**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K/A**


**(Amendment
      No. 2)**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              For
                the fiscal year ended - MARCH 31, 2007




OR




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





Commission
      file number 000-50601





**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: Common Stock $0.0001 Par
      Value





Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No
x





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. Yes o No
      x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No
o





Indicate
      by check mark if disclosure of delinquent filers in response to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerx





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


Yes o No x





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant based on the average closing sale price of
      the
      registrant’s common stock for 20 trading days before September 29, 2006 (the
      last business day of the registrant’s most recently completed second fiscal
      quarter) was $67,401,030





As
      of
      June 18, 2007, there were 54,000,713 shares of the registrant’s Common Stock
      outstanding.







**EXPLANATORY
      NOTE:**





Synutra
      International, Inc. (“Synutra” or the “Company”) is filing this Amendment No. 2
      to the Annual Report on Form 10-K for the fiscal year ended March 31, 2007
      (the
“Form 10-K/A”) to address certain deficiencies identified as the Company carries
      out an ongoing assessment process to improve the effectiveness of its disclosure
      controls and procedures and internal control over financial
      reporting.





On
      July
      15, 2005, pursuant to a Share Exchange Agreement dated as of June 14, 2005
      among
      Vorsatech Ventures, Inc., Thomas Braun, Beams Power Investment Limited, Strong
      Gold Finance Ltd and Synutra, Inc. (“Synutra Illinois”), Vorsatech Ventures,
      Inc. issued 48,879,500 shares of its common stock in exchange for all of the
      issued and outstanding shares of Synutra Illinois (the “Exchange”). As a result
      of this Exchange, Synutra Illinois became a wholly owned subsidiary of Vorsatech
      Ventures, Inc. In connection with the Exchange, Synutra Illinois changed its
      corporate year end from December 31 to March 31 and Vorsatech Ventures, Inc.,
      subsequently, changed its name to Synutra International, Inc. On August 22,
      2005, the Company filed Amendment No. 1 to a current report on Form 8-K
      providing the financial statements of Synutra Illinois required by Rule 3-05(b)
      of Regulation S-X that included audited financial statements for the years
      ended
      December 31, 2003 and 2004, and unaudited financial statements for the six
      and
      three months ended June 30, 2005.





On
      January 11, 2008, the Company filed Amendment No. 2 to the Current Report on
      Form 8-K to restate Synutra Illinois’ audited consolidated Balance Sheets,
      Income Statement and Cash Flow Statements as of and for the calendar years
      ended
      December 31, 2003 and 2004 and unaudited consolidated Balance Sheets, Income
      Statements and Cash Flow Statements as of and for the three and six months
      ended
      June 30, 2004 and 2005. The financial statements of Synutra Illinois were
      restated to (i) reclassify certain other income as sales revenue and (ii)
      breakout certain cash and cash equivalents into cash and restricted cash line
      items. The restatement of Synutra Illinois’ financial statements was the result
      of the Company's ongoing assessment of the effectiveness of its disclosure
      controls and procedures and internal controls over financial reporting.





In
      subsequent filings, including the Annual Report on Form 10-K for the fiscal
      year
      ended March 31, 2007 (the “Original Filing”) and amendment No. 1 to the Annual
      Report on Form 10-K for the fiscal year ended March 31, 2007 (“Amendment No.
      1”), the Company presented audited financial statements covering the 12-month
      periods ended March 31, 2005, 2006, and 2007. However, these filings should
      have
      presented, but did not present, audited financial statements for the three-month
      transition period ended March 31, 2005, unaudited comparative financial
      statements for the three months ended March 31, 2004 and audited financial
      statements for the 12-month period ended December 31, 2004 rather than
      audited financial statements for the 12-month period ended March 31,
      2005. Accordingly, the Company is filing the Form 10-K/A to
      include such periods and related disclosures. The results from the transition
      period are referred to throughout this report as “2005 transition period”,
“transition 2005”, “T2005”, or the “transition period”.





During
      the ongoing assessment, the Company also analyzed its financial position,
      changes in financial position and results of operations as of the same dates
      and
      for the same periods for which audited consolidated financial statements have
      been presented, and determined that the restricted net assets of the Company’s
      consolidated subsidiaries not available for distribution to the Company as
      of
      March 31, 2007 exceeded certain thresholds. Accordingly, the Form 10-K/A
      includes Schedule I to present condensed financial information for the years
      ended March 31, 2006 and 2007 as part of the financial statements as required
      by
      Articles 12-04(a) and 4-08(e)(3) of Regulation S-X. The Company also added
      a
      disclosure in Notes to the Financial Statements to describe its assessment
      of
      the restricted net assets of the Company’s consolidated subsidiaries in Note
      18.





Finally,
      during the preparation of the Form 10-K/A, the Company identified an error
      in
      the Cash Flow statements for the year ended March 31, 2006 in which the
      depreciation expense amount was misstated. Accordingly, the Company has revised
      the data column for the year ended March 31, 2006 in the Cash Flow statements
      to
      reflect the correct depreciation amount of that period. This change is also
      described in Note 19 Restatement to the Financial Statements below.




In
      the
      Form 10-K/A, the Company has revised the following items:





·
            Item
                6. Selected Financial Data, to reflect the restatements described
                above;


·
            Item
                7. Management’s Discussion and Analysis of Financial Condition and Results
                of Operation, to revise and expand certain disclosures in conjunction
                with
                the above restatements;


·
            Item
                8. Financial Statements and Supplementary Data, to include the transition
                period and to present corresponding financial statements of the parent
                company in Schedule 1;


·
            Item
                9A. Controls and Procedures, to update its assessment of the effectiveness
                of the Company’s disclosure controls and procedures and internal control
                over financial reporting.





Except
      as
      described above, all other information is unchanged and reflects the disclosures
      made at the time of the Original Filing and Amendment No. 1 and this Form 10-K/A
      does not otherwise reflect events occurring after the Original Filing and
      Amendment No. 1 or otherwise modify or update these disclosures. Accordingly,
      this Form 10-K/A should be read in conjunction with the Company's filings with
      the Securities and Exchange Commission subsequent to the Original Filing and
      Amendment No. 1.









**TABLE
      OF CONTENTS**





PAGEPART
                IIITEM
                6.
            SELECTED
                FINANCIAL DATA
            1ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
            1ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            17ITEM
                9A.
            CONTROLS
                AND POCEDURES
            51PART
                IVITEM
                15.
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES
            53SIGNATURES
            54










**PART
          II**





**ITEM 6.
      SELECTED FINANCIAL DATA**





The
      following selected consolidated financial data should be read in conjunction
      with the Consolidated Financial Statements and Notes thereto and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operation”
appearing elsewhere in this report.




**Year
                EndedMarch 31,**
            
            
            **Three
                Months Ended**
              **March
                31,**
            
            
            **Year
                Ended December 31,**(In
              thousands, except per share amounts)
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
              **(Unaudited)**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
              **(Unaudited)**Sales
            
            $
            216,605
            
            $
            132,289
            
            $
            18,692
            
            $
            12,782
            
            $
            57,542
            
            $
            40,978
            
            $
            37,977Income
                (loss) from operations
            
            
            21,791
            
            
            13,338
            
            
            3,269
            
            
            1,576
            
            
            2,812
            
            
            (2,488
            )
            
            460Net
                income (loss) attributable to shareholders
            
            $
            19,874
            
            $
            11,035
            
            $
            4,436
            
            $
            934
            
            $
            (380
            )
            $
            (3,345
            )
            
            (66
            )Earning
                (loss) per share—basic and diluted
            
            $
            0.40
            
            $
            0.23
            
            $
            0.10
            
            $
            0.02
            
            $
            (0.01
            )
            $
            (0.07
            )
            $
            (0.001
            )






**March
                31,**
            
            
            **December
                31,**(In
              thousands)
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
              **(Unaudited)****Balance
              Sheet Data (restated):**Working
                Deficit
            
            $
            (8,281
            )
            $
            (14,269
            )
            $
            (15,920
            )
            $
            (17,837
            )
            $
            (2,643
            )
            $
            (4,635
            )Total
                Assets
            
            
            127,271
            
            
            83,009
            
            
            64,192
            
            
            59,849
            
            
            38,658
            
            
            23,738Short-Term
                Debt
            
            
            53,104
            
            
            36,680
            
            
            29,644
            
            
            29,880
            
            
            12,919
            
            
            7,159Long-Term
                Liabilities
            
            
            4,138
            
            
            -
            
            
            4,833
            
            
            4,833
            
            
            8,458
            
            
            580Shareholders’
                Equity
            
            $
            42,701
            
            
            20,951
            
            $
            7,622
            
            $
            2,990
            
            $
            3,648
            
            $
            402




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND REUSULTS OF
      OPERATION**





The
      following is management’s discussion and analysis of certain significant factors
      that have affected the Company's financial position and operating results during
      the periods included in the accompanying consolidated financial statements,
      as
      well as information relating to the plans of the Company's current management.
      This report includes forward-looking statements. Generally, the words “believe,”
“anticipate,” “may,” “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 the Company files 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. The Company undertakes no obligation to update these
      forward-looking statements.





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




1





**OVERVIEW**





The
      Company produces, markets and sells nutritional products under its own
      brands in China, and is a leader in sales of infant formula products in
      China.





The
      Company markets its products under 圣元 ,
      or
      Synutra, master brand comprising of the sub-brands Super, U-Smart,
      U-Strong, and National Standard, each targeting a different pricing tier. The
      Company focuses on higher-priced premium infant formula products, which are
      supplemented by more affordable infant formula products targeting the
      mass market. The Company sells substantially all of the its products in
      China primarily to distributors who resell the products to end customers
      through their own distribution networks, typically composed of sub-distributors
      and retail outlets. The Company’s distribution network serves over 50,000 retail
      outlets across China. The Company’s extensive sales, customer service, customer
      education and distribution network has helped the Company build brand
      recognition and customer loyalty in the its primary markets where the Company
      focuses on its sales and marketing efforts, which, prior to 2007, were
      primarily cities outside of China’s most well-known urban centers of Beijing,
      Shanghai, Chongqing, Tianjin and China’s provincial capitals. By leveraging the
      its strong brand recognition in the its primary markets, the Company has begun
      to expand into these well-known urban centers, such as Beijing, Shanghai,
      Chongqing and Tianjin and China’s provincial capitals, which have historically
      been dominated by a few, large multinational firms.





