr. Zhang transferred 67% of his ownership to Sheng Zhi Da Dairy
      Corporation. In January 2005, Ms. Xiu Qing Meng transferred 33% of her ownership
      to Synutra Illinois, Sheng Zhi Da Dairy Corporation transferred 67% of its
      ownership to Synutra Illinois, resulting in a 100% ownership of Luobei Sheng
      Yuan Dairy Co., Ltd by Synutra Illinois.





21




Qingdao
      Mother and Infant Nutrition Research Company Limited is engaged in the research
      and development of various nutritional products for both infants and children
      as
      well as pregnant and lactating women. Qingdao Mother and Infant Nutrition
      Research Company Limited was formed in April 2004 by Sheng Zhi Da Dairy
      Corporation (80%) and Ms. Xiu Qing Meng (20%). In May 2005, Sheng Zhi Da Dairy
      Corporation transferred 80% of its ownership to Synutra Illinois and Ms. Xiu
      Qing Meng transferred 20% of her ownership to Synutra Illinois, resulting in
      a
      100% ownership of Qingdao Mother and Infant Nutrition Research Company Limited
      by Synutra Illinois.





Chabei
      Sheng Yuan Dairy Co., Ltd. is engaged in the production and processing of all
      of
      Synutra’s products under the brand names Super, U-Smart, U-Strong, and National
      Standards. Chabei Sheng Yuan Dairy Co., Ltd. was formed in February 2002, by
      Ms,
      Xiu Qing Meng (20%) and Sheng Zhi Da Dairy Corporation (80%). In March 2005,
      Ms.
      Xiu Qing Meng transferred 20% of her ownership to Synutra Illinois and Sheng
      Zhi
      Da Dairy Corporation transferred 80% of its ownership to Synutra Illinois,
      resulting in a 100% ownership of Chabei Sheng Yuan Dairy Co., Ltd. by Synutra
      Illinois. In August 2005, Chabei Sheng Yuan Diary Co., Ltd. was merged with
      Zhangjiakou Sheng Yuan Diary Co., Ltd. Zhangjiakou Sheng Yuan Diary Co., Ltd.
      emerged as the surviving entity from the merger.




Zhangjiakou
      Sheng Yuan Dairy Co., Ltd. (“Zhangjiakou”) is engaged in the production and
      processing of all of Synutra’s products under the brand names Super, U-Smart,
      U-Strong, and National Standards. Zhangjiakou Sheng Yuan Dairy Co., Ltd. was
      formed in March 2004 by Sheng Zhi Da Dairy Corporation (40%) and Synutra
      Illinois (60%). In March 2005, Sheng Zhi Da Dairy Corporation transferred 40%
      of
      its ownership to Synutra Illinois, resulting in Synutra Illinois owing 100%
      of
      Zhangjiakou.





As
      of
      December 31, 2003, Mr. Zhang and Ms. Meng held 80% and 18.8%, respectively,
      of
      Beijing Honnete Diary Co., Ltd. They also held 71.43% and 14.29%, respectively,
      of the voting interest in Sheng Zhi Da Dairy Group Corporation at December
      31,
      2003.





On
      July
      15, 2005, pursuant to a Share Exchange Agreement dated as of June 14, 2005
      among
      the Company, Thomas Braun, Beams Power Investment Limited, Strong Gold Finance
      Ltd and Synutra Illinois, the Company issued 48,879,500 shares of its common
      stock in exchange for all of the issued and outstanding shares of Synutra
      Illinois that owned all the registered capital of the six subsidiaries (the
      “Exchange”). As a result of this Exchange, Synutra Illinois became a wholly
      owned subsidiary of the Company.





Immediately
      prior to the Exchange, the Company had 2,638,713 outstanding shares of common
      stock and no outstanding shares of preferred stock. The Company’s Certificate of
      Incorporation provides for authorized capital of two hundred and seventy million
      shares (270,000,000) of which two hundred and fifty million (250,000,000) are
      $0.0001 par value common stock and twenty million (20,000,000) are $0.0001
      par
      value preferred stock. Prior to the Exchange, Thomas Braun, the sole director
      and officer of the Company, and his affiliates owned 2,200,000 shares of the
      Company common stock. Pursuant to the Exchange, the Company cancelled
      approximately 1,517,500 shares of common stock owned by Mr. Braun and his
      affiliates reducing their ownership to 682,500 shares, resulting in the total
      issued and outstanding shares of the Company common stock equaling 1,121,213
      shares.





Pursuant
      to the Exchange, the Company issued 46,000,000 shares of its common stock in
      exchange for all of the outstanding capital stock of Synutra Illinois held
      by
      Beams Power Investment Limited and Strong Gold Finance Ltd., 2,844,500 shares
      were issued to various financial consultants and/or their designees and 35,000
      shares to a finder. Therefore, the total issued and outstanding shares of the
      Company’s common stock were 50,000,713 shares after giving effect to the
      Exchange.





As
      a
      result of the Exchange, the stockholders of the Company immediately prior to
      the
      Exchange owned approximately 1,121,213 shares, or approximately 2% of the issued
      and outstanding shares of the Company’s common stock and the Company is now
      controlled by the former stockholders of Synutra Illinois.





22




The
      Share
      Exchange Agreement was determined through arms’-length negotiations between the
      Company and Synutra Illinois.





Immediately
      following the completion of the Exchange, all of the existing members of the
      Company’s board of directors and all of its executive officers resigned and new
      appointees were elected to the Company’s board of directors.





On
      September 9, 2005 the Company changed its name to Synutra International, Inc.
      (OTCBB: SYUT).





Although
      the Company acquired Synutra Illinois pursuant to the Exchange, the Exchange
      was
      treated as a “reverse merger” whereby Synutra Illinois is considered to be the
      accounting acquirer. As such, the results of operations are those of Synutra
      Illinois.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





The
      Company prepares its financial statements in accordance with accounting
      principles generally accepted in the United States of America. The preparation
      of these financial statements requires the use of estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amount of revenues and expenses during the reporting period.
      Management periodically evaluates the estimates and judgments made. Management
      bases its estimates and judgments on historical experience and on various
      factors that are believed to be reasonable under the circumstances. Actual
      results may differ from these estimates as a result of different assumptions
      or
      conditions.





The
      following critical accounting policies affect the more significant judgments
      and
      estimates used in the preparation of the Company’s financial statements.





For
      certain of the Company's financial instruments, including cash and cash
      equivalents, trade receivables and payables, prepaid expenses, deposits and
      other current assets, short-term bank borrowings, and other payables and
      accruals, the carrying amounts approximate fair values due to their short
      maturities.





A
      related
      party is generally defined as (i) any person that holds 10% or more of the
      Company's securities and their immediate families, (ii) the Company's
      management, (iii) someone that directly or indirectly controls, is controlled
      by
      or is under common control with the Company, or (iv) anyone who can
      significantly influence the financial and operating decisions of the Company.
      A
      transaction is considered to be a related party transaction when there is a
      transfer of resources or obligations between related parties.





**ACCOUNTING
      METHOD**





The
      Company uses the accrual method of accounting which recognizes revenues when
      earned and expenses when incurred.





**ACCOUNTS
      RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS**





The
      Company presents accounts receivable, net of allowance for doubtful accounts.
      The allowance is calculated based on review of individual customer accounts.





**INVENTORIES**





Inventories
      are stated at the lower of cost or net realizable value. Cost is calculated
      on
      the moving-average basis and includes all costs to acquire and other costs
      incurred in bringing the inventories to their present location and condition.
      The Company evaluates the net realizable value of its inventories on a regular
      basis and records a provision for loss to reduce the computed weighted-average
      cost if it exceeds the net realizable value. Net realizable value is the
      estimated selling price in the ordinary course of business less the estimated
      costs of completion and the estimated costs  necessary
      to make the sale.





23




**PROPERTY,
      PLANT AND EQUIPMENT**





Property,
      plant and equipment are stated at cost less accumulated depreciation and
      impairment losses. The initial cost of the asset comprises its purchase price
      and any directly attributable costs of bringing the asset to its working
      condition and location for its intended use. Depreciation is provided using
      the
      straight-line method over the assets estimated useful life for periods ranging
      from five to fifty years. Significant improvements and betterments are
      capitalized where it is probable that the expenditure resulted in an increase
      in
      the future economic benefits expected to be obtained form the use of the asset
      beyond its originally assessed standard of performance. Routine repairs and
      maintenance are expensed when incurred. Gains and losses on disposal of fixed
      assets are recognized in the income statement based on the net disposal proceeds
      less the carrying amount of the assets.





**INCOME
      TAXES**





Income
      taxes of the Company’s subsidiaries are calculated in accordance with taxation
      principles currently effective in the PRC. For Synutra Illinois, applicable
      U.S.
      tax laws are followed. Deferred tax assets and liabilities are recognized for
      the future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. Deferred tax assets and liabilities are measured using
      enacted tax rates expected to apply to taxable income in the years in which
      those temporary differences are expected to be recovered or settled. The effect
      on deferred tax assets and liabilities of a change in tax rates is recognized
      as
      income in the period that includes the enactment date. A valuation allowance
      is
      provided for the amount of deferred tax assets and liabilities that, based
      on
      available evidence, are not expected to be realized.





Qingdao
      St. George Dairy Co., Ltd,Heilongjiang Loubei Shengyuan Dairy Co. Ltd, Bei’an
      Yipin Dairy Co. Ltd and Zhangjiakou Sheng Yuan Co. Ltd qualify as a foreign
      investment production enterprise and were established in a special economic
      zone. As approved by the tax authorities, such subsidiaries are entitled to
      a
      two year exemption from income taxes followed by three years of a 50% tax
      reduction, commencing from the first cumulative profit-making year net of losses
      carried forward.





Qingdao
      St. George Dairy Co., Ltd. is under such preferential tax treatment until
      December 31, 2008. Accordingly, the applicable enterprise income tax rate is
      24%
      and the local tax rate is0%, resulting in an aggregate tax rate of 24%. The
      subsidiary will not be subject to local income tax prior to 2003. The
      subsidiary’s first cumulative profit-making year was 2004.





Heilongjiang
      Luobei Sheng Yuan Dairy Co., Ltd. is under such preferential tax treatment
      until
      December 31, 2010. Accordingly, the applicable enterprise income tax rate is
      30%
      and the local tax  rate
      is3%, resulting in an aggregate tax rate of 33%. The subsidiary will not be
      subject to local income tax prior to 2005, The subsidiary’s first cumulative
      profit-making year was2006.





Bei’an
      Yipin Dairy Co., Ltd. is under such preferential tax treatment until December
      31, 2009. Accordingly, the applicable enterprise income tax rate is30% and
      the
      local tax rate is 3%, resulting in an aggregate tax rate of 33%. The subsidiary
      will not be subject to local income tax prior to 2004. The subsidiary’s first
      cumulative profit-making year was 2005.





Zhangjiakou
      Sheng Yuan Dairy Co., Ltd. is under such preferential tax treatment until
      December 31, 2010. Accordingly, the applicable enterprise income tax rate is
      30%
      and the local tax rate is 3%, resulting in an aggregate tax rate of 33%. The
      subsidiary will not be subject to local income tax prior to 2005. The
      subsidiary’s first cumulative profit-making year was 2006.





Qingdao
      Women and Children Nutrition Research Co. Ltd is subject to 33% income
      tax.




24


Tax
      Rates
      Schedule for various operating subsidiaries of the Company in China is as
      follows.








**REVENUE
      RECOGNITION**





The
      Company recognizes revenue from product sales when goods are shipped or
      delivered and rewards and risk of ownership and title pass to the customer.
      Revenues consist of the invoice value of the sale of goods and services net
      of
      value added tax, rebates and discounts, certain sales incentives, trade
      promotions, and product returns. Revenue dilution is accounted for as reductions
      in sales in the same period the related sales are recorded.





Most
      of
      the Company’s mainline product sales are through distributors. The Company’s
      revenue arrangement with all its distributors requires distributor advance
      payment before shipment and delivery  of
      goods
      to distributors. Under this distributor arrangement, evidenced by purchase
      order
      together with advance payment, sales revenue is realized and earned upon
      shipment and acceptance of delivery of products to and by distributors. The
      Company applies this revenue recognition policy uniformly to all its mainline
      products, including all dairy-based pediatric and adult nutritional products.
      Revenue recognition criteria outlined in the provisions of SAB 104, namely,
      persuasive evidence of arrangement, product delivery, fixed and determinable
      product prices, and reasonable assurance of collectibility are, therefore,
      met
      and self-evident.





A
      fraction of the Company’s mainline product sales are through supermarket
      retailers directly. Revenue arrangement with these retailers requires receipt
      of
      purchase orders before product shipment and delivery. Similarly, the revenues
      from retailers are recognized upon shipment or delivery of the goods to the
      retailers under payment terms of the sales contracts which are negotiated with
      select long term retailers, to assure reasonable collectibility.





The
      Company provides its distributors and retailers the right to return products
      due
      to package damage and shelf-life expiration. The majority of the Company’s
      products carry shelf lives of 18 to 24 months and the majority of products
      are
      sold during the shelf lives. Product returns due to damage and expiration,
      if
      any, are charged against current sales revenues. The arrangement meets the
      revenue recognition criteria under FASB Statement of Financial Accounting
      Standards No.48 “Revenue Recognition When Right of Return Exists.”





For
      new
      product offerings, the Company grants its distributors and retailers the same
      rights to return products due to package damage and shelf-life expiration as
      existing product offerings. These returns are deducted from revenue for the
      reporting period the return occurs. The Company monitors over time each product
      line, including new product offerings, to track the pattern of sales returns
      and
      considers if sales return reserves are necessary.





On
      top of
      standard distributor pricing arrangements, the Company provides its larger
      distributors with a growth-based incentive mechanism that ties incremental
      discounts to the levels of incremental sales growth attained in the
      corresponding periods. Qualified discounts are accrued in the corresponding
      periods during which the sales growth materialized. The cost of this policy
      is
      treated as discount and is charged against sales revenue of the corresponding
      period.





25


Most
      of
      the Company’s products are shipped to the distributors upon receipt of payment
      directly from them, and thus assume title of the products immediately. No single
      customer constitutes a significant distributor to the Company by commanding
      more
      than 3% of its total sales.





The
      Company does not employ any sales incentive programs aimed at inducing sales
      to
      customers that result in excess inventory levels. The practice of the Company’s
      standard cash in advance revenue arrangement with distributors also discourages
      customers from accumulating excessive inventory beyond their normal business
      needs.





**CONCENTRATION
      OF CREDIT RISK**





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist primarily of accounts receivable. The Company performs
      ongoing credit evaluations with respect to the financial condition of its
      creditors, but does not require collateral. In order to determine the value
      of
      the Company’s accounts receivable, the Company records a provision for doubtful
      accounts to cover probable credit losses. Management reviews and adjusts this
      allowance periodically based on historical experience and its evaluation of
      the
      collectibility of outstanding accounts receivable. The Company is exposed to
      the
      following risk factors:





(i)
      Credit risks - The Company has policies in place to ensure that sales of
      products are made to customers with an appropriate credit history. The Company
      also has a concentration of credit risk due to geographic sales as a majority
      of
      its products are marketed and sold in the PRC.





(ii)
      Liquidity risks - Prudent liquidity risk management implies maintaining
      sufficient cash, the availability of funding through an adequate amount of
      committed credit facilities and ability to close out market positions.





(iii)
      Interest rate risk - The interest rate and terms of repayments of short-term
      and
      long-term bank borrowings are approximately 5% per annum. The Company's income
      and cash flows are substantially independent of changes in market interest
      rates. The Company has no significant interest-bearing assets. The Company's
      policy is to maintain all of its borrowings in fixed rate instruments.




**RESULTS
      OF OPERATIONS**





**Year
      Ended March 31, 2006 Compared to Year Ended March 31, 2005**





**Sales**





Sales
      for
      the year ended March 31, 2006 increased by  $69,239,976
      or 109.12% to $132,691,502 from $63,451,526 for the year ended March 31, 2005.
      Increase in volume of products sold was due in part to greater market
      penetration as a result of various measures including changes made by management
      to incentive programs and policies affecting the Synutra sales system. Such
      change enhanced sales force productivity through targeted resource allocation
      down to the store level, and strengthened promotional efforts in the medium
      sized city markets and rural markets of China by aligning bonuses with sales
      performance.





The
      sales
      of traditional main products, such as the dairy based nutritional products
      for
      infants, children and adults under its brand names of Super, U-Smart, U-Strong,
      and National Standards, mostly contributed to the increasing trend of revenue.
      The total revenue also included sales generated from processing and packaging
      of
      nutritional supplement ingredients, anhydrous milk-fat, non-fat dry milk, and
      toll packaging and blending services, which amounted to $29,504,855 and
      $7,491,656 for the years ended March 31, 2006 and 2005 respectively.




26




a.
            The
                tons sold of traditional main products increased to 19,240 tons in
                the
                year ended March 31, 2006 from 12,903 tons in the year ended March
                31,
                2005, resulting in an increase of $27,484,348 in gross
                sales





b.
            Higher
                average selling price also contributed to the increase of gross sales.
                For
                the year ended March 31, 2006, the average selling price of the Company’s
                traditional main products increased from $4,337 to $4,956 per ton,
                resulting in an increase of $7,985,598 in gross sales.




c.
            Sales
                growth attributable to combined factor of the increase of the volume
                and
                the price was $3,922,078.




d.
            New
                product launched contributed $7,834,753 in gross sales growth.




e.
            Revenue
                generated from processing and packaging of nutritional supplement
                ingredients, anhydrous milk-fat, non-fat dry milk, and toll packaging
                and
                blending services was $29,505,855 and $7,491,656 for the years ended
                March
                31 of 2006 and 2005 respectively, which contributed $22,014,199 to
                the
                increase in the gross sales.





In
      the
      fiscal year ended March 31, 2006, the Company realized and earned close to
      98.8%
      of its sales revenue of the $103 million of traditional main products through
      its wholesale distributor networks and about 1.2% through the supermarket
      retailers. Of the total $56 million of main products sales earned in the 12
      months period ended March 31, 2005, about 98.7% was from distributors and about
      1.3% from supermarket retailers.





Majority
      of the Company’s products carry shelf lives of 18 to 24 months. Damaged and
      unsold products with expired shelf life are returned and deducted from sales
      revenue. In the year ended March 31, 2006 product returns were estimated at
      approximately $1.4 million, compared with an estimated $2.24 million in the
      previous year. These amounts were deducted from revenue of the reporting period.
      The decrease in product returns over the reporting periods reflects in part
      improvements in product package, in addition to overall product quality
      control.





Qualified
      discounts are accrued to larger distributors with a growth-based incentive
      mechanism in the corresponding periods during which the sales growth
      materialized. The cost of this policy is treated as discount and is charged
      against sales revenue of the corresponding period. In the year ended March
      31,
      2006, growth based distributor incentive amounted to approximately $1.62
      million, compared to about $0.88 million the year ended March 31,
      2005.





Most
      of
      the Company’s products are shipped to the distributors upon receipt of payment
      directly from them, who thus assume title of the products immediately. No single
      customer constitutes a significant distributor to the Company by commanding
      more
      than 3% of its total sales both in the year ended March 31, 2006 and
      2005.





Management
      believes that the overall infant formula industry in China has grown faster
      than
      its traditional natural growth due to increased consumer recognition and
      acceptance of the products, especially Synutra’s name-brand products. Management
      believes Synutra name brand product lines have gained recognition in the
      marketplaces where it operates and thus has captured a greater portion of the
      increased growth experienced by the industry. In addition, management believes
      premium products with a higher margin have grown faster in the period across
      the
      industry.





**Cost
      of Sales**





Cost
      of
      sales for the year ended March 31, 2006 increased to $75,422,827 from
      $35,171,262 for the year ended March 31, 2005. The 114.4%% increase in cost
      of
      sales of $40,251,565 was a result of increases in purchases of raw materials
      and
      other ingredients, as well as increases in processing expenses, all in
      proportion to the production volume increases.





27


The
      increase of 6,337 tons sold of the traditional main products resulted in
      $13,737,164 increase of cost. The average cost per unit decreased by $104 per
      metric ton, resulting in $1,336,349 cost reduction for the year ended March
      31,
      2006. Additionally, the combined factor of production volume and reduction
      of
      unit cost led to $656,340 decline of cost of products sold. The launch of new
      products accounted for $6,827,584 in the total cost of sales for the year ended
      March 31, 2006. The total cost of sales also included costs associated with
      processing and packaging of nutritional supplement ingredients, anhydrous
      milk-fat, non-fat dry milk, and toll packaging and blending
      services.





The
      $104
      average cost per unit decrease for main products was principally due to the
      Company’s continuous effort in improving the formula mix in addition to
      achieving economies of scale. The production volume of the Company’s mainline
      products increased by approximately 8,000 tons or more than 50% during the
      fiscal year ended March 31, 2006 from the previous fiscal year, which
      contributed to a reduction in processing cost per ton of products
      produced.





**Gross
      Profit**





Gross
      profit was $57,268,675 or 43.2% of sales for the year ended March 31, 2006,
      compared to $28,280,264 or 44.6% of sales for the year ended March 31, 2005.
      It
      was an increase of $28,988,411 or 102.5% in gross profit.





The
      sales
      of traditional main products contributed $55,637,682 or 97.2% of gross profits
      for the year ended March 31, 2006. Such main products sales contributed
      $27,990,135 or 99% gross profits for the year ended March 31, 2005.





In
      the
      year ended March 31, 2006, the Company experienced increases in both gross
      profit and gross margin. This increase was primarily a result of increased
      volume of products sold and the average sales price during the year. Due to
      implementation of targeted sales incentive programs, sales of the higher margin
      lines of products increased more, contributing to the increase in gross
      margin.





**Selling
      and Distribution Expenses**





Selling
      and distribution expenses increased by $4,224,746 or 37.5% to $15,494,007 for
      the year ended March 31, 2006, as compared to $11,269,262 for the year ended
      March 31, 2005. The increase in selling and distribution expenses in 2006
      as compared to 2005 was a result of increased transportation and travel expenses
      in proportion to the increase in sales volume, in addition to increases in
      expenses such as wages. ** The
      total
      compensation to the sales force increased by $2,904,932 from $1,623,507 in
      the
      year ended March 31, 2005 to $4,528,439 in the year ended March 31, 2006. In
      the
      meantime shipping and handling expenses increased by $845,484 from $1,964,855
      in
      the year ended March 31, 2005 to $2,810,339 in the year ended March 31, 2006;
      and travel expenses increased by $644,934 from $732,278 in the year ended March
      31, 2005 to $1,377,213 in the year ended March 31, 2006. Sales force
      compensation increased due to the hiring of additional sales personnel in
      response to expanding business and greater market penetration. During the fiscal
      year ended March 31, 2006, the Company increased its marketing effort in rural
      areas with more than 800 sales personnel added reaching into 1,000 additional
      townships throughout China.





**Advertising
      and Sales Promotion**





Advertising
      and sales promotion increased by $13,363,733 or 145.63% to $22,540,472 for
      the
      year ended March 31, 2006, as compared to $9,176,739 for the year ended March
      31, 2005 as a result of increased advertising and promotional activity expenses.
      The major components of advertising and sales promotion are placement of
      advertisements with major media outlets and points of sale and community
      promotional activities.




28




**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**
            
            **change
                in $**
            
            **change
                in %**Advertising
            
            $
            6,038,236
            
            $
            2,556,608
            
            $
            3,481,628
            
            
            136.18
            %Sales
                promotion
            
            
            16,502,236
            
            
            6,620,131
            
            
            9,882,105
            
            
            149.27
            %**Totals**
            
            **$**
            **22,540,472**
            
            **$**
            **9,176,739**
            
            **$**
            **13,363,733**
            
            
            145.63
            %





**General
      and Administrative Expenses**





General
      and administrative expenses increased by $2,862,789 or 101.0% to $5,697,969
      for
      the year ended March 31, 2006, as compared to $2,835,180 for the year ended
      March 31, 2005. The major increases in general and administrative expenses
      were
      for staff salaries and management expenses which accounted for about $1.1
      million of the total increase. The Company incurred an additional $1.1 million
      incremental legal, accounting, and consulting costs related to corporate
      transactions and the costs associated with operating a public
      company.





**Income
      from Operations**





Based
      on
      the sales increase of $69.2 million or 109.1% and the cost of sales increase
      of
      $40.2 million or 114.4% for the year ended March 31, 2006, gross profit was
      up
      by almost $29 million or 102.5% compared to March 2005. In the meantime,
      operational expenses also increased by approximately $20 million for the year.
      As a result, income from operations was $13,536,227 for the year ended March
      31,
      2006, as compared to $4,999,083 for the year ended March 31, 2005, an increase
      of $8,537,144 or 170.8%





**Finance
      costs**





Finance
      costs increased by $812,933 or 69.6% to $1,981,565 for the year ended March
      31,
      2006, as compared to $1,168,632 for the year ended March 31, 2005. The increase
      is mainly a result of recording of share-based payment to financial consultants
      in a transaction fee of $567,000 and interest charged for various bank loans.
      In
      addition to increases in notes payable, short-term loan interest rate also
      went
      up during the reporting period.