The
      Company has opportunistically utilized excess capacity and resources to provide
      toll packaging, toll drying services and sales of ingredients and materials
      to
      industrial customers. The Company also sources and exports chondroitin sulfate
      to the U.S. industrial customers through its agents. These businesses, however,
      are not the Company's core businesses and do not contribute
      significantly in terms of profit.





The
      Company's net sales for the fiscal year ended March 31, 2007 grew by 63.7%
      to
      $216.6 million from $132.3 million for the same period in the previous year.
      The
      Company's gross profit for the fiscal year ended March 31, 2007 grew by 91.8%
      to
      $106.7 million from $55.6 million for the same period in the previous year.
      The
      Company's net income for the fiscal year ended March 31, 2007 grew by 80.1%
      to
      $19.9 million from $11.0 million for the same period in the previous year.





This
      significant increase in the Company's net sales and gross profit is attributable
      primarily to the following:





·
            Rapid
                growth of the infant formula market in China, which increased in
                terms of
                sales revenue by 28.2% from RMB15.8 billion in 2006 to RMB22.4 billion
                in
                2007, according to Euromonitor, an international market research
                company;





·
            Strong
                sales in the Company's primary markets, areas which the Company believes
                to be experiencing rapid growth in powdered infant formula consumption
                as
                compared to well-known urban centers historically dominated by
                multinational players, enabling the Company to increase its national
                market share;





·
            Increases
                in the Company's average selling prices and gross margins resulting
                from
                increases in sales of its premium infant formula products with higher
                selling prices, which are one of the Company's fastest growing
                product categories.





On
      November 6, 2006, the Company consummated a transaction with the Department
      of
      Finance of Zheng Lan Qi (County) of Inner Mongolia in which the Company acquired
      certain assets owned by them including approximately $256,000 in land use rights
      and $5,635,000 in plant and buildings under construction. In connection with
      the
      acquisition, the Company established a wholly owned company, the Inner Mongolia
      Sheng Yuan Food Co., Ltd., to produce milk fat and other diary-based food
      ingredients.





In
      November 2006, Zhangjiakou Sheng Yuan Co., Ltd., one of the Company’s operating
      subsidiaries, entered into an agreement with the shareholders of Inner Mongolia
      Meng Yuan Food Co., Ltd. (“Meng Yuan”) to acquire 100% of the equity interest in
      Meng Yuan for a consideration of approximately $900,000. At the close of the
      transaction, Meng Yuan transferred assets under its control to Zhangjiakou
      which
      included land use rights, plant equipment and plant buildings under
      construction. The Meng Yuan project is anticipated to be put in service in
      late
      2007 and is designed to produce 7,200 tons per year of infant formula products.




2





In
      November 2006, the Company obtained government approval to form a business
      venture, Mei Tai Technology (Qingdao) Co., Ltd., to develop, manufacture, and
      export chondroitin sulfate, or cartilage, a nutraceutical supplement ingredient
      for distribution and sale in North American markets. For the past year, the
      Company has been exporting these products which have generated revenue for
      the
      Company. It is expected that the collagen protein, as a by-product of the
      cartilage manufacturing processes, will become a key raw material component
      for many of the Company’s new products, such as specially formulated milk
      powder products for women, dairy-based protein bars, and new meal
      replacement products for women, in addition to contributing as a revenue source
      through direct export to North America.





On December
      8, 2006, the Company’s subsidiary, Qingdao ST George Dairy Co., Ltd. (renamed as
      Shengyuan Nutrition Co., Ltd. on June 5, 2007), entered into an agreement with
      the owners of Cangshan Tian Fa Bio-chemical Co., Ltd. (“Tian Fa”), a chondroitin
      sulfates supplier of the Company, to acquire a 51% equity stake in Tian Fa
      from
      its owners for a consideration of $ 196,000. The consideration was not paid
      and
      both parties agreed on December 18, 2006 to terminate the transaction due
      to differences on business direction. Qingdao ST George Dairy Co., Ltd. ceased
      to be a shareholder of Tian Fa on the same date.




**FACTORS
        AFFECTING THE COMPANY’S RESULTS OF OPERATIONS**
 
 The
        Company’s operating results are primarily affected by the following factors:
 
 **Industry
        Growth**
 
 The
        infant formula market in China is projected by Euromonitor to grow from RMB22.4
        billion in 2007 to RMB50.7 billion in 2011, a compound annual growth rate,
        or
        CAGR, , of 22.7%. The Company believes that recent growth in infant formula
        consumption in China is largely attributable to the following factors:
 
 ·
              increased
                  affordability of infant formula in China due to economic
                  growth;
 
 ·
              increased
                  penetration of infant formula into the Company’s primary markets outside
                  of well-known urban centers such as Beijing, Shanghai, Chongqing,
                  Tianjin
                  and China’s provincial capitals; and
 
 ·
              a
                  growing female working population.
 
 The
        Company expects these factors to continue drive industry growth, especially
        in
        its primary markets. Such growth will not only increase the overall market
        size
        for infant formula products, but will also benefit companies that are well
        positioned to sell into these markets. The Company believes that the increasing
        affordability of infant formula in its primary markets has become an
        increasingly important driver of growth.
 
 **Perceptions
        of Product Quality and Safety**
 
 Rising
        consumer wealth in China has increased PRC consumer acceptance of and desire
        for
        higher-priced products with perceived quality advantages associated with
        such
        products. Thus, the Company believes that infant formula producers with greater
        customer perception of quality and safety should be able to command higher
        average selling prices and thereby generate higher gross margins than
        competitors who do not possess the same reputation for safety and high quality.
        Conversely, any decrease in consumer perceptions of quality and safety of
        any
        one infant formula manufacturer may not only impact such manufacturer’s sales
        and gross margins, but may also affect infant formula producers generally.
        The
        Company believes its past growth has benefited from its brand recognition
        and
        perceived safety and high quality of its infant formula products. However,
        if
        future market crisis involving any of its products should occur, especially
        if
        management failed to respond to such crisis in a timely and effective manner,
        the Company’s brand recognition and reputation could be severe damaged, which
        could adversely affect its results of operations.
 
 **Brand
        Recognition and Customer Loyalty**
 
 In
        recent
        years, there has been increasing demand in China for premium infant formula
        products due to increasing consumer awareness of brand image and nutritional
        value of the products and services offered by leading producers. Although
        the
        market is still highly competitive, according to data collected by CIC, the
        top
        ten brands accounted for 76.2% of total infant formulas sold in China in
        2006.
        The Company believes that companies with strong national brands and customer
        loyalty will increasingly capture market share from regional brands with
        less
        brand recognition. Moreover, the Company believes brand recognition and customer
        loyalty are predominantly influenced by customer perceptions of the quality
        and
        safety of branded products. The Company believes recent scandals involving
        smaller infant formula producers have increased the importance of consumer
        perceptions of quality and safety to maintaining and increasing brand
        recognition and customer loyalty.
 
 **Product
        Offering and Pricing**
 
 Infant
        formula has been, and is expected to remain, the Company’s primary product.
        Infant formula products account for over 72.3% of the Company’s total sales
        revenue for the fiscal year ended March 31, 2007. Due to rising economic
        affluence in China, infant formula products have become more affordable,
        resulting in the rapid growth of the overall market for infant formula in
        China.
        Despite the recent rapid growth, the Company believes there is much of the
        market that is still underserved with respect to infant formula. The Company
        believes this growth in demand will help drive sales for many PRC infant
        formula
        producers, but companies with strong brand loyalty and extensive distribution
        networks in cities outside of China’s most well-known urban centers outside of
        Beijing, Shanghai, Chongqing Tianjin and China’s provincial capitals will have
        greater ability to capitalize on such growth as well as to increase prices
        and
        pass on higher raw material costs to consumers through launching higher-priced
        new infant formula product lines (such as the Super series of infant formula
        products) or re-launching older product lines at higher prices (such as the
        U-Smart series of infant formula products). Since the fiscal year ended March
        31, 2005, the Company has been migrating towards selling higher-priced infant
        formula products. As a result of this shift towards more premium products,
        the
        Company has seen its average selling price for the fiscal year ended March
        31,
        2007 increase by 20% as compared to the fiscal year ended March 31, 2006,
        which
        contributed significantly to its sales revenue and profit.
 
 **Raw
        Material Supply and Prices**
 
 The
        per
        unit costs of producing the Company’s infant formula are subject to the supply
        and price volatility of raw milk and other raw materials, which are affected
        by
        the PRC and global markets. For example, the price the Company pays for its
        raw
        milk is affected by factors such as geographic location, fluctuations in
        production and competition. Historically, the Company has been able to meet
        its
        raw milk supply by building its production facilities close to its milk
        suppliers and by maintaining long term business relationships with milk
        collection stations.
 
 Rising
        raw material costs will exert financial pressure on smaller competitors who
        do
        not possess the necessary economies of scale or premium brand reputations,
        thus
        creating a catalyst for future industry consolidation.
  For
        certain key ingredients, such as DHA, ARA and powdered whey protein, there
        are a
        limited number of suppliers in the global market. The Company sources its
        DHA
        and ARA from Martek Biosciences Corporation, or Martek, and whey protein
        powder
        from Beijing Honnete Dairy Co., Ltd., or Honnete, and Eurosérum S.A.S., or
        Eurosérum. Eurosérum supplies 10% of the whey protein powder in the world and
        Honnete is the exclusive distributor for Eurosérum in China. The Company expects
        its costs of sales and gross margins will be influenced by any shifts in
        its raw
        material costs.
 