**Subsidy
      income**





Subsidy
      income from local governments increased by $463,256 to $734,035 for the year
      ended March 31, 2006 as compared to $270,779 for the year ended March 31, 2005.
      These subsidies were provided to the Company as economic incentives to secure
      business commitments and no repayment by the Company is required.





**Other
      Expenses**





Other
      net
      expenses were $44,602 for the year ended March 31, 2006, and the amount was
      $290,988 for the year ended March 31, 2005. The Company incurred these net
      expenses mainly as a result of sales and disposal of certain assets or fixed
      assets.





29




**Provision
      for Income Taxes**





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $1,445,677 and $88,355 for the years ended March 31, 2006 and 2005,
      respectively. The difference in income tax provisions was due to changes in
      the
      status of tax holidays and abatement treatment for the year 2006 for some of
      the
      operating subsidiaries.





Under
      the
      Provisional Taxation Regulation of the PRC, income tax is payable by enterprises
      at a rate of 33% of their taxable income. Subject to this regime, the Company’s
      aggregate corporate income tax would have been $4,118,784 and $1,305,051 for
      the
      year ended March 31, 2006 and 2005, respectively. Some of the Company’s
      operating subsidiaries in China currently enjoy reduced tax rates or tax
      holidays which will expire under varying termination schedules. Due to
      application of such preferential tax policy, the actual corporate income tax
      was
      $1,445,677 and $88,355 for the year ended March 31, 2006 and 2005, respectively.
      The reduced tax rates or tax holidays accorded to the Company resulted in tax
      savings of $2,673,107 and $1,216,696, respectively. The per share effect of
      the
      total tax savings was $0.05 and $0.03 for the year ended March 31, 2006 and
      2005, respectively





**Net
      Income Attributed to Shareholders**





Net
      income attributable to shareholders for the year ended March 31, 2006 increased
      by $7,912,944 to $11,034,912 from $3,121,968 for the year ended March 31, 2005
      due to the factors discussed above.





**Earnings
      Per Share**





Basic
      and
      diluted Earnings Per Share were $0.23 and $0.07 for the years ended March 31,
      2006 and 2005, respectively.





**FINANCIAL
      CONDITION**





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Cash**





The
      cash
      balance increased by $6,048,466 to $22,133,869 at March 31, 2006, as compared
      to
      $16,085,403 at March 31, 2005. The increase was mainly attributable to cash
      flow
      from operations in 2005 which amounted to $11,102,458, being offset by cash
      spent in construction projects on plant and acquisition of fixed assets which
      amounted to$7,731,403 and cash used in financing activities which amounted
      to
      $1,403,855. The remaining $1,273,555 was the effect of exchange rate changes
      on
      cash items.




Cash
      flow
      generated from operations was $11,102,458 for the fiscal the year ended March
      31, 2006. Trade receivables increased by $786,224 and advances to suppliers
      decreased by $367,572. Expanded scale of operations from the increase in sales
      revenues in 2006 resulted in additional demand on working capital. Therefore,
      we
      experienced increased account receivables and inventories to support our
      increased sales revenues and production activities. Also, expansion of
      operations resulted in significant increases in accounts payable and customer
      deposits, resulting in $8,004,946 in cash flow. A reduction of approximately
      $5
      million in cash flow was due to advances to related parties   in prepayment
      in order to secure key ingredient supplies.





Cash
      flows used in investing activities amounted to $7,731,403. During the year,
      we
      used around $7 million for the construction of a new factory plant and
      facilities. The facilities are expected to be completed in mid 2006 *.* We
      also
      spent around $669,447 for new machinery and equipment.





Cash
      flows generated from financing activities was $1,403,855. The net increase
      in
      bank loans was approximately $930,000.





30




**Working
      Capital**





Working
      capital increased by $6.6 million to negative $9.3 million at March 31, 2006,
      as
      compared to negative $15.9 million at March 31, 2005. The increase in working
      capital reflects current ratios of 83.73% and 69.23%, respectively.





Although
      the Company continues to have a working capital deficit, since 2004, growth
      of
      the Company’s pretax earnings continues to outpace by an average factor of about
      10 times the interest payments over current liabilities, demonstrating the
      Company’s ability to meet interest payment of current liabilities with cash from
      operations. In addition, management believes much of the bank loans and notes
      payables booked as current liabilities can be readily extended on a revolving
      bases.





The
      Company currently generates its cash flow through operations which it believes
      will be sufficient to sustain operations for at least the next twelve months.
      During the fiscal year ending March 31, 2007, we intend to continue to work
      to
      expand our product lines and product mix, as well as our product distribution
      throughout China. We plan to use our working capital for such purposes.





**Contractual
      Obligations**





A
      summary
      of the Company's contractual Obligations at March 31, 2006 is as follows:





Payments
                due by periodLess
                Than
            
            
            1
                to 3
            
            
            3
                to 5
            
            
            More
                ThanContractual
                Obligations
            
            
            Total
            
            
            1
                Year
            
            
            Years
            
            
            Years
            
            
            5
                YearsLong-Term
                Debt Obligations
            
            $
            4,932,182
            
            
            —
            
            
            4,932,182
            
            
            —
            
            
            —Operating
                Lease Obligations
            
            $
            453,488
            
            
            272,230
            
            
            181,258
            
            
            —
            
            
            —Total
            
            $
            5,385,670
            
            
            272,230
            
            
            5,113,440
            
            
            —
            
            
            —




**QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
      Company does not have any market risk with respect to such factors as commodity
      prices, equity prices, and other market changes that affect market risk
      sensitive investments. A 10 point basis change in the Company’s average debt
      interest rate would not have a material effect on the Company’s results of
      operations.





With
      respect to foreign currency exchange rates, the Company does not believe that
      a
      devaluation or fluctuation of the RMB against the USD would have a detrimental
      effect on the Company’s operations, since the Company conducts virtually all of
      its business in China, and the sale of its products and the purchase of raw
      materials and services are settled in RMB. The effect of a devaluation or
      fluctuation of the RMB against the USD would affect the Company’s results of
      operations, financial position and cash flows, when presented in USD (based
      on a
      current exchange rate) as compared to RMB.





As
      the
      Company’s debt obligations are primarily short-term in nature, with fixed
      interest rates, the Company does not have any risk from an increase in market
      interest rates. However, to the extent that the Company arranges new borrowings
      in the future, an increase in market interest rates would cause a commensurate
      increase in the interest expense related to such borrowings.





**ITEM
      7. FINANCIAL STATEMENTS**





Financial
      statements are set forth at the end of this report after ITEM 14.




31






**ITEM
      13. EXHIBITS**





**EXHIBIT
                NO.**
            
            **DOCUMENT
                DESCRIPTION**3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws
                (1)10.1
            
            Share
                Exchange Agreement dated as of June 14, 2005 (2)10.2
            
            License
                and Supply Agreement dated as of September 1, 2003(3)31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as amended.32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
                Officer).32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
                Officer).




(1)
            Incorporated
                herein by reference from the Registrant’s form 10SB12G filed with the
                Securities and Exchange Commission on June 15, 2005.(2)
            Incorporated
                herein by reference from the Registrant’s Form 8-K filed with the
                Securities and Exchange Commission on July 21, 2005.


(3)
            Incorporated
                herein by reference from the Registrant’s Form 10KSB filed with the
                Securities and Exchange Commission on May 5, 2006.






32




**ITEM
        7. FINANCIAL STATEMENTS**





**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**MARCH
      31, 2006 AND 2005**





**INDEX
      TO FINANCIAL STATEMENTS**





Independent
                Auditors' Report
            F-2Consolidated
                Balance Sheets as of March 31, 2006 and 2005
            F-3
                - F-4Consolidated
                Statements of Income for the years ended March 31, 2006 and 2005
                (restated)
            F-5Consolidated
                Statements of Changes in Equity for the years ended March 31, 2006
                and
                2005 (restated)
            F-6Consolidated
                Statement of Cash Flows for the years ended March 31, 2006 and 2005
            F-7
                - F-8Notes
                to Consolidated Financial Statements
            F-9
                - F-29





F-1


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To
      the
      Board of Directors


and
      Stockholders


Synutra
      International, Inc. and Subsidiaries


Rockville,
      Maryland








We
      have
      audited the accompanying consolidated balance sheets of Synutra International,
      Inc. and Subsidiaries as of March 31, 2006 and 2005, and the related
      consolidated statements of income, changes in equity, and cash flows for each
      of
      the two years in the period ended March 31, 2006 and 2005. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of March
      31,
      2006 and 2005, and the results of its operations and its cash flows for each
      of
      the two years in the period ended March 31, 2006 and 2005, in conformity with
      accounting principles generally accepted in the United States of
      America.





As
      discussed in Note 18, the financial statements for the year ended March 31,
      2006
      have been restated both to give effect to the fair value of 2,879,500 shares
      of
      common stocks issued for the service rendered in connection with the
      recapitalization transaction of the company and to reflect the historical shares
      of common stock of Vorsatech that were issued and the related earnings per
      share
      for the period prior to the merger.








/s/
      Rotenberg & Co., llp





Rotenberg
      & Co., llp


Rochester,
      New York


May
      5,
      2006


(Except
      for Note 18 as to which the date is January 31, 2007.)




F-2


**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**





**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF MARCH 31, 2006 AND 2005**





**ASSETS**
            
            **March
                31, 2006**
            
            **March
                31, 2005****Current
                Assets**Cash
                and cash equivalents
            
            $
            22,133,869
            
            $
            16,085,403Short
                term investment - at market
            
            
            42,557
            
            
            45,237Notes
                receivables
            
            
            
            
            
            27,790Trade
                receivables, net of provisions
            
            
            2,539,717
            
            
            1,968,235Inventories,
                net of provisions
            
            
            11,789,433
            
            
            6,757,021Advances
                to suppliers
            
            
            354,052
            
            
            721,623Other
                receivables, net of provisions
            
            
            2,229,869
            
            
            1,745,985Due
                from related parties
            
            
            8,602,363
            
            
            8,082,451Including
                Trade receivables
            
            
            2,018,344
            
            
            357,204Other
                receivables
            
            
            2,058,250
            
            
            2,173,191Prepayment
            
            
            4,525,769
            
            
            5,552,056Deferred
                expenses
            
            
            125,931
            
            
            383,869**Total
                current assets**
            
            
            **47,817,791**
            
            
            **35,817,613****Property,
                plant and equipment, net**
            
            
            **13,727,873**
            
            
            **13,887,012****Other
                Assets**Intangible
                assets
            
            
            264,562
            
            
            334,392Construction
                in progress
            
            
            21,198,431
            
            
            14,152,518**TOTAL
                ASSETS**
            
            $
            83,008,658
            
            $
            64,191,535





The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-3


**CONSOLIDATED
      BALANCE SHEETS (Continued)**


**AS
      OF MARCH 31, 2006 AND 2005**


**LIABILITIES
      AND SHAREHOLDERS' EQUITY**





**March
                31, 2006**
            
            **March
                31, 2005****Current
                Liabilities**Bank
                loans
            
            $
            13,133,534
            
            **$**
            12,299,885Notes
                payable
            
            
            19,112,823
            
            
            19,821,180Trade
                payables
            
            
            12,579,942
            
            
            4,966,997Advance
                from customers
            
            
            932,843
            
            
            540,843Other
                payables
            
            
            4,569,873
            
            
            4,400,128Accrued
                expenses
            
            
            498,786
            
            
            293,640Tax
                payables
            
            
            1,996,789
            
            
            605,915Due
                to related parties
            
            
            4,301,137
            
            
            8,808,905Including
                Trade payables
            
            
            4,301,137
            
            
            6,452,836Notes
                payables
            
            
            -
            
            
            2,356,068**Total
                current liabilities**
            
            $
            57,125,726
            
            **$**
            **51,737,493****Long
                term liabilities**
            
            
            **4,932,182**
            
            
            **4,832,961****Total
                liabilities**
            
            $
            62,057,909
            
            **$**
            **56,570,454****Minority
                interest**
            
            
            **-**
            
            
            **(576**
            **)****Shareholders'
                equity**Share
                capital
            
            
            5,000
            
            
            4,600Additional
                paid-in capital
            
            
            8,226,033
            
            
            7,205,809Reserves
            
            
            45,804
            
            
            45,804Retained
                profits
            
            
            11,618,515
            
            
            583,603Accumulated
                comprehensive income/(loss)
            
            
            1,055,397
            
            
            (218,158
            )**Total
                shareholders' equity**
            
            $
            20,950,749
            
            $
            7,621,657**TOTAL
                LIABILITIES AND SHAREHOLDERS'**
            
            $
            83,008,658
            
            $
            64,191,535





The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-4


**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**





**Year
                ended**
            
            **Year
                ended****March
                31, 2006**
            
            **March
                31, 2005**Restated,
                see Note 18
            
            Restated,
                see Note 18Sales
            
            $
            132,691,502
            
            $
            63,451,526Including
                sales to related parties
            
            
            20,983,249
            
            
            4,820,854Cost
                of sales
            
            
            75,422,827
            
            
            35,171,262Including
                cost of sales to related parties
            
            
            19,771,007
            
            
            4,499,888**Gross
                profit**
            
            
            **57,268,675**
            
            
            **28,280,264**Selling
                & distribution expenses
            
            
            15,494,007
            
            
            11,269,262Advertising
                and promotion
            
            
            22,540,472
            
            
            9,176,739General
                & administrative expenses
            
            
            5,697,969
            
            
            2,835,180**Income
                from operations**
            
            
            **13,536,227**
            
            
            **4,999,083**Finance
                   costs
            
            
            (1,981,565
            )
            
            (1,168,632
            )Subsidy
            
            
            734,035
            
            
            270,779Interest
                income
            
            
            237,070
            
            
            144,458Other
                income/(expenses)
            
            
            (44,602
            )
            
            (290,988
            )**Income
                before tax**
            
            
            **12,481,165**
            
            
            **3,954,700**Corporation
                income tax - current
            
            
            1,445,677
            
            
            88,355**Net
                income before minority interests**
            
            
            **11,035,488**
            
            
            **3,866,345**Minority
                interests
            
            
            (576
            )
            
            (744,377
            )**Net
                income attributable to shareholders**
            
            
            **11,034,912**
            
            
            **3,121,968**Comprehensive
                income/(loss)
            
            
            1,273,555
            
            
            (109,805
            )**Comprehensive
                income**
            
            
            **12,308,468**
            
            
            **3,012,163****Earning
                per share**Basic
                and diluted
            
            $
            0.23
            
            $
            0.07**Weighted
                average common share outstanding**Basic
                and diluted
            
            
            48,833,838
            
            
            46,000,000





The
      accompanying notes are an integral part of the consolidated financial
      statement.




(1)
            All
                shares and additional paid-in capital have been restated to reflect
                recapitalization on July 15, 2005.




F-5




**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Restated)**


**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**





AccumulatedCommon
                Stock
            
            Share
            
            Additional
            
            
            
            Retained
            
            comprehensiveOutstanding
            
            capital
            
            paid-in
                capital
            
            Reserves
            
            profits
            
            income(loss)
            
            TotalBalance
                at April 1, 2004
            
            
            46,000,000
            
            $
            4,600
            
            $
            7,001,139
            
            $
            29,149
            
            $
            (2,521,710
            )
            $
            (108,353
            )
            $
            4,404,825Capital
                contribution during the year
            
            
            
            
            
            
            
            
            204,670
            
            
            
            
            
            
            
            
            
            
            
            204,670Net
                income for the year
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            3,121,968
            
            
            -
            
            
            3,121,968Transfer
                to reserves
            
            
            
            
            
            
            
            
            
            
            
            16,655
            
            
            (16,655
            )
            
            -
            
            
            -Other
                comprehensive income/(loss)
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            (109,805
            )
            
            (109,805
            )Balance
                at March 31, 2005
            
            
            46,000,000
            
            
            4,600
            
            
            7,205,809
            
            
            45,804
            
            
            583,603
            
            
            (218,158
            )
            
            7,621,657Acquisition
                of Vorsatech
              (Restated,
                see Note 18)
            
            
            1,121,213
            
            
            112.12
            
            
            (17,473
            )
            
            
            
            
            
            
            
            
            
            
            (17,361
            )Capital
                stock issued to Financial consultant and finders
            
            
            2,879,500
            
            
            288
            
            
            566,712
            
            
            
            
            
            
            
            
            
            
            
            567,000Capital
                contribution during the year
            
            
            
            
            
            
            
            
            470,985
            
            
            
            
            
            
            
            
            
            
            
            470,985Excess
                in capital contribution
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income for the year
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            11,034,912
            
            
            -
            
            
            11,034,912Other
                comprehensive income/(loss)
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,273,555
            
            
            1,273,555Balance
                at March 31, 2006
            
            
            50,000,713
            
            $
            5,000
            
            $
            8,226,033
            
            $
            45,804
            
            $
            11,618,515
            
            $
            1,055,397
            
            $
            20,950,749






(1)
            All
                shares and additional paid-in capital have been restated to reflect
                recapitalization on July 15, 2005.





The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-6




**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**





**Year
                ended**
            
            **Year
                ended****March
                31, 2006**
            
            **March
                31, 2005****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            11,034,912
            
            $
            3,121,968Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                   and amortization
            
            
            914,456
            
            
            1,320,410Bad
                Debt Expenses
            
            
            214,742
            
            
            98,123Gain
                on short term investment
            
            
            2,680
            
            
            26,315Minority
                interest
            
            
            576
            
            
            744,376Financial
                consultants and finders fee
            
            
            567,000Changes
                in operating assets and liabilities:Bills
                receivable
            
            
            27,790
            
            
            172,993Trade
                receivable, net
            
            
            (786,224
            )
            
            (759,617
            )Inventories
            
            
            (5,032,412
            )
            
            (327,256
            )Advances
                to suppliers
            
            
            367,572
            
            
            86,514Other
                receivable, net
            
            
            (483,884
            )
            
            10,916,178Deferred
                expenses
            
            
            257,939
            
            
            (58,492
            )Due
                from related parties
            
            
            (519,911
            )
            
            (5,592,687
            )Due
                to related parties
            
            
            (4,507,769
            )
            
            (817,332
            )Bills
                payable
            
            
            (708,358
            )
            
            7,738,778Trade
                payable
            
            
            7,612,945
            
            
            417,910Advances
                from customers
            
            
            392,000
            
            
            (320,458
            )Other
                payable & accrued expenses
            
            
            357,531
            
            
            (2,566,741
            )Tax
                payable
            
            
            1,390,874
            
            
            91,328**Net
                Cash Provided by Operating Activities**
            
            
            **11,102,458**
            
            
            **14,292,311****Cash
                Flows from Investing Activities:**Acquisition
                of property, plant and equipment
            
            
            (669,447
            )
            
            (1,379,998
            )Cash
                used for construction in progress
            
            
            (7,045,914
            )
            
            (13,224,460
            )Purchases
                of intangible assets
            
            
            (16,042
            )
            
            (334,392
            )**Net
                Cash Used in Investing Activities**
            
            
            **(7,731,403**
            **)**
            
            **(14,938,852**
            **)**





The
      accompanying notes are an integral part of the consolidated financial
      statements




F-7


**CONSOLIDATED
      STATEMENTS OF CASH FLOW (Continued)**


**FOR
      THE YEARS ENDED MARCH 31, 2006 AND 2005**





**Year
                ended**
            
            **Year
                ended****March
                31, 2006**
            
            **March
                31, 2005****Cash
                Flows from Financing Activities:**Inception
                of bank loans, net
            
            
            932,870
            
            
            6,524,497Repayment
                of bank loans, net
            
            
            -
            
            
            (3,624,721
            )(Excess
                of)/ capital contribution
            
            
            470,985
            
            
            204,670**Net
                Cash Provided by Financing Activities**
            
            
            **1,403,855**
            
            
            **3,104,446****Net
                Change in Cash and Cash Equivalents**
            
            
            **4,774,911**
            
            
            **2,457,905**Effect
                of Exchange Rate Changes on Cash and Cash Equivalents
            
            
            1,273,555
            
            
            (109,805
            )Cash
                and cash equivalents, beginning of period
            
            
            16,085,403
            
            
            13,737,303**Cash
                and cash equivalents, end of period**
            
            $
            22,133,869
            
            $
            16,085,403**Supplementary
                Cash Flows Disclosures**Interest
                paid
            
            $
            1,981,565
            
            $
            1,168,632Income
                taxes paid
            
            $
            1,026,266
            
            $
            95,451





The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-8


**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005**





**1.
      ORGANIZATION AND PRINCIPAL ACTIVITIES**





Qingdao
      Sheng Yuan Dairy Co., Ltd. is engaged in the sales and marketing of dairy based
      nutritional products for infants, children and adults under its brand names
      of
      Super, U-Smart, U-Strong, and National Standards. Qingdao Sheng Yuan Dairy
      Co.,
      Ltd. was formed in January 1998 by Sodiaal Industrial Co. Ltd (55%) and Beijing
      Honnete Dairy Co., Ltd.,(45%) an affiliate of Mr. Liang Zhang, the Company’s
      Chief Executive Officer. In December 2003, Sodiaal Industrial Co. Ltd
      transferred 15% of its ownership to Beijing Honnete Dairy Co., Ltd ,and
      transferred 40% of its ownership to Synutra Illinois, In February 2004,Beijing
      Honnete Dairy Co., Ltd, transferred 60% of his ownership to Sheng Zhi Da Dairy
      Corporation ,In February 2005,Sheng Zhi Da Dairy Corporation transferred 60%of
      its ownership to Synutra Illinois, resulting in a 100% of ownership of Qingdao
      Sheng Yuan Dairy Co., Ltd. by Synutra Illinois.





Qingdao
      ST George Dairy Co., Ltd. is engaged in the production, packaging, shipping
      and
      distribution of all of Synutra’s products. Qingdao ST George Dairy Co., Ltd. was
      formed in September 2001 by Synutra Illinois. In March 2004 Synutra Illinois
      transferred 75% of Qingdao St George Dairy Co., Ltd ownership to Sheng Zhi
      Da
      Dairy Corporation and Synutra Illinois retained 25% of the company. In February
      2005 Sheng Zhi Da Dairy Corporation transferred all of its ownership in Qingdao
      St. George Dairy Co., Ltd. (75%) to Synutra Illinois, resulting in a 100%
      ownership of Qingdao St. George Dairy Co., Ltd by Synutra Illinois.





Beian
      Yi
      Pin Dairy Co., Ltd. (“Beian”) is engaged in the production and processing of
      adult dairy based nutritional products and various milk powder products. Beian
      Yi Pin Dairy Co., Ltd. was formed In June 2004,by Sheng Zhi Da Dairy Corporation
      and Synutra Illinois-. In January 2005, Sheng Zhi Da Dairy Corporation
      transferred 71.26% of its ownership in Beian to Synutra Illinois, resulting
      in a
      100% ownership of Beian Yi Pin Dairy Co., Ltd. by Synutra Illinois





Luobei
      Sheng Yuan Dairy Co., Ltd. (“Loubei”) is engaged in the production and
      processing of Synutra’s products for infants and children under the brand names
      U-Smart, U-Strong, and National Standards under the “Sheng Yuan” label. Loubei
      was formed in April 2001 by Mr. Liang Zhang, and Ms. Xiu Qing Meng. In June
      2003, Mr. Zhang transferred 67% of his ownership to Sheng Zhi Da Dairy
      Corporation. In January 2005, Ms. Xiu Qing Meng transferred 33% of her ownership
      to Synutra Illinois , Sheng Zhi Da Dairy Corporation transferred 67% of its
      ownership to Synutra Illinois, resulting in a 100% ownership of Luobei Sheng
      Yuan Dairy Co., Ltd by Synutra Illinois.





Qingdao
      Mother and Infant Nutrition Research Company Limited is engaged in the research
      and development of various nutritional products for both infants and children
      as
      well as pregnant and lactating women. Qingdao Mother and Infant Nutrition
      Research Company Limited was formed in April 2004 by -Sheng Zhi Da Dairy
      Corporation (80%) and Ms. Xiu Qing Meng(20%). In May 2005, Sheng Zhi Da Dairy
      Corporation transferred 80% of its ownership to Synutra Illinois and Ms. Xiu
      Qing Meng transferred 20% of her ownership to Synutra Illinois, resulting in
      a
      100% ownership of Qingdao Mother and Infant Nutrition Research Company Limited
      by Synutra Illinois.





F-9


**1.
      ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)**





Chabei
      Sheng Yuan Dairy Co., Ltd. is engaged in the production and processing of all
      of
      Synutra’s products under the brand names Super, U-Smart, U-Strong, and National
      Standards. Chabei Sheng Yuan Dairy Co., Ltd. was formed in February 2002, by
      Ms,
      Xiu Qing Meng (20%) and Sheng Zhi Da Dairy Corporation (80%). In March 2005,
      Ms.
      Xiu Qing Meng transferred 20% of her ownership to Synutra Illinois and Sheng
      Zhi
      Da Dairy Corporation transferred 80% of its ownership to Synutra Illinois,
      resulting in a 100% ownership of Chabei Sheng Yuan Dairy Co., Ltd. by Synutra
      Illinois. In August 2005, Chabei Sheng Yuan Diary Co., Ltd. was merged with
      Zhangjiakou Sheng Yuan Diary Co., Ltd. Zhangjiakou Sheng Yuan Diary Co., Ltd.
      emerged as the surviving entity from the merger.