 **Advertising
        and Sales Promotion Costs**
 
 The
        Company has historically relied on its extensive distributor network, its
        consumer education programs and customer relation services to market and
        sell
        its products. To leverage its brand recognition by focusing its marketing
        and
        sales efforts on large urban centers and at a national level, the Company
        substantially increased its television advertising expenditures for fiscal
        year
        ended March 31, 2007, as part of its strategy of improving brand recognition
        on
        a national level to promote its premium brands. The Company intends to continue
        to increase national advertising and promotion efforts and expects these
        costs
        to continue to grow.


**RESULTS
      OF OPERATIONS**





**Fiscal
      Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31, 2006**





***Net
      Sales***




Net
      Sales
      for the fiscal year ended March 31, 2007 increased by 63.7% to $216.6 million
      from $132.3 million for the same period in the previous year. This increase
      in
      net sales was due in part to greater market penetration as a result of various
      measures including continuation of incentive programs and policies
      affecting the Company's sales system and continuation of the further
      alignment of bonuses with sales performance.




Net
      sales
      of nutritional products for the fiscal year ended March 31, 2007, including
      powdered infant formulas for infants, children and adults under the brand names
      Super, U-Smart, U-Strong and National Standards, increased by 76.4% to $167.5
      million from $94.9 million for the same period in the previous year, principally
      as a result of the following factors:




·
            Sales
                volume of nutritional products for the fiscal year ended March 31,
                2007
                increased to 27,942 tons from 19,022 tons for the same period in
                the
                previous year, resulting in an increase of $44.5 million in net sales.







·
            Higher
                average selling price also contributed to the increase in net sales.
                For
                the fiscal year ended March 31, 2007, the average selling price of
                the
                Company's nutritional products increased by 20.0% to $5,982 per ton
                from
                $4,992 per ton for the same period in the previous year, resulting
                in an
                increase of $28.0 million in net sales. This increase in average
                selling
                price was primarily due to changes in product mix toward higher priced
                products. For example, sales of the Company's Super branded
                infant formula and sales of U-Smart branded infant formula products
                increased by 176% and 56%, respectively, as compared to the sales
                of National Standards infant formula branded products, which
                decreased by 32%.





Net
      sales
      from the Company's other activities for the fiscal year ended March
      31, 2007 increased by 31.5% to $49.1 million from $37.3 million for the same
      period in the previous year. The increase in sales was due to the fact that
      some
      categories of sales for the Company's other activities were only made
      in the fourth quarter of the fiscal year ended March 31, 2006, where in the
      fiscal year ended March 31, 2007 such sales were for the entire fiscal
      year.




3





***Cost
      of Sales***





Cost
      of
      sales for the fiscal year ended March 31, 2007 increased by 43.4% to $109.9
      million from $76.7 million for the same period in the previous year. This
      increase was primarily a result of increases in purchases of raw materials
      proportional to the production volume increases and increases in unit costs
      of the Company's raw materials.





The
      cost
      of sales for the Company's nutritional products for the fiscal year
      ended March 31, 2007 increased by 59.3%to 65.2 million from $40.9 million for
      the same period in the previous year. The increase of 8,920 tons of nutritional
      products sold resulted in a $19.2 million increase in cost of sales. Due to
      the
      increase in sales of premium products, the average cost per unit increased
      by
      $180 per ton, resulting in a $5.0 million increase in cost of sales for the
      fiscal year ended March 31, 2007.





The
      cost
      of sales from the Company's other activities for the fiscal year ended March
      31,
      2007 increased by 25.1% to $44.7 million from $35.7 million for the same period
      in the previous year. The majority of this cost increase was because production
      of these products started in the fourth quarter of the fiscal year ended March
      31, 2006 and in the fiscal year ended March 31, 2007 production was for the
      entire fiscal year.




***Gross
      Profit***





Gross
      profit for the fiscal year ended March 31, 2007 increased by 91.8% to $106.7
      million from $55.6 million for the same period in the previous year, primarily
      due to the sales of nutritional products which contributed $102.3 million,
      or
      95.9% of gross profits for the fiscal year ended March 31, 2007, versus $54.0
      million, or 97.1% gross profits for the same period in the previous year.





In
      the
      fiscal year ended March 31, 2007, 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 increase in the average selling price during
      the
      fiscal year. Due to implementation of the Company's targeted sales incentive
      programs, sales of the Company's higher margin lines of products increased
      more, thus contributing to the increase in gross margin.




***Selling
      and Distribution Expenses***





Selling
      and distribution expenses for the fiscal year ended March 31, 2006 increased
      by
      65.0% to $25.6 million from $15.5 million for the same period in the previous
      year. This increase was primarily the result of increased compensation expenses
      for the sales force, and increased transportation and travel expenses in
      proportion to the increase in sales volume. Total compensation to the sales
      force for the fiscal year ended March 31, 2007 increased by 104.4% to $9.2
      million from $4.5 million for the same period in the previous year, mainly
      as a
      result of increased sales staff numbers. Shipping and handling expenses for
      the
      fiscal year ended March 31, 2007 increased by 42.9% to $4.0 million from $2.8
      million for the same period in the previous year and travel expenses for the
      fiscal year ended March 31, 2007 increased by 42.9% to $2.0 million from $1.4
      million for the same period in the previous year. Entertainment, event and
      conventions, communication and marketing expenses for the fiscal year ended
      March 31, 2007 increased by
      233.3%
      to $6.0 million from $1.8 million for the same period in the previous year,
      primarily as a result of an increase in business activities.





4




***Advertising
      and Promotion Expenses***





Advertising
      and promotion expenses for the fiscal year ended March 31, 2007 increased by
      150.2% to $52.3 million from $20.9 million for the same period in the previous
      year. This increase was the result of increased advertising and promotional
      activities as the Company expanded its nationwide advertising campaign in order
      to further promote its brands. Advertising expenses for the fiscal year ended
      March 31, 2007 accounted for 31.3% of total advertising and sales promotion
      expenses, representing an increase of 170.8% to $16.4 million from $6.0 million
      for the same period in the previous year. Sales and promotion expenses for
      the
      fiscal year ended March 31, 2007 accounted for 68.7% of total advertising and
      sales promotion expenses, representing an increase of 141.9% to $36.0 million
      from $14.9 million for the same period in the previous year.





***General
      and Administrative Expenses***





General
      and administrative expenses for the fiscal year ended March 31, 2007 increased
      by 19.4% to $7.0 million from $5.9 million for the fiscal year ended March
      31,
      2006. These increases in general and administrative expenses were primarily
      for
      staff salaries and management expenses which accounted for $0.9 million of
      the
      total increase.





***Interest
      Expense***





Interest
      expense for the fiscal year ended March 31, 2007 increased by 6.3% to $1.9
      million from $1.8 million for the same period in the previous year. This
      increase was primarily due to interest charged for various bank loans. In
      addition to increases in notes payable, the short-term interest rates also
      increased during the fiscal year ended March 31, 2007.





***Interest
      Income***





Interest
      income for the fiscal year ended March 31, 2007 increased by 49.6% to $356,000
      from $238,000 for the same period in the previous year, due primarily to
      increased bank deposits.





***Other
      Income/(Expense), Net***





Other
      income was $1.2 million and $0.7 million for the fiscal year ended March 31,
      2007, and 2006, respectively. This increase in other income was mainly as a
      result of an increase of subsidy income from local governments for the fiscal
      year ended March 31, 2007 by 51.1% to $1.1 million from $0.7 million for the
      same period in the previous year.







***Provision
      for Income Taxes***





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $1.6 million and $1.4 million for the fiscal years ended March 31, 2007 and
      2006, respectively. The difference in income tax provisions was due to changes
      in the status of tax holidays and abatement treatment for the fiscal year ended
      March 31, 2007 for some of the Company's operating subsidiaries. The Company's
      effective tax rate decreased to 7.4% for the fiscal years ended March 31, 2007
      from 11.6% for the fiscal years ended March 31, 2006, because two of the
      Company's subsidiaries, Zhangjiakou and Luobei, started to enjoy preferential
      tax treatment after becoming foreign owned enterprises.





***Net
      Income Attributed to Shareholders***





Net
      income attributable to stockholders for the fiscal year ended March 31, 2007
      increased by 80.1% to $19.9 million from $11.0 million for the same period
      in
      the previous year due to the factors discussed above.




5




**Fiscal
      Year Ended March 31, 2006 Compared to Year Ended December 31, 2004**





***Net
      Sales***





Net
      sales
      for the fiscal year ended March 31, 2006 increased by 129.9% to $132.3
      million from $57.5 million for the year ended December 31, 2004. This
      increase in net sales resulted from the volume increase in the Company's premium
      infant formula products, including the Super branded products. The
      increase in volume of products sold was due in part to greater market
      penetration resulting from changes made by management to incentive programs
      and
      policies affecting the Company's sales system. Such changes enhanced sales
      force
      productivity through targeted resource allocation down to the store level,
      and
      strengthened promotional efforts in the Company's primary markets by aligning
      bonuses with sales performance.




Net
      sales
      of the Company's nutritional products mostly contributed to the increasing
      revenue trend. Net Sales for the Company's nutritional products for
      the fiscal year ended March 31, 2006 increased by 88.0% to $94.9 million from
      $50.5 million for the year ended December 31, 2004.




·
            Sales
                volume of nutritional products for the fiscal year ended March 31,
                2006
                increased by 54.4% to 19,022 tons from 12,324 tons for the year ended
                December 31, 2004, resulting in an increase of $27.5 million in net
                sales.
                This increase was partly due to significant increases in sales
                of Super branded premium infant formula products and U-Smart
                branded infant formula products.