Zhangjiakou
      Sheng Yuan Dairy Co., Ltd. (“Zhangjiakou”) is engaged in the production and
      processing of all of Synutra’s products under the brand names Super, U-Smart,
      U-Strong, and National Standards. Zhangjiakou Sheng Yuan Dairy Co., Ltd. was
      formed in March 2004 by Sheng Zhi Da Dairy Corporation(40%) and Synutra
      Illinois(60%). In March 2005, Sheng Zhi Da Dairy Corporation transferred 40%
      of
      its ownership to Synutra Illinois, resulting in Synutra Illinois owing 100%
      of
      Zhangjiakou.




As
      of
      December 31, 2003, Mr. Zhang and Ms. Meng held 80% and 18.8%, respectively,
      of
      Beijing Honnete Diary Co., Ltd. They also held 71.43% and 14.29%, respectively,
      of the voting interest in Sheng Zhi Da Dairy Group Corporation at December
      31,
      2003.





On
      July
      15, 2005, pursuant to a Share Exchange Agreement dated as of June 14, 2005
      among
      the Company, Thomas Braun, Beams Power Investment Limited, Strong Gold Finance
      Ltd and Synutra Illinois, the Company issued 48,879,500 shares of its common
      stock in exchange for all of the issued and outstanding shares of Synutra
      Illinois that owned all the registered capital of the six subsidiaries (the
      “Exchange”). As a result of this Exchange, Synutra Illinois became a wholly
      owned subsidiary of the Company.





Immediately
      prior to the Exchange, the Company had 2,638,713 outstanding shares of common
      stock and no outstanding shares of preferred stock. The Company’s Certificate of
      Incorporation provides for authorized capital of two hundred and seventy million
      shares (270,000,000) of which two hundred and fifty million (250,000,000) are
      $0.0001 par value common stock and twenty million (20,000,000) are $0.0001
      par
      value preferred stock. Prior to the Exchange, Thomas Braun, the sole director
      and officer of the Company, and his affiliates owned 2,200,000 shares of the
      Company common stock. Pursuant to the Exchange, the Company cancelled
      approximately 1,517,500 shares of common stock owned by Mr. Braun and his
      affiliates reducing their ownership to 682,500 shares, resulting in the total
      issued and outstanding shares of the Company common stock equaling 1,121,213
      shares.





Pursuant
      to the Exchange, the Company issued 46,000,000 shares of its common stock in
      exchange for all of the outstanding capital stock of Synutra Illinois held
      by
      Beams Power Investment Limited and Strong Gold Finance Ltd., 2,844,500 shares
      were issued to various financial consultants and/or their designees and 35,000
      shares to a finder. Therefore, the total issued and outstanding shares of the
      Company’s common stock was 50,000,713 shares after giving effect to the
      Exchange.





As
      a
      result of the Exchange, the stockholders of the Company immediately prior to
      the
      Exchange owned approximately 1,121,213 shares, or approximately 2% of the issued
      and outstanding shares of the Company’s common stock and the Company is now
      controlled by the former stockholders of Synutra Illinois.





F-10


**2.
      BASIS OF PRESENTATION**





The
      consolidated financial statements include the accounts of the Company (SYUT)
      and
      all its subsidiaries ("The Group"). All material inter-company accounts and
      transactions have been eliminated.





The
      following companies are consolidated for financial statement presentation:





**Name
                of subsidiaries**
            
            **March
                31, 2005**
            
            **March
                31, 2006**
            
            **Incorporation
                date**Qingdao
                St. George Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            September
                2001Qingdao
                Sheng Yuan Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            January
                1998Heilongjiang
                Loubei Sheng Yuan Food Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            April
                2001Bei’an
                Yipin Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            June
                2004Qingdao
                Women and Children Nutrition Research Co., Ltd.
            
            
            0
            %
            
            100
            %
            
            April
                2004Zhangjiakou
                Shen Yuan Diary Co., Ltd. *
            
            
            100
            %
            
            100
            %
            
            March
                2004





**
      Zhangjiakou completed a merger with Chaibei Sheng Yuan as of August 2005 and
      Zhangjiakou emerged as the surviving entity from the merger.*





Qingdao
      Women and Children Nutrition Research Co., Ltd. was consolidated after May
      1,
      2005 when the Company acquired 100% of ownership and voting rights in the
      entity.




**3.
      SUMMARY OF PRINCIPAL ACCOUNTING POLICIES**




**A.
      CASH AND CASH EQUIVALENTS**





The
      Company considers cash and cash equivalents to include cash on hand and demand
      deposits with banks with an original maturity of three months or less.





March
                31, 2006
            
            March
                31, 2005Cash
            
            $
            5,676,616
            
            $
            5,812,340Cash
                restricted
            
            
            16,457,253
            
            
            10,273,063Total
            
            $
            22,133,869
            
            $
            16,085,403





Cash
      restricted is 30%, 50%, or 100% bank demand deposit used as security against
      notes payable. This is used by the Company as a short term instrument to reduce
      financing cost. Cash restricted are called at the same terms of notes.





**B.
      INVENTORIES**





Inventories
      are stated at the lower of cost or net realizable value. Cost is calculated
      on
      the moving-average basis and includes all costs to acquire and other costs
      incurred in bringing the inventories to their present location and condition.
      The Company evaluates the net realizable value of its inventories on a regular
      basis and records a provision for loss to reduce the computed weighted-average
      cost if it exceeds the net realizable value. Net realizable value is the
      estimated selling price in the ordinary course of business less the estimated
      costs of completion and the estimated costs necessary to make the sale.




F-11




**C.
      LAND USE RIGHTS**





According
      to the law of China, the government owns all the land in China. Companies or
      individuals are authorized to possess and use the land only through land use
      rights granted by the Chinese government. Land use rights are being amortized
      using the straight-line method over the lease term of 40 to 50 years.





**D.
      PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment are carried at cost. The cost of repairs and maintenance
      is
      expensed as incurred; major replacements and improvements are capitalized.





When
      assets are retired or disposed of, the cost and accumulated depreciation are
      removed from the accounts, and any resulting gains or losses are included in
      income in the year of disposition.





Depreciation
      is calculated on a straight-line basis over the estimated useful lives of the
      assets. The useful lives for property, plant and equipment are as follows:





Buildings
                and leasehold improvement
            40
                - 50 yearsPlant
                and machinery
            5
                -
                10 yearsOffice
                equipment and furnishings
            5
                yearsMotor
                vehicles
            5
                years




**E.
      CONSTRUCTION IN PROGRESS**





Construction
      in progress represents direct costs of construction or acquisition and design
      fees incurred. Capitalization of these costs ceases and the construction in
      progress is transferred to plant and equipment when substantially all the
      activities necessary to prepare the assets for their intended use are completed.
      No depreciation is provided until it is completed and ready for intended use.





The
      capitalized interest accrued up to March 31, 2006 was $481,045 associated with
      construction in progress.





**F.
      INTANGIBLE ASSETS**





Intangible
      assets - Intangible assets represent computer software and applications.
      Intangible assets are measured initially at cost. Intangible assets are
      recognized if it is probable that the future economic benefits that are
      attributable to the asset will flow to the enterprise and the cost of the asset
      can be measured reliably. After initial recognition, Intangible assets -
      Intangible assets represent computer software and applications. Intangible
      assets are measured initially at cost.





The
      gross
      carrying amount of the intangible assets was $264,562 at March 2006 and $334,392
      at March 2005 respectively.





**G.
      ACCOUNT RECEIVABLES**





Trade
      receivables are recognized and carried at the original invoice amount less
      allowance for any uncollectible amounts. An estimate for doubtful accounts
      is
      made when collection of the full amount is no longer probable. Bad debts are
      written off as incurred. The allowance on the doubtful accounts was $417,143
      and
      $202,401 as at March 31, 2006 and 2005, respectively.




F-12




**H.
      INCOME TAXES**





Income
      taxes of the Company’s subsidiaries are calculated in accordance with taxation
      principles currently effective in the PRC. For Synutra Illinois, applicable
      U.S.
      tax laws are followed. The Company accounts for income taxes using the liability
      method. Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized as income in
      the
      period that includes the enactment date. A valuation allowance is provided
      for
      the amount of deferred tax assets that, based on available evidence, are not
      expected to be realized.





A
      company
      registered in the PRC is subject to state and local income taxes within the
      PRC
      at the applicable tax rate on the taxable income as reported in their PRC
      statutory financial statements in accordance with relevant income tax laws.
      Under the Provisional Taxation Regulation of the PRC, income tax is payable
      by
      enterprises at a rate of 33% of their taxable income. Subject to this regime,
      the Company’s aggregate corporate income tax would have been $4,305,894 and
      $1,305,051 for the year ended March 31, 2006 and 2005, respectively. Some of
      the
      Company’s operating subsidiaries in China currently enjoy reduced tax rates or
      tax holidays which will expire under varying termination schedules. Due to
      application of such preferential tax policy, the actual corporate income tax
      was
      $1,445,677 and $88,355 for the year ended March 31, 2006 and 2005, respectively.
      The reduced tax rates or tax holidays accorded to the Company resulted in tax
      savings of $2,860,217 and $1,216,696, respectively. The per share effect of
      the
      total tax savings was $0.06 and $0.03 for the year ended March 31, 2006 and
      2005, respectively.





Qingdao
      St. George Dairy Co., Ltd,Heilongjiang Loubei Shengyuan Dairy Co. Ltd, Bei’an
      Yipin Dairy Co. Ltd and Zhangjiakou Sheng Yuan Co. Ltd qualify as a foreign
      investment production enterprise and were established in a special economic
      zone. As approved by the tax authorities, such subsidiaries are entitled to
      a
      two year exemption from income taxes followed by three years of a 50% tax
      reduction, commencing from the first cumulative profit-making year net of losses
      carried forward.





Qingdao
      St. George Dairy Co., Ltd. is under such preferential tax treatment until
      December 31, 2008. Accordingly, the applicable enterprise income tax rate is
      24%
      and the local tax rate is0%, resulting in an aggregate tax rate of 24%. The
      subsidiary will not be subject to local income tax prior to 2003. The
      subsidiary’s first cumulative profit-making year was 2004.





Heilongjiang
      Luobei Sheng Yuan Dairy Co., Ltd. is under such preferential tax treatment
      until
      December 31, 2010. Accordingly, the applicable enterprise income tax rate is
      30%
      and the local tax rate is3%, resulting in an aggregate tax rate of 33%. The
      subsidiary will not be subject to local income tax prior to 2005, The
      subsidiary’s first cumulative profit-making year was2006.





Bei’an
      Yipin Dairy Co., Ltd. is under such preferential tax treatment until December
      31, 2009. Accordingly, the applicable enterprise income tax rate is30% and
      the
      local tax rate is 3%, resulting in an aggregate tax rate of 33%. The subsidiary
      will not be subject to local income tax prior to 2004. The subsidiary’s first
      cumulative profit-making year was 2005.





Zhangjiakou
      Sheng Yuan Dairy Co., Ltd. is under such preferential tax treatment until
      December 31, 2010. Accordingly, the applicable enterprise income tax rate is
      30%
      and the local tax rate is 3%, resulting in an aggregate tax rate of 33%. The
      subsidiary will not be subject to local income tax prior to 2005. The
      subsidiary’s first cumulative profit-making year was 2006.





Qingdao
      Women and Children Nutrition Research Co., Ltd is subject to 33% income
      tax.




F-13





Tax
      Rates
      Schedule for various operating subsidiaries of the Company in China is as
      follows.












**I.
      GOVERNMENT SUBSIDIES**





Subsidies
      from the government are recognized at their fair values when received or there
      is reasonable assurance that they will be received, and all attached conditions
      are complied with. The Subsidies from the government were $734,035 and $270,779
      during the years ended March31, 2006 and 2005, respectively. There is no
      interest subsidy involved herein.





**J.
      RELATED PARTIES**





Parties
      are considered to be related if one party has the ability, directly or
      indirectly, to control the other party or exercise significant influence over
      the other party in making financial and operational decisions. Parties are
      also
      considered to be related if they are subject to common control or common
      significant influence. Related parties may be individuals or corporate entities.
      The related parties were excluded from consolidation due to equity structure
      and
      other business reasons.




**K.
      FOREIGN CURRENCY TRANSLATION**





The
      Company maintains its books and accounting records in Renminbi ("RMB"), the
      PRC's currency, being the functional currency. Transactions denominated in
      foreign currencies are translated into the reporting currency at the exchange
      rates prevailing on the transaction dates. Assets and liabilities denominated
      in
      foreign currencies are translated into the reporting currency at the exchange
      rates prevailing at the balance sheet date. Income and expenditures are
      translated at the average exchange rate of the year.





March
                31,2006Balance
                sheet
            
            
            RMB
            
            
            8.017
            
            
            to
                US
            
            $
            1.00Operating
                statement
            
            
            RMB
            
            
            8.147
            
            
            to
                US
            
            $
            1.00March
                31,2005Balance
                sheet
            
            
            RMB
            
            
            8.2765
            
            
            to
                US
            
            $
            1.00Operating
                statement
            
            
            RMB
            
            
            8.2765
            
            
            to
                US
            
            $
            1.00





F-14


On
      January 1, 1994, the PRC government introduced a single rate of exchange as
      quoted daily by the People's Bank of China (the "Unified Exchange Rate"). The
      quotation of the exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the Bank of China or other banks authorized to buy and
      sell
      foreign currencies at the exchange rates quoted by the People's Bank of China.
      Approval of foreign currency payments by the Bank of China or other institutions
      requires submitting a payment application form together with supplier's
      invoices, shipping documents and signed contracts.





In
      July
      2005, the PRC began to value the RMB against a basket of currencies of its
      major
      trading partners, including the U.S. This measure has allowed the RMB yuan
      to
      fluctuate within a narrow band vis a vis the U.S. dollars. Since the adoption
      of
      this managed flexible exchange rate policy, the RMB has been under pressure
      to
      appreciate against the U.S. dollar. This has affected the changes in the foreign
      currency translation as reflected in the other comprehensive income /
      (loss) of $1,273,555 and $(109,805) for the years ended March 31, 2006 and
      2005,
      respectively.





**L.
      USE OF ESTIMATES**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenue and expenses
      during the reporting period. Actual results when ultimately realized could
      differ from those estimates.





**M.
      FAIR VALUE OF FINANCIAL INSTRUMENTS**





The
      carrying value of financial instruments including cash, receivables, accounts
      payable and accrued expenses and debt, approximates their fair value at March
      31, 2006 and 2005 due to the relatively short-term nature of these instruments.





**N.
      REVENUE RECOGNITION**




The
      Company recognizes revenue from product sales when goods are shipped or
      delivered and rewards and risk of ownership and title pass to the customer.
      Revenues consist of the invoice value of the sale of goods and services net
      of
      value added tax, rebates and discounts, certain sales incentives, trade
      promotions, and product returns. Revenue dilution is accounted for as reductions
      in sales in the same period the related sales are recorded.





Most
      of
      the Company’s mainline product sales are through distributors. The Company’s
      revenue arrangement with all its distributors requires distributor advance
      payment before shipment and delivery of goods to distributors. Under this
      distributor arrangement, evidenced by purchase order together with advance
      payment, sales revenue is realized and earned upon shipment and acceptance
      of
      delivery of products to and by distributors. The Company applies this revenue
      recognition policy uniformly to all its mainline products, including all
      dairy-based pediatric and adult nutritional products. Revenue recognition
      criteria outlined in the provisions of SAB 104, namely, persuasive evidence
      of
      arrangement, product delivery, fixed and determinable product prices, and
      reasonable assurance of collectibility are, therefore, met and self-evident.





A
      fraction of the Company’s mainline product sales are through supermarket
      retailers directly. Revenue arrangement with these retailers requires receipt
      of
      purchase orders before product shipment and delivery. Similarly, the revenues
      from retailers are recognized upon shipment or delivery of the goods to the
      retailers under payment terms of the sales contracts which are negotiated with
      select long term retailers, to assure reasonable collectibility.




F-15





The
      Company provides its distributors and retailers the right to return products
      due
      to package damage and shelf-life expiration. The majority of the Company’s
      products carry shelf lives of 18 to 24 months and majority of products are
      sold
      during the shelf lives. Product returns due to damage and expiration, if any,
      are charged against current sales revenues. The arrangement meets the revenue
      recognition criteria under Statement of Financial Accounting Standards No.48
      “Revenue Recognition When Right of Return Exists.





For
      new
      product offerings, the Company grants its distributors and retailers the same
      rights to return products due to package damage and shelf-life expiration as
      existing product offerings. These returns are deducted from revenue for the
      reporting period. The Company monitors over time each product line, including
      new product offerings, to track the pattern of sales returns and considers
      if
      sales return reserves are necessary.





On
      top of
      standard distributor pricing arrangements, the Company provides its larger
      distributors with a growth-based incentive mechanism that ties incremental
      discounts to the levels of incremental sales growth attained in the
      corresponding periods the return occurs. Qualified discounts are accrued in
      the
      corresponding periods during which the sales growth materialized. The cost
      of
      this policy is treated as discount and is charged against sales revenue of
      the
      corresponding period.





Most
      of
      the Company’s products are shipped to the distributors upon receipt of payment
      directly from them, and thus assume title of the products immediately. No single
      customer constitutes a significant distributor to the Company by commanding
      more
      than 3% of its total sales.





The
      Company does not employ any sales incentive programs aimed at inducing sales
      to
      customers that result in excess inventory levels. The practice of the Company’s
      standard cash in advance revenue arrangement with distributors also discourages
      customers from accumulating excessive inventory beyond their normal business
      needs.




**O.
      SHIPPING AND HANDLING**





All
      shipping and handling are expensed as incurred and outbound freight is not
      billed to customers. Shipping and handling expenses are included in selling
      and
      distribution expenses. The expenses were $2,810,339 and $1,964,855 during the
      years ended March 31, 2006 and 2005 respectively





**P.
      ADVERTISING COSTS AND PROMOTION**





Advertising
      costs and promotion include salaries for all salesmen all over the Mainland
      China and are expensed as incurred. The advertising costs and promotion
      expenses were $22,540,472 and $9,176,739 during the years ended March 31, 2006
      and 2005 respectively.





**Q.
      EMPLOYEES' BENEFITS**





Mandatory
      contributions are made to the Government's health, retirement benefit and
      unemployment schemes at the statutory rates in force during the period, based
      on
      gross salary payments. The cost of these payments is charged to the statement
      of
      income in the same period as the related salary cost.





**R.
      SEGMENTS**





No
      business segment analysis is provided for the years end March 31, 2006 and
      2005,
      as less than 10% of consolidated revenue and less than 10% of consolidated
      income from operations is attributable to the segment other than sales of dairy
      based infant and adult nutritional products.




F-16




Further,
      no geographical segment analysis is provided for the years ended March 31,
      2006
      and 2005, as less than 10% of consolidated revenue and less than 10%
      consolidated income from operations is attributable to the segment other than
      the Mainland China.





**S.
      COMPREHENSIVE INCOME/(LOSS)**





The
      Company has adopted the provisions of Statement of Financial Accounting
      Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
      No.
      130 establishes standards for the reporting and display of comprehensive income,
      its components and accumulated balances in a full set of general-purpose
      financial statements. SFAS No. 130 defines comprehensive income (loss) to
      include all changes in equity except those resulting from investments by owners
      and distributions to owners, including adjustments to minimum pension
      liabilities, accumulated foreign currency translation, and unrealized gains
      or
      losses on marketable securities. The comprehensive income for the year ended
      March 31, 2006 was $1,273,555, while the comprehensive loss for the year ended
      March 31, 2005 was $109,805.




**T.
      CONCENTRATION OF CREDIT RISK**





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist primarily of trade accounts receivable. The Company
      performs ongoing credit evaluations with respect to the financial condition
      of
      its creditors, but does not require collateral. In order to determine the value
      of the Company's accounts receivable, the Company records a provision for
      doubtful accounts to cover probable credit losses. Management reviews and
      adjusts this allowance periodically based on historical experience and its
      evaluation of the collectibility of outstanding accounts receivable.





**U.
      RECENT PRONOUNCEMENTS**





In
      November 2004, the FASB issued SFAS No. 151, "Inventory Costs". This Statement
      amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify
      the
      accounting for abnormal amounts of idle facility expense, freight, handling
      costs and wasted material (spoilage). In addition, this Statement requires
      that
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. The provisions of this
      Statement had been adopted by the Company from 2005.





In
      December 2004, the FASB issued a revised SFAS No. 123R, Accounting for
      Stock-Based Compensation, which supersedes APB opinion No. 25, Accounting for
      Stock Issued to Employees, and its related implementation guidance. This
      statement requires a public entity to recognize and measure the cost of employee
      services it receives in exchange for an award of equity instruments based on
      the
      grant-date fair value of the award (with limited exceptions). These costs will
      be recognized over the period during which an employee is required to provide
      service in exchange for the award - the requisite service period (usually the
      vesting period). This statement also establishes the standards for the
      accounting treatment of these share-based payment transactions in which an
      entity exchanges its equity instruments for goods or services. It addresses
      transactions in which an entity incurs liabilities in exchange for goods or
      services that are based on the fair value of the entity's equity instruments
      or
      that may be settled by the issuance of those equity instruments. This statement
      shall be effective the first interim or annual reporting period that begins
      after December 15, 2005 for small business public entities and nonpublic
      companies. The Company has adopted this accounting standard since January 1,
      2006. The Company has not issued any options pursuant to the 2005 stock
      compensation plan.




F-17


In
      December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
      Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67"
      (“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales
      of Real Estate” to reference the financial accounting and reporting guidance for
      real estate time-sharing transactions that is provided in AICPA Statement of
      Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP
      04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and
      Initial Rental operations of Real Estate Projects” to state that the guidance
      for incidental operations and costs incurred to sell real estate projects does
      not apply to real estate time-sharing transactions, with the accounting for
      those operations and costs being subject to the guidance in SOP 04-2. The
      provisions of SFAS 152 are effective in fiscal years beginning after June 15,
      2005. As such, the Company is required to adopt these provisions at the
      beginning of the fiscal year ended December 31, 2006. The Company is currently
      evaluating the impact of SFAS 152 on its consolidated financial statements.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
      -
      an amendment of APB Opinion No. 29" (“SFAS 153”). SFAS 153 replaces the
      exception from fair value measurement in APB Opinion No. 29 for nonmonetary
      exchanges of similar productive assets with a general exception from fair value
      measurement for exchanges of nonmonetary assets that do not have commercial
      substance. A nonmonetary exchange has commercial substance if the future cash
      flows of the entity are expected to change significantly as a result of the
      exchange. SFAS 153 is effective for all interim periods beginning after June
      15,
      2005. As such, the Company is required to adopt these provisions at the
      beginning of the fiscal quarter ended September 30, 2005. The Company is
      currently evaluating the impact of SFAS 153 on its consolidated financial
      statements.





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections
      -
      a replacement of APB Opinion No. 20 and FASB Statement No. 3" (“SFAS 154”). SFAS
      154 changes the requirements for the accounting for and reporting of a change
      in
      accounting principle. These requirements apply to all voluntary changes and
      changes required by an accounting pronouncement in the unusual instance that
      the
      pronouncement does not include specific transition provisions. SFAS 154 is
      effective for fiscal years beginning after December 15, 2005. As such, the
      Company is required to adopt these provisions at the beginning of the fiscal
      year ended December 31, 2006. The Company is currently evaluating the impact
      of
      SFAS 154 on its consolidated financial statements.





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 155, "Accounting for
      Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133
      and 140" (“SFAS 155”). SFAS 155 resolves issues addressed in Statement 133
      Implementation Issue No. D1, “Application of Statement 133 to Beneficial
      Interests in Securitized Financial Assets.” SFAS 155 is effective for all
      financial instruments acquired or issued after the beginning of the first fiscal
      year that begins after September 15, 2006. As such, the Company is required
      to
      adopt these provisions at the beginning of the fiscal year ended December 31,
      2007. The Company is currently evaluating the impact of SFAS 155 on its
      consolidated financial statements.





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standard (“SFAS”) No. 156, "Accounting for Servicing of
      Financial Assets - an amendment of FASB Statement No. 140" (“SFAS 156”). SFAS
      156 amends FASB Statement No. 140 with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. SFAS 156 requires all
      separately recognized servicing assets and servicing liabilities to be initially
      measured at fair value, if practical. SFAS 156 is effective as of the beginning
      of the first fiscal year that begins after September 15, 2006. As such, the
      Company is required to adopt these provisions at the beginning of the fiscal
      year ended December 31, 2007. The Company is currently evaluating the impact
      of
      SFAS 156 on its consolidated financial statements.