·
            Higher
                average selling price also contributed to the increase of net sales.
                The
                average selling price of the Company's nutritional products for the
                fiscal
                year ended March 31, 2006, increased by 21.8% to $4,617 per ton from
                $3,741 per ton for year ended December 31, 2004, resulting in an
                increase
                of $17.0 million in net sales. The increase in average selling price
                resulted mainly from changes in product mix toward higher priced
                products.




Net
      sales
      from the Company's other activities for the fiscal year ended March 31, 2006
      increased by 431.5% to $37.3 million from $7.0 million for the year ended
      December 31, 2004. The volume of sales in dairy and other ingredients and
      packaging materials proportional to the increases in customers increased
      significantly for the fiscal year because the Company's customers’
business activities increased rapidly and transactions between industry
      customers increased significantly as the sector grew over for the same period.





***Cost
      of Sales***





Cost
      of
      sales for the fiscal year ended March 31, 2006 increased by 128.1% million
      to
      $76.7 million from $33.6 million for the year ended December 31, 2004. The
      increase in cost of sales was a result of increases in purchases of raw
      materials proportional
      to the increases to the Company's production volume.





Cost
      of
      sales for the Company's nutritional products for the fiscal year ended
      March 31, 2006 increased by 52.8% to $40.9 million from $26.8 million for the
      year ended December 31, 2004 as a result of increase in sales.




Cost
      of
      sales for the Company's other activities for the fiscal year ended
      March 31, 2006 increased by 425.2% to $35.7 million from $6.8 million for the
      year ended December 31, 2004. These cost increases, though significant, are
      in
      line with the increases in the sales generated from the
      Company's other activities.




***Gross
      Profit***





Gross
      profit for the fiscal year ended March 31, 2006 increased by 132.4% to $55.6
      million from $23.9 million for the year ended December 31, 2004. This
      increase was primarily a result of increased volume of products sold and the
      increase in average sales price during the fiscal year. Due to the
      implementation of targeted sales incentive programs, such as allocating more
      bonuses for the sales of premium branded products, sales of the higher margin
      product lines increased at a higher rate, contributing to the increase in gross
      margin.




6





Gross
      profit for the Company's nutritional products for the fiscal year
      ended March 31, 2006 increased by 127.8% to $54.0 million from $23.7 million
      for
      the year ended December 31, 2004.




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




***Selling
      and Distribution Expenses***





Selling
      and distribution expenses for the fiscal year ended March 31, 2006 increased
      by
      64.3% to $15.5 million from $9.4 million for the year ended December 31,
      2004. The increase in selling and distribution expenses 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 for the fiscal year ended March 31, 2006
      increased by 350.0% to $4.5 million from $1.0 million for the year ended
      December 31, 2004. Shipping and handling expenses for the fiscal year ended
      March 31, 2006 increased by 31.8% to $2.8 million from $2.1 million for the
      year
      ended December 31, 2004; and travel expenses for the fiscal year ended March
      31,
      2006 increased by $102.9% to $1.4 million from $679,000 for the year ended
      December 31, 2004. Sales force compensation increased due to the hiring of
      additional sales personnel in response to the Company's expanding business
      and
      greater market penetration. During the fiscal year ended March 31, 2006, the
      Company increased its marketing effort with the addition of more than 800 sales
      personnel and the expansion of its geographic reach increased into 1,000
      additional townships throughout China.





***Advertising
      and Promotion Expenses***





Advertising
      and promotion expenses for the fiscal year ended March 31, 2006 increased by
      146.6% to $20.9 million from $8.5 million for the year ended December 31, 2004
      as a result of increased advertising and promotional activity expenses.
      Advertising expenses for the fiscal year ended March 31, 2006 accounted for
      28.9% of total advertising and sales promotion expenses, representing an
      increase of 139.8% to $6.0 million from $2.5 million for the year ended December
      31, 2004, as the Company started nationwide advertising campaign to promote
      its
      brand. Sales and promotion expenses for the fiscal year ended March 31, 2006
      accounted for 71.1% of total advertising and sales promotion expenses,
      representing an increase of 149.4% to $14.9 million from $6.0 million for the
      year ended December 31, 2004.




***General
      and Administrative Expenses***





General
      and administrative expenses for the fiscal year ended March 31, 2006 increased
      by 83.2% to $5.9 million from $3.2 million for the year ended December 31,
      2004.
      The majority of the 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 $850,000 in incremental
      legal, accounting, and consulting costs associated with operating as a public
      company.





***Interest
      Expense***





Interest
      expense for the fiscal year ended March 31, 2006 increased by 179.6% to $1.8
      million from $638,000 for the year ended December 31, 2004. This increase was
      mainly a result of interest charged for various bank loans. In addition to
      increases in notes payable, short-term interest rates also increased during
      the
      reporting period.




7





***Interest
      Income***





Interest
      income for the fiscal year ended March 31, 2006 increased by 170.5% to $238,000
      from $88,000 million for the year ended December 31, 2004, due primarily to
      increased bank deposits.





***Other
      Income/(Expense), Net***





Other
      income was $690,000 for the fiscal year ended March 31, 2006, and $32,000 for
      the year ended December 31, 2004. The Company generated other income
      mainly as a result of an increase in subsidy income from local governments,
      which for the fiscal year ended March 31, 2006 increased to $734,000 from
      $271,000 for the year ended December 31, 2004.




***Provision
      for Income Taxes***





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $1.4 million and $76,000 for the years ended March 31, 2006 and December 31,
      2004, respectively. The difference in income tax provisions was due to changes
      in the status of tax holidays and abatement treatment for fiscal year 2006
      for
      some of the Company's operating subsidiaries. The Company's effective
      tax rate increased to 11.6% for the fiscal years ended March 31, 2006 from
      3.3%
      for the year ended December 31, 2004. This increase in effective income tax
      rate
      resulted mainly from a major subsidiary, Sheng Yuan Nutritional Food, which
      became profitable for the fiscal year ended March 31, 2006.




***Net
      Income Attributable to Shareholders***




Net
      income attributable to shareholders for the fiscal year ended March 31, 2006
      increased by $11.4 million to $11.0 million from a loss of $380,000 for the
      year
      ended December 31, 2004 due to the factors discussed above.





**Three
      Months Transition Period Ended March 31, 2005 Compared to Three Months Ended
      March 31, 2004 (Unaudited)**





***Net
      sales***





Net
      sales
      for the transition period ended March 31, 2005 increased by 46.2% to $18.7
      million from $12.8 million for the same period in the previous year. The
      increase in net sales resulted from volume increase in the
      Company's premium infant formula products, including the U-Smart branded
      products. The increase in volume of products sold was mainly to greater market
      penetration as the Company's distribution network expanded.




Net
      sales
      of the Company's nutritional products mostly contributed to the increasing
      revenue trend. Net Sales for the Company's nutritional products for the transition
      period ended March 31, 2005 increased by 46% to $17.3 million from $11.8 million for the same period in
      the
      previous year .




·
            Sales
                volume of nutritional products for thetransition
                period ended March 31, 2005increased by 18.3% to 3,740 tons from 3,161 tons for the same period
                in
                the previous year,
                resulting in an increase of $2.2 million in net sales. This increase
                was
                partly due to significant increase in the sales of U-Smart branded
                infant
                formula products.





·
            Higher
                average selling price also contributed to the increase of net sales.
                The
                average selling price of the Company's nutritional products for the
                transition period ended March 31, 2005 increased by 23.4% to $4,617
                per
                ton from $3,741 per ton for the same period in the previous year,
                resulting in an increase of $3.3 million in net sales. The increase
                in
                average selling price resulted mainly from changes in product mix
                toward
                higher priced series.




8




Net
      sales
      from the Company's other activities for the transition
      period ended March 31, 2005 increased by 48.8% to $1.4 million from $957,000 for the same period in the
      previous year .
      The
      volume of sales in dairy and other ingredients and packaging materials
      proportional to the increases in the Company's customers increased significantly
      for the fiscal year because the business activities of the Company's
      customers increased rapidly and transactions between industry customers
      increased significantly as the sector grew over for the same period.





***Cost
      of Sales***





Cost
      of
      sales for the transition period ended March 31, 2005 increased by 20.8% to
      $9.1
      million from $7.6 million for the same period in the previous year .
      The
      increase in cost of sales was a result of increases in purchases of raw
      materials proportional
      to the increases in proportion to the Company's production volume.




Cost
      of
      sales for the Company's nutritional products for the transition
      period ended March 31, 2005 increased by 17.6% to $7.8 million from $6.6 million for the same period in
      the
      previous year as a
      result of increase in sales.




Cost
      of
      sales for the Company's other activities for the transition
      period ended March 31, 2005 increased by 42.4% to $1.4 million from $954,000 for the same period in the
      previous year .
      These
      cost increases, are in line with the increases in the sales generated from
      the
      Company's other activities.




***Gross
      Profit***





Gross
      profit for the transition
      period ended March 31, 2005 increased by 83.1% to $9.6 million from $5.2 million for the same period in
      the
      previous year .




Gross
      profit for the Company's nutritional products for the transition
      period ended March 31, 2005  increased
      by 81.9% to $9.5 million from $5.2 million for
      the
      same period in the previous year .




In
      the transition
      period ended March 31, 2005, the Company experienced an increase in
      gross profit. This increase was primarily a result of increased volume of
      products sold and the increase in average sales price during the transition
      period. Due to the implementation of targeted sales incentive programs, such
      as
      allocating more bonuses for the sales of premium branded products, sales of
      the
      higher margin product lines increased at a higher rate, contributing to the
      increase in gross margin.




***Selling
      and Distribution Expenses***





Selling
      and distribution expenses increased by 67.6% to $4.6 million for
      the transition
      period ended March 31, 2005 from $2.7 million for
      the
      same period in the previous year . The
      increase in selling and distribution expenses 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 for
      the transition
      period ended March 31, 2005 increased by 412.1% to $805,000 from $157,000 for
      the
      same period in the previous year .
      Travel
      expenses for
      the transition
      period ended March 31, 2005 increased by 36.7% to $201,000 from $147,000 for
      the
      same period in the previous year .
      Sales
      force compensation increased due to the hiring of additional sales personnel
      in
      response to expanding business and greater market penetration.