F-18


**4.
      ACCOUNT RECEIVABLES**





The
      Company's trade receivables as at March 31, 2006 and 2005 are summarized as
      follows:





**March
                31, 2006**
            
            **March
                31, 2005**Trade
                receivables
            
            $
            2,956,860
            
            $
            2,170,636Less:
                Allowance for doubtful accounts
            
            
            (417,143
            )
            
            (202,401
            )$
            2,539,717
            
            $
            1,968,235





The
      activity in the Company allowance for doubtful accounts during the years ended
      March 31, 2006 and 2005 is summarized as follows:





**March
                31, 2006**
            
            **March
                31, 2005**Balance
                at beginning of year
            
            $
            202,401
            
            $
            104,278Add:
                Additions during the year
            
            
            214,742
            
            
            98,123Balance
                at end of year
            
            $
            417,143
            
            $
            202,401





**5.
      PROPERTY, PLANT AND EQUIPMENT**





**March
                31, 2006**
            
            **March
                31, 2005****Cost:**Buildings
                and leasehold improvement
            
            $
            7,313,860
            
            $
            7,694,759Land
                use rights
            
            
            1,659,542
            
            
            1,607,166Plant
                and machinery
            
            
            7,206,411
            
            
            6,117,319Office
                equipment and furnishings
            
            
            988,330
            
            
            832,120Motor
                vehicles
            
            
            1,210,974
            
            
            1,458,30618,379,117
            
            
            17,709,670**Less:
                Accumulated depreciation:**Buildings
                and leasehold improvement
            
            
            1,264,683
            
            
            986,350Land
                use rights
            
            
            113,585
            
            
            75,889Plant
                and machinery
            
            
            2,306,131
            
            
            1,583,481Office
                equipment and furnishings
            
            
            336,235
            
            
            328,398Motor
                vehicles
            
            
            630,610
            
            
            848,5404,651,244
            
            
            3,822,658Property,
                plant and equipment, net
            
            $
            13,727,873
            
            $
            13,887,012





Depreciation
      expenses relating to property, land, plant and equipment was $828,585 and
      $1,320,405 for the years ended March 31, 2006 and 2005, respectively.





F-19




**6.
      INVENTORIES**





The
      Company's inventories at March 31, 2006 and 2005 are summarized as follows:





**March
                31, 2006**
            
            **March
                31, 2005**Raw
                materials
            
            $
            1,984,520
            
            $
            981,710Work-in-progress
            
            
            7,586,465
            
            
            2,735,098Finished
                goods
            
            
            2,131,552
            
            
            2,216,386Packing
                materials and other consumables
            
            
            86,896
            
            
            824,827Total
                Inventories
            
            $
            11,789,433
            
            $
            6,757,021





**7.
      DUE FROM/(TO) RELATED PARTIES**





The
      amounts are unsecured, interest-free and have no fixed repayment terms.





**A.
      Classification of Related Party Balance by Nature**





a.
            Due
                from related parties





**March
                31, 2006**
            
            **March
                31, 2005**Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            $
            226,383
            
            $
            824,092Sheng
                Zhi Da Dairy Group Corporation
            
            
            (268,349
            )
            
            4,635,779Beijing
                Kelqin Dairy Co. Ltd
            
            
            1,708,230
            
            
            (417,135
            )St.
                Angel (Beijing Business Service)
            
            
            1,761,265
            
            
            -Beijing
                Honnete Dairy Corporation Ltd
            
            
            4,185,149
            
            
            2,765,633Beijing
                Ao Naier Feed Stuff LLC
            
            
            297,892
            
            
            231,466Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            691,793
            
            
            42,616Total
                Due from Related Companies
            
            $
            8,602,363
            
            $
            8,082,451





b.
            Due
                to related parties





**March
                31, 2006**
            
            **March
                31, 2005**Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            $
            705,602
            
            $
            630,130Sheng
                Zhi Da Dairy Group Corporation
            
            
            2,192,892
            
            
            7,457,388Beijing
                Kelqin Dairy Co. Ltd
            
            
            63,909
            
            
            1,246,255St.
                Angel (Beijing Business Service)
            
            
            —
            
            
            (524,869
            )Beijing
                Honnete Dairy Corporation Ltd
            
            
            1,338,734
            
            
            —Beijing
                Ao Naier Feed Stuff LLC
            
            
            —
            
            
            —Total
                Due to Related Companies
            
            $
            4,301,137
            
            $
            8,808,904





F-20




**B.
      Classification of Related Party Balance by Nature**





**a.
                Due from related parties****March
                31,2006**
            
            **March
                31,2005**Trade
                receivables
            
            $
            2,018,344
            
            $
            357,204Prepayments
            
            
            4,525,769
            
            
            5,552,056Other
                receivables
            
            
            2,058,250
            
            
            2,173,191**Total**
            
            $
            8,602,363
            
            $
            8,082,451**b.
                Due to related parties****March
                31,2006**
            
            
            **March
                31,2005**Trade
                payables
            
            $
            4,301,137
            
            $
            6,452,836Notes
                payables
            
            
            -
            
            
            2,356,068**Total**
            
            $
            4,301,137
            
            $
            8,808,904




These
      entities are considered related parties to the Company because they are
      affiliates of the Company under the common control of the Company’s major
      shareholder. These related parties act only as the Company’s suppliers or
      distributors and there are no other relationships wherein the Company has the
      ability to exercise significant influence over the operating and financial
      policies of these parties. The economic substance of each entity apart from
      its
      relationship with the Company and the controlling beneficial shareholder is
      discussed in the table below.





**Related
                Party**
            
            **Economic
                Substance**Heilongjiang
                Baoquanling Sheng Yuan Dairy Co., Ltd
            
            Engages
                in spray-drying milk powder products that are shipped in 25kg bags
                to
                commercial customers.Sheng
                Zhi Da Dairy Group Corporation
            
            Engaged
                in buying and selling packaging materials, and vitamin and mineral
                pre-mixes, and other food ingredients.Beijing
                Kelqin Dairy Co. Ltd
            
            Produces
                and distributes retail-packaged yogurt products in
                Beijing.St.
                Angel (Beijing Business Service)
            
            Publishes
                catalogues and engages in direct marketing and sales of consumer
                products
                featured in catalogues.Beijing
                Honnete Dairy Corporation Ltd
            
            Engages
                in importing and distributing whey protein products to commercial
                customers.Beijing
                Ao Naier Feed Stuff LLC
            
            Engages
                in buying and selling whey protein and other protein
                substitutes.Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            Operates
                retail shelf spaces in supermarkets in
                Beijing.




F-21





**8.
      INTANGIBLES**





Intangible
      assets represent computer software and applications. Intangible assets are
      measured initially at cost. Intangible assets are recognized if it is probable
      that the future economic benefits that are attributable to the asset will flow
      to the enterprise and the cost of the asset can be measured reliably. After
      initial recognition, intangible assets are measured at cost less any impairment
      losses. Intangible assets with definite useful lives are amortized on a
      straight-line basis over their useful lives.




Intangible
      assets consist of the follow:





**March
                31, 2006**
            
            **March
                31, 2005**Gross
                Carrying Amount
            
            
            Accumulated
                Amortization
            
            
            Gross
                Carrying Amount
            
            
            Accumulated
                AmortizationComputer
                software and applications
            
            
            426,430
            
            
            161,868
            
            $
            408,952
            
            
            74,560**Total
                intangible assets**
            
            
            426,430
            
            
            161,868
            
            
            408,952
            
            
            74,560





Amortization
      expenses for year ended March 31,2006 and 2005 was$87,308and $56,414
      respectively. Estimated amortization expense for each of the five
      succeeding years is as follow:





**Year
                ending**
              **March
                31,**2007
            
            $
            88,1872008
            
            
            88,1872009
            
            
            88,1872010
            
            
            —2011
            
            
            —





**9.
      BANK LOANS**





As
      at
      March 31, 2006 and 2005, the Company had short-term loans from banks at the
      amount of $13,113,534 and $12,229,885 bearing interest ranging from 5.576%
      to
      7.488% per annum. Such loans are extendable for not less than one year to March
      2007. The loans were secured by the pledge of certain fixed assets held by
      the
      Group and its subsidiaries.





The
      value
      of equipment pledged were $11.56 million and $9.95million during the year ended
      March 31, 2006 and 2005 respectively.





The
      Company’s long term borrowing includes a RMB 40 million (approximately USD $4.8
      million) bank loan incepted in 2003 with a maturity date before the end of
      year
      2006. This loan carries an interest rate of 2.88% for the first year and 5.76%
      for the second and third years. The Company has the intention to refinance
      the
      loan of $4.8 million on a long-term basis and the previous history has
      demonstrated its ability to consummate the refinancing. There are no other
      long
      term borrowings by the Company at the time of this report.





F-22


**10.
      OTHER EXPENSES**




Other
      net
      expenses were $44,602 for the year ended March 31, 2006, and the amount was
      $290,988 for the year ended March 31, 2005. The Company incurred these net
      expenses mainly as a result of sales and disposal of certain assets or fixed
      assets.





As
      previously reported for the fiscal year ended March 31, 2006, other
      income/expenses included sales and cost of sales from processing or packaging
      of
      nutritional supplement ingredients, anhydrous milk-fat, non-fat dry milk, and
      toll packaging and blending services. During this reporting period, the
      Company’s business license defined its central operations to include dairy-based
      nutritional products for infant and children. Processing or packaging
      nutritional supplement ingredients, anhydrous milk-fat, non-fat dry milk, and
      toll packaging and blending services at the time were considered new and
      development stage projects and were therefore classified as non-core operations.
      The Company’s business license was subsequently updated to include these
      operations, and the management now considers these business activities as mature
      and contributing to its revenue stream. Therefore, the Company has revised
      the
      presentation of these sales (and related costs) for them to be included in
      revenue (and cost of sales).




**11.
      INCOME TAXES**





The
      Company’s income/(loss) before income taxes was comprised of the following for
      the years ended March 31, 2006 and 2005, respectively:





**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**United
                States
            
            $
            (316,610
            )
            $
            (20,360
            )PRC
            
            
            12,797,775
            
            
            3,975,060Total
            
            $
            12,481,165
            
            $
            3,954,700





Income
      taxes are calculated on a separate entity basis. There currently is no tax
      benefit or burden recorded in the United States.





The
      provisions for income taxes for the years ended March 31, 2006 and 2005,
      respectively, are summarized as follows:





**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**PRC
                only:Current
            
            $
            1,445,677
            
            $
            88,355Deferred
            
            
            —
            
            
            —$
            1,445,677
            
            $
            88,355





Under
      the
      Provisional Taxation Regulation of the PRC, income tax is payable by enterprises
      at a rate of 33% of their taxable income. Subject to this regime, the Company’s
      aggregate corporate income tax would have been $4,305,894 and $1,305,051 for
      the
      year ended March 31, 2006 and 2005, respectively. Some of the
      Company’s operating subsidiaries in China currently enjoy reduced tax rates or
      tax holidays which will expire under varying termination schedules. Due to
      application of such preferential tax policy, the actual corporate income tax
      was
      $1,445,677 and $88,355 for the year ended March 31, 2006 and 2005, respectively.
      The reduced tax rates or tax holidays accorded to the Company resulted in tax
      savings of $2,860,217 and $1,216,696, respectively. The per share effect of
      the
      total tax savings was $0.06 and $0.03 for the year ended March 31, 2006 and
      2005, respectively.





F-23





**12.
      RESERVES**





The
      reserve fund is comprised of the following:





**March
                31, 2006**
            
            **March
                31, 2005**Statutory
                surplus reserve fund
            
            $
            45,804
            
            $
            45,804





Pursuant
      to the relevant laws and regulations of Wholly Owned Foreign Enterprises, the
      profits of the Company, which are based on their PRC statutory financial
      statements, are available for distribution in the form of cash dividends after
      they have satisfied all the PRC tax liabilities, provided for losses of previous
      years, and made appropriations to reserve funds, as determined by the Board
      of
      Directors in accordance with the PRC accounting standards and regulations.





The
      Company did not elect to issue dividends in fiscal years of 2005 and 2006.
      Therefore, there had not been any changes in the reserves over the same period
      of time.





As
      stipulated by the relevant laws and regulations for enterprises operating in
      the
      PRC, all subsidiaries (both wholly-owned foreign enterprises) are required
      to
      make annual appropriations to two reserve funds, consisting of the statutory
      surplus and public welfare funds. In accordance with the relevant PRC
      regulations and the articles of association of the respective companies, the
      companies are required to allocate a certain percentage of their profits after
      taxation, as determined in accordance with the PRC accounting standards
      applicable to the companies, to the statutory surplus reserve until such reserve
      reaches 50% of the registered capital of the companies.





Net
      income as reported in the US GAAP financial statements differs from that as
      reported in the PRC statutory financial statements. In accordance with the
      relevant laws and regulations in the PRC, the profits available for distribution
      are based on the statutory financial statements. If any subsidiary has foreign
      currency available after meeting its operational needs, it may make its profit
      distributions in foreign currency to the extent foreign currency is available.
      Otherwise, it is necessary to obtain approval and convert such distributions
      at
      an authorized bank.