***Advertising
      and Promotion Expenses***





Advertising
      and promotion expenses for the transition
      period ended March 31, 2005 increased by 186.8% to $1.1 million from $373,000 million for the same period
      in
      the previous year as a
      result of increased advertising and promotional activity expenses. Advertising
      expenses for the transition
      period ended March 31, 2005 accounted for 9.4% of total advertising and sales promotion expenses,
      representing an increase of 62.9% to $101,000 from $62,000 for the same period
      in the previous year .
      Sales
      and promotion expenses for the transition
      period ended March 31, 2005 accounted for 90.6% of total advertising and sales promotion expenses,
      representing an increase of 211.9% to $970,000 from $311,000 for the same period
      in the previous year .




9





***General
      and Administrative Expenses***





General
      and administrative expenses for
      the transition
      period ended March 31, 2005 increased by 19.9% to $665,000 from $555,000 for
      the
      same period in the previous year, primarily due to increased business activities
      and corporate headcounts.





***Interest
      Expense***





Interest
      expense for
      the transition
      period ended March 31, 2005 increased by 26.0% to $183,000 from $145,000 million
      for the same period in the previous year, primarily due to increased bank
      borrowings.





***Provision
      for Income Taxes***





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $32,000 and $19,000 for the three
      months ended March 31, 2005 and 2004,
      respectively. The difference in income tax provisions was due to changes in
      the
      status of tax holidays. The Company's effective tax rate decreased
      to 1.0% for the transition
      period ended March 31, 2005 from
      1.3% for the three
      months ended March 31, 200 4
      due to
      effects from these related tax holidays.





***Net
      Income Attributed to Shareholders***





Net
      income attributable to shareholders for the transition period ended March 31,
      2005 increased by 374.7% to $4.4 million from $934,000 for the same period
      in
      the previous year due to the factors discussed above.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Cash**





The
      cash
      balance increased by $15.1 million to $20.8 million at March 31, 2007, as
      compared to $5.7 million at March 31, 2006. The increase was mainly attributable
      to net cash provided by operating activities of $14.8 million and net cash
      provided by financial activities of $16.4 million, being offset by cash spent
      in
      construction projects on plant and acquisition of fixed assets which amounted
      to
      $21.6 million.





Cash
      flow
      generated from operations was $14.8 million for the fiscal year ended March
      31,
      2007. Accounts receivable increased by $4.0 million and advances to suppliers
      increased by $852,000. Expanded scale of operations from the increase in sales
      revenues in fiscal year 2007 resulted in additional demand on working capital.
      Therefore, the Company experienced increased account receivables and
      inventories to support its increased sales revenues and production
      activities. Also, expansion of operations resulted in increases in other payable
      and accrued expenses and customer deposits, which provided $5.0 million in
      cash flow. Deferred income provided $4.1 million in cash flow.





Cash
      flows used in investing activities amounted to $18 million. During the fiscal
      year ended March 31, 2007, the Company used approximately $12.7
      million for the construction on a factory plant and facilities. The
      Company also spent approximately $8.9 million on new machinery and
      equipment.





Cash
      flows generated from financing activities was $16.4 million due to a net
      increase in bank loans.




10





**Working
      Capital**





Working
      capital increased by $6.0 million to $8.3 million at March 31, 2007, as compared
      to $14.3 million at March 31, 2006. The increase in working capital reflects
      current ratios of 89.7% and 77.0%, respectively.





The
      significant improvement was due to the growth of the Company’s pretax earnings
      which continues to outpace by an average factor of 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, 2008, the Company intends to
      continue to work to expand its product lines and product mix, as well
      as its product distribution throughout China. The Company expect
      to fund these projects with operating cash flows generated in the normal course
      of business, as well as ongoing borrowings under the facility.





In
      April,
      2007, the Company and ABN AMRO Bank N.V., Hong Kong branch ("ABN") entered
      into
      a Loan Agreement pursuant to which ABN agreed to make loans to the Company
      in
      the amount of $35,000,000. The principal amount, and any unpaid accrued interest
      thereon, is due on October 19, 2007 (the "Maturity Date"). The loans may be
      prepaid without penalty prior to the Maturity Date. The loans bear interest
      at
      the one-month London interbank offered rate for deposits in US dollars plus
      2.5%
      with interest payable on the last day of each month. The Company is required
      to
      pay to ABN a commitment fee of 1% on the daily amount of the unused commitment
      amount. The proceeds of the loans have been used to fund the expansion of infant
      formula production capacities, to establish a plant for the production of
      Chondroitin, and to purchase fixed assets for the production of nutritional
      food
      bars.





In
      addition, pursuant to a USD facility side letter agreement dated April 19,
      2007
      between the Company and ABN, the Company is obligated to issue warrants to
      purchase up to 400,000 shares of the common stock. Upon Closing, 200,000 shares
      were issued at $8.84 per share. The remaining 200,000 shares will be issued
      on
      the earlier of (i) the completion of a private placement of debt or a loan
      to
      the Company in amount sufficient to repay the loans, or (ii) on October 19,
      2007.





On
      June
      15, 2007, the Company completed a transaction pursuant to a Purchase Agreement
      dated May 24 between the Company and Warburg Pincus Private Equity IX, L.P,
      whereby Warburg purchased four million shares of common stock, par value
      $0.0001 per share, for an aggregate purchase price of sixty-six million dollars
      ($66,000,000). The proceeds from this transaction are intended for general
      corporate purposes.




**CONTRACTUAL
      OBLIGATIONS**





The
      Company's cash flows from operations are dependent on a number of factors,
      including fluctuations in its operating results, accounts receivable
      collections, inventory management, and the timing and amount of tax and other
      payments. As a result, the impact of contractual obligations on the
      Company's liquidity and capital resources in future periods should be
      analyzed in conjunction with such factors. In addition, the
      Company plans for and measure its liquidity and capital resources
      through an annual budgeting process.




11




The
      following tables summarize the Company's contractual obligations at
      March 31, 2007 (in thousands):





**PAYMENTS
                DUE BY PERIOD****March
                31, 2007****Total**
            
            **Less than 1 Year**
            
            **1-3 years**
            
            **3—5 years**
            
            **More than 5 years**Operating
                leases
            
            $
            728
            
            
            355
            
            
            373
            
            
            -
            
            
            -Short-
                term debt
            
            
            53,104
            
            
            53,104
            
            
            -
            
            
            -
            
            
            -Other
                long-term liabilities
            
            
            4,138
            
            
            -
            
            
            -
            
            
            -
            
            
            4,138**Total**
            
            **$**
            57,970
            
            
            53,459
            
            
            373
            
            
            -
            
            
            4,138




**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, advances 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.





***Revenue***





The
      Company recognizes product sales when title and risk and rewards for the
      products are transferred to the customer, price is fixed and determinable and
      collect ability is reasonably assured. At the time of the sale, the
      Company also records estimates for a variety of sales deductions, including
      value added taxes, rebates, discounts and incentives, trade promotions and
      product returns. Sales deductions are reported as a reduction of revenue. Most
      of the Company's nutritional product sales are made through distributors. The
      Company's revenue arrangements with most of its distributors requires
      distributor advance payment prior to any shipment and delivery of goods
      by the Company to such distributors. Under this distributor
      arrangement, evidenced by purchase order together with advance payment, sales
      revenue is realized and earned upon acceptance of delivery of products by the
      distributors. The Company applies this revenue recognition policy uniformly
      to
      all its nutritional products, including all dairy-based pediatric and adult
      nutritional products.




A
      small
      fraction of the Company's nutritional product sales are through supermarket
      retailers directly. The Company's 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 collect
      ability.




12




***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 transporting the Company's inventory to their present location
      and
      condition. The Company evaluates the net realizable value of its inventory
      on a regular basis and record 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 consummate
      the sale.




***Deductions
      from Revenues***




The
      Company's gross sales are subject to various deductions, primarily
      comprised of rebates and discounts to distributors and retailers. These
      deductions represent estimates of the related obligations, requiring the use
      of
      judgment when estimating the impact of these sales deductions on gross sales
      for
      a reporting period. The Company reports these adjustments as a
      reduction of gross sales to arrive at net sales.




·
            The
                Company offers rebates to key distributors, group purchasing organizations
                and other direct and indirect customers to sustain and increase its
                product market share. These rebate programs provide that distributors
                receive a rebate after attaining certain performance parameters relating
                to product purchases, formulary status and/or pre-established market
                share
                milestones relative to competitors. Since rebates are contractually
                agreed
                upon, the Company estimates rebates based on the specific terms in
                each
                agreement, historical experience, anticipated reimbursement channel
                mix
                and product growth rates. The Company considers the sales
                performance of products subject to rebates and other contract discounts
                and adjust the provision periodically to reflect actual experience.




·
            The
                Company records a provision for estimated sales returns due to
                package damage and shelf life expiration, which the
                Company estimates through a comparison of historical return data to
                related sales. The Company uses historical rates of return
                and the Company adjusts for known or expected changes in the
                marketplace when appropriate. Sales returns amount to approximately
                1% of
                gross product sales.





·
            The
                Company offers cash discounts to distributors and retailers to encourage
                prompt payment. The Company accrues cash discounts, which are
                typically 1-2% of gross sales, at the time of invoicing and are recorded
                as revenue deductions.




·
            The
                Company generally records discounts, rebates or other deductions
                shown on the invoice directly as a reduction in the gross to net
                sales
                value and they do not pass through the provision
                account.





***Income
      Taxes***




The
      provision for income taxes has been determined using the asset and liability
      approach of accounting for income taxes. Under this approach, deferred taxes
      represent the future tax consequences expected to occur when the reported
      amounts of assets and liabilities are recovered or paid. The provision for
      income taxes represents income taxes paid or payable for the current year plus
      the change in deferred taxes during the year. Deferred taxes result from
      differences between the financial and tax bases of the Company's assets and
      liabilities and are adjusted for changes in tax rates and tax laws when changes
      are enacted. Valuation allowances are recorded to reduce deferred tax assets
      when it is more likely than not that a tax benefit will not be realized. The
      assessment of whether or not a valuation allowance is required often requires
      significant judgment including the long-range forecast of future taxable income
      and the evaluation of tax planning initiatives. Adjustments to the deferred
      tax
      valuation allowances are made to earnings in the period when such assessments
      are made.




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.




13





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 but in certain limited
      areas applicable tax rate is 24%. Subject to this regime, the Company’s
      aggregate corporate income tax would have been $7.1 million and $4.1 million
      for
      the fiscal years ended March 31, 2007 and 2006, and $757,000 for the year ended
      December 31, 2004, respectively. Due to various preferential tax policies that
      some of the Company’s operating subsidiaries in China currently enjoy, the
      actual corporate income tax was $1.6 million, $1.4 million and $76,000 for
      the
      fiscal years ended March 31, 2007, 2006 and December 31, 2004, respectively.
      The
      reduced tax rates or tax holidays accorded to the Company resulted in tax
      savings of $5.5 million, $2.7 million and $681,000 for the fiscal years ended
      March 31, 2007, 2006 and December 31, 2004, respectively. The per share effect
      of the total tax savings was $0.11, $0.05 and $0.01 for the fiscal years ended
      March 31, 2007, 2006 and December 31, 2004, respectively. The actual corporate
      income tax was $32,000 and $19,000 for the transition period ended March 31,
      2005 and March 31, 2004, respectively. The reduced tax rates or holidays
      accorded to the Company resulted in tax savings of $992,000 and $457,000,
      respectively. The per share effect of the total tax savings was $0.02 and $0.01
      for the transition period ended March 31, 2005 and March 31, 2004, respectively.
      These preferential tax rates will expire at varying times in the coming
      years.





Qingdao
      St. George Dairy Co., Ltd, Heilongjiang Loubei Shengyuan Dairy Co. Ltd, Bei’an
      Yipin Dairy Co. Ltd and Zhangjiakou Sheng Yuan Co. Ltd., Inner Mongolia
      Shengyuan Food Co., Ltd., and Mei Tai Technology (Qingdao) Co., Ltd. qualify
      as
      a foreign investment production enterprise and were established in special
      economic zones. 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, as calculated under PRC accounting standards.





The
      following table illustrates tax benefits enjoyed by the Company's subsidiaries
      under the current regulations:




**Name
                  of Subsidiary**
              
              **Normal
                  Tax Rate**
              
              **Tax
                  Holiday (based on calendar year)**Qingdao
                  St. George Dairy Co., Ltd
              
              24%
              
              2
                  years tax free (2004, 2005); 3 years tax at 12%
                  (2006-08)Qingdao
                  Sheng Yuan Dairy Co., Ltd.
              
              33%
              
              Waiver
                  of 3% local tax for taxable years ending before Jan. 1, 2008Heilongjiang
                  Luobei Sheng Yuan Dairy Co., Ltd.
              
              33%
              
              2
                  years tax free (2006, 2007); 3 years tax at 16.5%
                  (2008-10)Bei’an
                  Yipin Dairy Co., Ltd.
              
              33%
              
              2
                  years tax free (2005, 2006); 3 years tax at 16.5%
                  (2007-09)Zhangjiakou
                  Sheng Yuan Dairy Co., Ltd.
              
              33%
              
              2
                  years tax free (2006, 2007); 3 years tax at 16.5%
                  (2008-10)Mei
                  Tai Technology (Qingdao) Co., Ltd.
              
              33%
              
              2
                  years tax free (2008, 2009); 3 years tax at 16.5%
                  (2010-12)Inner
                  Mongolia Sheng Yuan Food Co., Ltd.
              
              33%
              
              2
                  years tax free (2008, 2009); 3 years tax at 16.5%
                  (2010-12)




14




On
      March
      16, 2007, the National People’s Congress of China enacted the New Enterprise
      Income Tax (“EIT”) Law, which will become effective on January 1, 2008. The New
      EIT Law imposes a unified enterprise income tax rate of 25% on all domestic
      enterprises and foreign-invested enterprises unless they qualify for certain
      tax
      incentives. Under the New EIT Law, enterprises that were established and already
      enjoyed preferential tax treatments before March 16, 2007 will continue to
      enjoy
      them (1) in the case of reduced tax rates, for a period of five years from
      January 1, 2008, subject to certain phase-out rules, or (ii) in the case of
      fixed-term tax holidays, until the expiration of such term. Because the detailed
      implementing rules for the New EIT Law have not been promulgated, it is not
      clear how these transitional rules will be applied.




In
      addition, the New EIT Law sets the top rate of withholding tax on dividends
      to
      20% and, unlike the Income Tax Law for Foreign-Invested Enterprises and Foreign
      Enterprises currently in effect, does not specifically exempt withholding tax
      on
      dividends paid by foreign-invested enterprises to foreign investors. Although
      the New EIT Law provides for the possibility of exemption or reduction of such
      withholding tax, the details await the forthcoming implementing rules. The
      ultimate withholding tax rate on dividends is subject to reduction by applicable
      tax treaty between China and the tax residence of the foreign investor. The
      Company are actively monitoring the withholding tax on dividends and are
      evaluating appropriate organizational changes to minimize any unfavorable tax
      consequences, to the extent practicable.





The
      Company's subsidiary Inner Mongolia Meng Yuan Dairy Co., Ltd. is not entitled
      to
      preferential tax treatment. The applicable enterprise income tax rate for this
      entity is 33% for taxable years ending before January 1, 2008, and 25%
      thereafter.




**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 (1) geographic sales as a
      majority of its products are marketed and sold in the PRC; (2) export of
      chondroitin sulfate was through a single importer in North America.





(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.





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the Financial Accounting Standard Board (“FASB”) issued Interpretation No.
      48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
      Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
      tax positions. This interpretation requires that the Company recognize in its
      financial statements the impact of a tax position if that position is more
      likely than not of being sustained on audit, based on the technical merits
      of
      the position. FIN 48 is effective for fiscal years beginning after December
      15,
      2006 which is the beginning of the Company’s fiscal 2008. The Company is
      currently assessing the potential effect of adopting FIN 48 on its financial
      statements, but preliminary analysis shows the effect to be immaterial.




15





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 “Defining Fair Value Measurement” (“SFAS 157”) which defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      FAS
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, which is the Company’s fiscal 2009. The Company is
      currently evaluating the impact of adopting FAS 157 on its financial statements.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, which is the Company’s fiscal 2009. The Company is currently evaluating
      the impact of adopting FAS 157 on its financial statements.





**OFF-BALANCE
      SHEET OBLIGATIONS**





The
      Company does not have any special purpose entities or off-balance sheet
      financing arrangements. However, the Company does guarantee certain
      bank loans to farmers as discussed below. As at March 31, 2007, the
      Company had a guarantee given to the Zhangbei Branch of the Agriculture
      Bank of China in respect of bank loans of $1.1 million in total extended to
      104
      farmers in the Zhangbei area. The total amount of bank loans under this
      guarantee arrangement was $1.1 million as of March 31, 2007. These bank loans
      mature on December 25, 2007. The potential loss from this guarantee could not
      be
      estimated as the Company was unable to assess the financial position
      of individual farmers. However, based on general economic information available
      for this area, the Company believes that these loans will be repaid by
      the farmers upon maturity. Therefore, no liability was recorded on the balance
      sheet in relation to these guarantees.




16




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      following consolidated financial statements are filed as a part of this report:





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Report
                of Independent Registered Public Accounting Firm
            18Consolidated
                Balance Sheets as of March 31, 2007 and 2006 (restated)
            19Consolidated
                Statements of Income for the fiscal years ended March 31, 2007 and
                2006
                and December 31, 2004 (restated), for the three month transition
                period
                ended March 31, 2005 and three months ended March 31, 2004
                (unaudited)
            20Consolidated
                Statements of Shareholders’ Equity for the fiscal years ended March 31,
                2007 and 2006 and December 31, 2004 (restated), and for the three
                month
                transition period ended March 31, 2005
            21Consolidated
                Statements of Cash Flows for the fiscal years ended March 31, 2007
                and
                2006 and December 31, 2004 (restated), for the three month transition
                period ended March 31, 2005 and three months ended March 31, 2004
                (unaudited)
            22Notes
                to Consolidated Financial Statements
            23




17




**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, 2007 and 2006, and the related
      consolidated statements of income, changes in shareholders' equity, and cash
      flows for the two fiscal years ended March 31, 2007 and 2006, the three months
      ended March 31, 2005 and the year ended December 31, 2004, and related financial
      statement schedules. These consolidated financial statements and related
      financial statement schedules 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,
      2007 and 2006, and the results of its operations and its cash flows for the
      two
      fiscal years ended March 31, 2007 and 2006, the three months ended March 31,
      2005 and the year ended December 31, 2004, in conformity with accounting
      principles generally accepted in the United States of America. Also, in our
      opinion, the related financial statement schedules, when considered in relation
      to the basic consolidated financial statements taken as a whole, presents fairly
      in all material respects, the information set forth therein.