F-24


13.
      EARNINGS PER SHARE
      (EPS)




SFAS
      128
“Earnings Per Share” requires the Company to calculate its net income
      (loss) per share based on basic and diluted net income (loss) per
      share, as defined. Basic EPS excludes dilution and is computed by dividing
      net
      income (loss) by the weighted average number of shares outstanding for the
      period. Diluted EPS reflects the potential dilution that could occur if
      securities or other contracts to issue common stock were exercised or converted
      into common stock. The dilutive effect of outstanding options and warrants,
      if
      exist, will be reflected in diluted EPS using the treasury stock method. Under
      the treasury stock method, options and warrants will generally have a dilutive
      effect when the average market price of common stock during the period exceeds
      the exercise price of the options.




**For
                the Year Ended March 312006****Income**
            
            **Shares**
            
            **Per-Share****(Numerator)**
            
            **(Denominator)**
            
            **Amount**(as
                restated)
            
            (as
                restated)
            
            (as
                restated)**Basic
                EPS**Income
                available to common stockholders
            
            $
            **11,034,912**
            
            
            **48,833,838**
            
            **$**
            **0.23****Effect
                of Dilutive Securities**Warrants
                and options
            
            
            —
            
            
            —
            
            
            —Convertible
                preferred stock
            
            
            —
            
            
            —
            
            
            —**Diluted
                EPS**Income
                available to common stockholders + assumed conversions
            
            
            **11,034,912**
            
            
            **48,833,838**
            
            **$**
            **0.23**





F-25


**14.
      RELATED PARTY TRANSACTIONS**





The
      following related party transactions occurred during the years ended March
      31,
      2006 and 2005:





**a.
      Sales to related companies**





In
      the
      fiscal years ended March 31, 2006 and 2005, the Company’s sales to the related
      parties included anhydrous milk fat and Non-Fat Dry Milk to Beijing Kelgin
      Dairy
      Co., Ltd. and Beijing Honnete Dairy Corporation, Ltd.; formulation ingredients
      to Sheng Zhi Da Dairy Group Corporation, Beijing Ao Naier Feed Stuff LLC, and
      Heilongjiang Baoquanling Sheng Yuan Dairy Co., Ltd.; and the Company’s name
      brand products to St Angel (Beijing Business Service) and Luding Xueyuan for
      direct sales, catalogue sales, and regional retail outlets distribution. Terms
      of all the sales are at market price.




**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**Beijing
                Honnete Dairy Corporation Ltd
            
            
            1,254,083
            
            
            —St.
                Angel (Beijing Business Service)
            
            
            1,047,813
            
            
            323,837Beijing
                Ao Naier Feed Stuff LLC
            
            
            —
            
            
            36Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            526,853
            
            
            270,075Total
            
            $
            2,828,749
            
            $
            593,948





**b.**  **Other
      income to related companies**




**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**Beijing
                Kelqin Dairy Co. Ltd
            
            $2,259,810
            
            384,118Sheng
                Zhi Da Dairy Group Corporation
            
            
            376,324
            
            
            1,037,714Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            
            3,541,592
            
            
            2,788,588Beijing
                Honnete Dairy Corporation Ltd
            
            
            11,901,364
            
            
            —Beijing
                Ao Naier Feed Stuff LLC
            
            
            75,410
            
            
            16,486Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            —
            
            
            —Total
            
            $
            18,154,500
            
            $
            4,226,906





**c.
      Purchases from related companies**





In
      the
      fiscal year ended March 31, 2006 and 2005, the Company’s purchases from related
      parties included whey protein powders from Beijing Kelgin Dairy Co. Ltd. and
      Beijing Honnete Dairy Corporation Ltd; various ingredients and materials
      (packaging, etc.) from Sheng Zhi Da Dairy Group Corporation; spray-dried milk
      powder from Heilongjiang Baoquanling Sheng Yuan Dairy Co. Ltd.; and catalogues,
      brochures, and marketing materials from Beijing Sheng Long Media Co., Ltd.
      Terms
      of these transactions are all done at market prices.




**Year
                ended**
              **March
                31, 2006**
            
            **Year
                ended**
              **March
                31, 2005**Beijing
                Kelqin Dairy Co. Ltd =
            
            $
            955,386
            
            $
            904,075Sheng
                Zhi Da Dairy Group Corporation
            
            
            2,145,168
            
            
            2,213,535Heilongjiang
                Baoquanling Sheng Yuan Dairy Co. Ltd
            
            
            11,987,277
            
            
            7,246,611Beijing
                Honnete Dairy Corporation Ltd
            
            
            6,655,093
            
            
            4,561,794Beijing
                Sheng Long Media Co. Ltd
            
            
            57,915
            
            
            31,524Total
            
            $
            21,800,839
            
            $
            14,957,539





F-26




**15.
      COMMITMENTS AND CONTINGENCIES**





**A.
      CAPITAL COMMITMENTS**





As
      of
      March 31, 2006, the Company had no significant capital commitments required
      for
      disclosure. **





**B.
      LEASE COMMITMENTS**





The
      lease
      commitments of the Company as at March 31, 2006 and 2005 were as follows:





**Expiration
                date**
            
            **Monthly
                payment**
            
            **Mar-07**
            
            **Mar-08**
            
            **Mar-09**
            
            **Mar-10**
            
            **Mar-11**Office
                facilities in Beijing(SOHO903)
            
            
            20-Apr-05
            
            
            -
                14-Dec-07
            
            $
            7,239
            
            $
            86,863
            
            $
            57,909
            
            
            —
            
            
            —
            
            
            —Office
                facilities in Beijing(SOHO2903-2905)
            
            
            15-Dec-04
            
            
            -
                14-Dec-07
            
            
            10,975
            
            
            131,700
            
            
            87,800
            
            
            —
            
            
            —
            
            
            —Office
                facilities in Beijing
            
            
            1-Jan-06
            
            
            -
                31-Dec-07
            
            
            3,950
            
            
            47,400
            
            
            35,550
            
            
            —
            
            
            —
            
            
            —Warehouses
                in Qingdao
            
            
            21-Nov-05
            
            
            -
                20-May-06
            
            
            2,640
            
            
            4,400
            
            
            —
            
            
            —
            
            
            —
            
            
            —Warehouses
                in Qingdao
            
            
            21-Nov-05
            
            
            -
                10-May-06
            
            
            1,401
            
            
            1,868
            
            
            —
            
            
            —
            
            
            —
            
            
            —**Total
                rent expenses**
            
            
            
            
            
            
            
            
            
            
            **$**
            **272,230**
            
            **$**
            **181,258**
            
            
            —
            
            
            —
            
            
            —





**C.
      LEGAL PROCEEDINGS**





N/A




**16.
      CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**





The
      Company faces a number of risks and challenges since its operations are in
      the
      PRC. The Company's operations in the PRC are subject to special considerations
      and significant risks not typically associated with companies in North America
      and Western Europe. The Company's results may be adversely affected by changes
      in the political and social conditions in the PRC, and by changes in
      governmental policies with respect to laws and regulations, anti-inflationary
      measures, currency conversion and remittance abroad, and rates and methods
      of
      taxation, among other things.




F-27


**17.
      SUBSEQUENT EVENTS**





In
      June,
      2006, the Company negotiated a Letter of Intent to acquire Zheng Lan Qi Dairy
      Company, Ltd. of Inner Mongolia, China with a cash payment of RMB 31 million
      (about USD $3.9 million at today’s exchange rate) from the local government of
      Zheng Lan Qi County. The scope of the transaction includes land use rights,
      plant buildings and all plant equipment. With an additional investment of RMB
      19
      million (about USD $ 2.4 million), the Company plans to bring the business
      into
      operation later this year. In consideration of the Company’s business
      commitment, the Zheng Lan Qi County government has agreed to make available
      a
      cash incentive package of RMB 30 million to the Company at the execution of
      a
      definitive project agreement. This agreement is pending approval from the
      Company’s board. The future plant will manufacture protein-based nutrition bars
      and other food and nutritional products for nationwide distribution.





**18.
      RESTATEMENT**





**Consolidated
      Statements of Change in Shareholders Equity**





The
      financial statements for the year ended March 31, 2006 have been restated to
      give effect to the fair value of the 2,879,500 shares of common stocks issued
      to
      consultants for the services related to the recapitalization transaction of
      the
      company going public. In accordance of paragraphs 8 through 10 of SFAS 123
      and
      SFAS 123R, the Company determined the fair value of the 2,879,500 shares issued
      at $567,000 by multiplying the net assets of Synutra, Inc. as of June 30, 2005
      (data of the closest end of month) by the nominal percentage of the shares
      issued to the consultants.





The
      financial statement for the periods ended March 31, 2006 and 2005 have also
      been
      restated to reflect the historical shares of common stock of Vorsatech that
      were
      issued and the related earnings per share for the period prior to the merger.
      The effect on current liabilities, additional paid in capital, retained
      earnings, net income attributable to shareholders, earnings per share, and
      weighted average common shares outstanding is summarized as
      follows:




Net
                Income for the
              year
                ended
              March
                31, 2006
            
            Current
                Liabilities
              as
                of
              March
                31, 2006
            
            Additional
                Paid In
              Capital
                as of
              March
                31, 2006
            
            Retained
                Earnings
              as
                of
              March
                31, 2006As
                previously stated
            
            $
            11,601,912
            
            $
            57,108,365
            
            $
            7,676,394
            
            $
            12,185,515Stock
                compensation and recapitalization
            
            
            ($567,000
            )
            $
            17,361
            
            $
            549,639
            
            
            ($567,000
            )Restated
            
            $
            11,034,912
            
            $
            57,125,726
            
            $
            8,226,033
            
            $
            11,618,515





For
                the year ended
              March
                31, 2006
            
            For
                the year ended
              March
                31, 2005Earnings
                per share as previously stated
            
            $
            0.23
            
            $
            0.06Earnings
                restated
            
            $
            0.23
            
            $
            0.07Weighted
                average common shares outstanding as previously stated
            
            
            50,000,713
            
            
            50,000,713Weighted
                average common shares outstanding restated
            
            
            48,833,838
            
            
            46,000,000





F-28




The
      weighted average common shares outstanding have been restated to reflect the
      actual time outstanding of common shares issued in connection with the
      recapitalization transaction of the company.





Since
      1,517,500 shares of Common Stock were cancelled by Vorsatech at the time of
      the
      recapitalization pursuant to the Share Exchange Agreement, the actual merger
      transaction between Vorsatech and the Company should have been recorded with
      a
      consideration of 1,121,213 shares (2,638,713 - 1,517,500). There was also an
      adjustment of $152 to the transaction value that is deemed immaterial. The
      Statements of Change in Shareholders Equity has been revised to restate the
      transaction value net of the cancellation of the shares as follows:




Common
                  Stock Outstanding
              
              
              Share
                  Capital
              
              
              Additional
                  Paid-in CapitalAs
                  Previously Reported
              
              
              Acquisition
                  of Vorsatech
              
              
              2,638,713
              
              $
              264
              
              $
              (17,625
              )Capital
                  Stock cancelled
              
              
              (1,517,500
              )
              $
              (152
              )
              $
              152Restated
              
              
              Acquisition
                  of Vorsatech
              
              
              1,121,213
              
              $
              112
              
              $
              (17,473
              )





**Consolidated
      Statements of Income**





As
      a
      result of reclassification (see Note 10 to the Consolidated Financial
      Statements) of the sales and cost of sales of certain processing and packaging
      of nutritional supplement ingredients, anhydrous milk-fat, non-fat dry milk,
      and
      toll packaging and blending services from Other income/(expenses), the following
      items in the Consolidated Income Statement have been restated as
      below:




**Year
                ended****March
                31, 2006**
            
            
            **Year
                ended****March
                31, 2005****Previously
                Reported**
            
            
            **Restated**
            
            
            **Previously
              Reported**
            
            
            **Restated**Sales
            
            $
            103,186,647
            
            
            132,691,502
            
            $
            55,959,870
            
            
            63,451,526Including
                sales to related parties
            
            
            2,828,749
            
            
            20,983,249
            
            
            593,948
            
            
            4,820,854Cost
                of sales
            
            
            46,541,796
            
            
            75,422,827
            
            
            27,969,736
            
            
            35,171,262Including
                cost of sales to related parties
            
            
            1,719,551
            
            
            19,771,007
            
            
            296,974
            
            
            4,499,888**Gross
                profit**
            
            
            **56,644,852**
            
            
            **57,268,675**
            
            
            **27,990,135**
            
            
            **28,280,264****Income
                from operations**
            
            
            **12,912,404**
            
            
            **13,536,227**
            
            
            **4,708,954**
            
            
            **4,999,083**Other
                income/(expenses)
            
            
            579,221
            
            
            (44,602
            )
            
            (859
            )
            
            (290,988
            )





F-29





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, on this 31 st day of
      January, 2007.




**SYNUTRA
                INTERNATIONAL, INC.**By:
            /s/ Liang
              ZhangLiang
                ZhangChief
                Executive Officer and Chairman