/s/
      Rotenberg & Co., LLP





Rotenberg
      & Co., llp


Rochester,
      New York


June
      26,
      2007 (except for the restatement discussed in Note 19 to the consolidated
      financial statements, as to which the date is January 9, 2008)




18




**SYNUTRA
      INTERNATIONAL, INC.**





**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, except share par value)**


**(As
      restated, see Note 19)**





**March
                31,**
              **2007**
            
            **March
                31,**
              **2006****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            20,836
            
            $
            5,677Restricted
                cash
            
            
            12,930
            
            
            16,457Accounts
                receivable
            
            
            6,760
            
            
            2,540Inventories
            
            
            16,406
            
            
            11,789Other
                receivable
            
            
            2,019
            
            
            2,230Due
                from the related parties
            
            
            11,742
            
            
            8,602Advances
                to suppliers
            
            
            1,206
            
            
            354Deferred
                expenses and other current assets
            
            
            252
            
            
            139**Total
                current assets**
            
            
            **72,151**
            
            
            **47,788****Property,
                plant and equipment, net**
            
            
            51,472
            
            
            33,318**Land
                use rights, net**
            
            
            3,024
            
            
            1,546**Deferred
                tax assets**
            
            
            432
            
            
            -**Other
                Assets**
            
            
            192
            
            
            357**TOTAL
                ASSETS**
            
            **$**
            **127,271**
            
            **$**
            **83,009****LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                Liabilities:**Bank
                loans
            
            $
            53,104
            
            $
            36,680Accounts
                payable
            
            
            12,085
            
            
            13,079Due
                to related parties
            
            
            2,935
            
            
            4,301Advances
                from customers
            
            
            4,263
            
            
            933Tax
                payables
            
            
            1,329
            
            
            1,996Other
                current liabilities
            
            
            6,716
            
            
            5,069**Total
                current liabilities**
            
            
            **80,432**
            
            
            **62,058**Deferred
                income
            
            
            4,138
            
            
            -**Total
                liabilities**
            
            
            **84,570**
            
            
            **62,058****Shareholders'
                equity:**Common
                stock, $.0001 par value: 250,000 authorized; 50,001  issued and
                outstanding at March 31, 2007 and 2006
            
            
            5
            
            
            5Additional
                paid-in capital
            
            
            8,226
            
            
            8,226Retained
                earnings
            
            
            31,538
            
            
            11,664Accumulated
                other comprehensive income
            
            
            2,932
            
            
            1,056**Total
                shareholders' equity**
            
            
            **42,701**
            
            
            **20,951****TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            **127,271**
            
            **$**
            **83,009**





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




19


**SYNUTRA
      INTERNATIONAL, INC.**





**CONSOLIDATED
      STATEMENTS OF INCOME**


**(in
      thousands except earning per share data)**


**(As
      restated, see Note 19)**




**Year
                Ended**
              **March
                31,**
            
            
            **Three
                Months Ended March 31,**
            
            
            **Year
                Ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2004****(Unaudited)**Net
                sales
            
            $
            216,605
            
            $
            132,289
            
            $
            18,692
            
            $
            12,782
            
            $
            57,542Including:
                related party sales
            
            
            16,815
            
            
            20,983
            
            
            2,016
            
            
            214
            
            
            3,020Cost
                of sales
            
            
            109,900
            
            
            76,653
            
            
            9,124
            
            
            7,556
            
            
            33,605Including:
                related party cost of sales
            
            
            14,871
            
            
            19,771
            
            
            1,787
            
            
            213
            
            
            2,836**Gross
                profit**
            
            
            **106,705**
            
            
            **55,636**
            
            
            **9,568**
            
            
            **5,226**
            
            
            **23,937**Selling
                & distribution expenses
            
            
            25,561
            
            
            15,494
            
            
            4,563
            
            
            2,722
            
            
            9,428Advertising
                and promotion expenses
            
            
            52,322
            
            
            20,908
            
            
            1,071
            
            
            373
            
            
            8,479General
                & administrative expenses
            
            
            7,031
            
            
            5,896
            
            
            665
            
            
            555
            
            
            3,218Total
                operating expense
            
            
            84,914
            
            
            42,298
            
            
            6,299
            
            
            3,650
            
            
            21,125**Income
                from operations**
            
            
            **21,791**
            
            
            **13,338**
            
            
            **3,269**
            
            
            **1,576**
            
            
            **2,812**Interest
                expense
            
            
            1,896
            
            
            1,784
            
            
            183
            
            
            (145
            )
            
            638Interest
                income
            
            
            (356
            )
            
            (238
            )
            
            (75
            )
            
            18
            
            
            (88
            )Other
                income, net
            
            
            (1,219
            )
            
            (690
            )
            
            58
            
            
            (8
            )
            
            (32
            )**Income
                before provision for income tax**
            
            
            **21,470**
            
            
            **12,482**
            
            
            **3,103**
            
            
            **1,441**
            
            
            **2,294**Provision
                for income tax
            
            
            1,596
            
            
            1,446
            
            
            32
            
            
            19
            
            
            76**Net
                income before minority interests**
            
            
            **19,874**
            
            
            **11,036**
            
            
            **3,071**
            
            
            **1,422**
            
            
            **2,218**Minority
                interests
            
            
            -
            
            
            1
            
            
            (1,365
            )
            
            488
            
            
            2,598**Net
                income attributable to shareholders**
            
            **$**
            **19,874**
            
            **$**
            **11,035**
            
            **$**
            **4,436**
            
            **$**
            **934**
            
            **$**
            **(380**
            **)****Earning
                per share—basic and diluted**
            
            **$**
            **0.40**
            
            **$**
            **0.23**
            
            **$**
            **0.10**
            
            **$**
            **0.02**
            
            **$**
            **(0.01**
            **)****Weighted
                average common share outstanding-basic and
                diluted**
            
            
            **50,001**
            
            
            **48,834**
            
            
            **46,000**
            
            
            **46,000**
            
            
            **46,000**




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




20




**SYNUTRA
      INTERNATIONAL, INC.**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**(in
      thousands)**


**(As
      restated, see Note 19)**





**Common**
              **Stock**
              **Outstanding**
            
            **Share**
              **capital**
            
            **Additional**
              **paid-in
                capital**
            
            **Retained**
              **earnings**
            
            **Accumulated**
              **other**
              **comprehensive**
              **income
                (loss)**
            
            **Total****Balance
                at January 1, 2004**
            
            
            **46,000**
            
            **$**
            **5**
            
            **$**
            **7,184**
            
            **$**
            (3,427
            )
            **$**
            (114
            )
            **$**
            3,648Capital
                contribution/(reduction)
            
            
            -
            
            
            -
            
            
            (183
            )
            
            -
            
            
            -
            
            
            (183
            )Net
                income/(loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            (380
            )
            
            -
            
            
            (380
            )Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (95
            )
            
            (95
            )**Balance
                at December 31, 2004**
            
            
            **46,000**
            
            
            **5**
            
            
            **7001**
            
            
            **(3,807**
            **)**
            
            **(209**
            **)**
            
            **2,990**Capital
                contribution
            
            
            -
            
            
            -
            
            
            205
            
            
            -
            
            
            -
            
            
            205Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,436
            
            
            -
            
            
            4,436Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9
            )
            
            (9
            )**Balance
                for the Three Month Transition Period Ended March 31,
                2005**
            
            
            **46,000**
            
            
            **5**
            
            
            **7,206**
            
            
            **629**
            
            
            **(218**
            **)**
            
            **7,622**Acquisition
                of Vorsatech
            
            
            1,121
            
            
            -
            
            
            (18
            )
            
            -
            
            
            -
            
            
            (18
            )Capital
                stock issued to financial consultant and finders
            
            
            2,880
            
            
            -
            
            
            567
            
            
            -
            
            
            -
            
            
            567Capital
                contribution
            
            
            -
            
            
            -
            
            
            471
            
            
            -
            
            
            -
            
            
            471Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            11,035
            
            
            -
            
            
            11,035Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,274
            
            
            1,274**Balance
                at March 31, 2006**
            
            
            **50,001**
            
            
            **5**
            
            
            **8,226**
            
            
            **11,664**
            
            
            **1,056**
            
            
            **20,951**Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            19,874
            
            
            -
            
            
            19,874Translation
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,876
            
            
            1,876**Balance
                at March 31,2007**
            
            
            **50,001**
            
            **$**
            **5**
            
            $
            **8,226**
            
            $
            **31,538**
            
            $
            **2,932**
            
            $
            **42,701**





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





21


**SYNUTRA
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands) (As restated, see Note 19)**





**Year
                Ended**
              **March
                31,**
            
            **Three
                Months Ended**
              **March
                31,**
            
            **Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2004****(Unaudited)****Cash
                flow from operating activities:**Net
                income
            
            $
            19,874
            
            $
            11,035
            
            $
            4,436
            
            $
            934
            
            $
            (380
            )Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
                and amortization
            
            
            2,057
            
            
            1,422
            
            
            336
            
            
            331
            
            
            1,387Bad
                debt expense
            
            
            397
            
            
            215
            
            
            36
            
            
            6
            
            
            68(Gain)
                or loss on short term investment
            
            
            (77
            )
            
            3
            
            
            4
            
            
            (5
            )
            
            17Loss
                on disposal of property, plant and equipment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1Minority
                interest
            
            
            -
            
            
            -
            
            
            (1,365
            )
            
            488
            
            
            2,598Financial
                consultants and finders fee
            
            
            -
            
            
            567
            
            
            -
            
            
            -
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (4,044
            )
            
            (758
            )
            
            1,265
            
            
            (375
            )
            
            (2,226
            )Inventories
            
            
            (4,616
            )
            
            (5,032
            )
            
            (493
            )
            
            272
            
            
            438Advances
                to suppliers
            
            
            (852
            )
            
            368
            
            
            20
            
            
            (245
            )
            
            (179
            )Due
                from related parties
            
            
            (3,139
            )
            
            (520
            )
            
            (3,403
            )
            
            (1,228
            )
            
            (3,418
            )Other
                receivable
            
            
            (363
            )
            
            (484
            )
            
            (220
            )
            
            (8,308
            )
            
            2,828Deferred
                expense
            
            
            (126
            )
            
            258
            
            
            (99
            )
            
            (54
            )
            
            (14
            )Accounts
                payable
            
            
            (994
            )
            
            5,788
            
            
            1,618
            
            
            2,316
            
            
            1,840Due
                to related parties
            
            
            (1,366
            )
            
            (4,508
            )
            
            281
            
            
            6,484
            
            
            5,386Advances
                from customers
            
            
            3,330
            
            
            392
            
            
            (860
            )
            
            (438
            )
            
            101Tax
                payable
            
            
            (668
            )
            
            1,391
            
            
            (27
            )
            
            361
            
            
            479Deferred
                tax assets
            
            
            (432
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                payable and other accrued liabilities
            
            
            1,647
            
            
            357
            
            
            299
            
            
            764
            
            
            (1,892
            )Deferred
                revenue
            
            
            4,138
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                cash provided by operating activities**
            
            
            **14,766**
            
            
            **10,494**
            
            
            **1,828**
            
            
            **1,303**
            
            
            **7,034****Cash
                flow from investing activities:**Acquisition
                of property, plant and equipment
            
            
            (8,939
            )
            
            (1,177
            )
            
            (1,499
            )
            
            (1,180
            )
            
            (14,349
            )Cash
                used for construction in progress
            
            
            (12,631
            )
            
            (7,046
            )
            
            -
            
            
            -
            
            
            -Purchases
                of land use right
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (415
            )Cash
                receipt of disposal of fix assets
            
            
            29
            
            
            -
            
            
            -
            
            
            -
            
            
            -Purchases
                of intangible assets
            
            
            (14
            )
            
            (16
            )
            
            (187
            )
            
            (180
            )
            
            (133
            )Sales
                on short term investment
            
            
            120
            
            
            -
            
            
            -
            
            
            -
            
            
            -Change
                in restricted cash
            
            
            3,527
            
            
            (6,184
            )
            
            (183
            )
            
            (1,809
            )
            
            (6,494
            )**Net
                cash used in investing activities**
            
            
            (17,908
            )
            
            (14,423
            )
            
            (1,869
            )
            
            (3,169
            )
            
            (21,391
            )


**Cash
                flow from financing activities:**Borrowing
                of bank loans
            
            
            32,625
            
            
            14,747
            
            
            1,571
            
            
            3,986
            
            
            31,480Repayment
                of bank loans
            
            
            (16,200
            )
            
            (12,698
            )
            
            (1,807
            )
            
            (800
            )
            
            (18,143
            )Capital
                contribution (distribution)
            
            
            -
            
            
            -
            
            
            205
            
            
            (183
            )
            
            (183
            )Issuance
                of Common stock
            
            
            -
            
            
            471
            
            
            -
            
            
            -
            
            
            -**Net
                cash provided by financing activities**
            
            
            **16,425**
            
            
            **2,520**
            
            
            **(31**
            **)**
            
            **3,003**
            
            
            **13,154****Net
                change in increase in cash and cash equivalents**
            
            
            **13,283**
            
            
            **(1,409**
            **)**
            **$**
            **(72**
            **)**
            
            **1,137**
            
            
            **(1,203**
            **)**Effect
                of exchange rate changes on cash and cash equivalents
            
            
            1,876
            
            
            1,274
            
            
            (9
            )
            
            6
            
            
            (95
            )**Cash
                and cash equivalents, beginning of period**
            
            
            **5,677**
            
            
            **5,812**
            
            
            **5,893**
            
            
            **7,191**
            
            
            **7,191****Cash
                and cash equivalents, end of period**
            
            **$**
            **20,836**
            
            **$**
            **5,677**
            
            **$**
            **5,812**
            
            **$**
            **8,334**
            
            **$**
            **5,893****Supplemental
                cash flow information:**Interest
                paid
            
            $
            2,119
            
            $
            1,982
            
            $
            183
            
            $
            145
            
            $
            1,141Income
                taxes paid
            
            $
            2,714
            
            
            1,026
            
            $
            18
            
            $
            93
            
            $
            109




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




22




**SYNUTRA
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FISCAL
      YEARS ENDED MARCH 31, 2007 AND 2006 AND DECEMBER 31, 2004 AND**


**THREE
      MONTH TRANSITION PERIOD ENDED MARCH 31, 2005**





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





Through
      its wholly owned subsidiary, Synutra Inc., an Illinois corporation (“Synutra
      Illinois”), the Company owns all of the equity interests of eight companies
      in the People’s Republic of China, (“China” or the “PRC”) described below, each,
      with the exception of Mei Tai, 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.





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
      ST George Dairy Co., Ltd., renamed Shengyuan Nutrition Co., Ltd. on June 5,
      2007, is engaged in the production, packaging, shipping and distribution of
      all
      of Synutra’s products.





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.





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.





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.





On
      November 6, 2006, the Company consummated a transaction with the Department
      of
      Finance of Zheng Lan Qi (County) of Inner Mongolia in which the Company acquired
      certain assets owned by them including approximately $256,000 in land use rights
      and $5,635,000 in plant and buildings under construction. The transaction was
      consummated to establish a wholly foreign-owned company, the Inner Mongolia
      Sheng Yuan Food Co., Ltd, to produce milk fat and other diary-based food
      ingredients.





In
      November 2006, the Company obtained government approval to form a business
      venture, Mei Tai Technology (Qingdao) Co., Ltd., to develop, manufacture, and
      export chondroitin sulfate, or cartilage, a nutraceutical supplement ingredient
      for distribution and sale in North American markets. For the past year, the
      Company has been exporting these products which generated revenue for the
      company. In the business venture, the Company has made an initial investment
      of
      $7.5 million. It is expected that the collagen protein, as a by-product of
      the
      cartilage manufacturing processes, will become a key revenue source for the
      Company’s operations, including in specially formulated milk powder products for
      women, in dairy-based protein bars, and as a main ingredient in new meal
      replacement products for women, in addition to direct export of the protein
      product to North America. The consummation of this business venture was
      contingent upon the injection of investment capital by the Company into the
      business within 6 months from the date of approval by the government
      authorities.





23


**2.
      BASIS OF PRESENTATION (Restated)**





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:





**March
                31,************2007**
            
            **2006**
            
            **2005**
            
            **Incorporation**
              **date****Name
                of subsidiaries**Qingdao
                St. George Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            Sep-01Qingdao
                Sheng Yuan Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            Jan-98Heilongjiang
                Loubei Sheng Yuan Food Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            Apr-01Bei’an
                Yipin Dairy Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            Jun-04Zhangjiakou
                Shen Yuan Diary Co., Ltd.
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            Mar-04Inner
                Mongolia Sheng Yuan Food Co.,Ltd.
            
            
            100
            %
            
            0
            %
            
            0
            %
            
            Sep-06Inner
                Mongolia Meng Yuan Food Co.,Ltd.
            
            
            100
            %
            
            0
            %
            
            0
            %
            
            Apr-05
            *Mei
                Tai Technology (Qingdao) Co., Ltd.
            
            
            100
            %
            
            0
            %
            
            0
            %
            
            Nov-06




*
      The
      previous owner of the assets acquired was established in April, 2005.





**3.
      SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Restated)**





**A.
      RESTRICTED CASH**





Restricted
      cash 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 consummate the
      sale.





24


**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 20 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
            
            
            20
                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, 2007 and 2006 was $726,000 and
      $481,000, respectively, associated with construction in progress. The
      capitalized interest accrued up to transition period ended March 31, 2005 and
      the three months ended December 31, 2004 was $67,000 and $22,000 (unaudited),
      respectively.





**F.
      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 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.





**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 $241,000
      and
      $417,000 at March 31, 2007 and 2006, respectively.




25


**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 but in certain limited
      areas applicable tax rate is 24%. Subject to this regime, the Company’s
      aggregate corporate income tax would have been $7.1 million and $4.1 million
      for
      the fiscal years ended March 31, 2007 and 2006, and $757,000 for the year ended
      December 31, 2004, respectively. Due to various preferential tax policies that
      some of the Company’s operating subsidiaries in China currently enjoy, the
      actual corporate income tax was $1.6 million, $1.4 million and $76,000 for
      the
      fiscal years ended March 31, 2007 and 2006 and December 31, 2004, respectively.
      The reduced tax rates or tax holidays accorded to the Company resulted in tax
      savings of $5.5 million, $2.7 million and $681,000 for the fiscal years ended
      March 31, 2007 and 2006 and December 31, 2004, respectively. The per share
      effect of the total tax savings was $0.11, $0.05 and $0.01 for the fiscal years
      ended March 31, 2007 and 2006 and December 31, 2004, respectively. The actual
      corporate income tax was $32,000 and $19,000 (unaudited) for the three month
      transition period ended March 31, 2005 and March 31, 2004, respectively. The
      reduced tax rates or holidays accorded to the Company resulted in tax savings
      of
      $992,000 and $ 457,000 (unaudited) for the three month transition period ended
      March 31, 2005 and March 31, 2004, respectively. The per share effect of the
      total tax savings was $0.02 and $0.01 (unaudited) for the three month transition
      period ended March 31, 2005 and March 31, 2004, respectively. These preferential
      tax rates will expire at varying times in the coming years.





Qingdao
      St. George Dairy Co., Ltd, Heilongjiang Loubei Shengyuan Dairy Co. Ltd, Bei’an
      Yipin Dairy Co. Ltd and Zhangjiakou Sheng Yuan Co. Ltd., Inner Mongolia
      Shengyuan Food Co., Ltd., and Mei Tai Technology (Qingdao) Co., Ltd. qualify
      as
      a foreign investment production enterprise and were established in special
      economic zones. 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, as calculated under PRC accounting standards.





The
      following table illustrates tax benefits enjoyed by our subsidiaries under
      the
      current regulations:





**Name
                of Subsidiary**
            
            **Normal
                Tax Rate**
            
            **Tax
                Holiday (based on calendar year)**Qingdao
                St. George Dairy Co., Ltd
            
            24%
            
            2
                years tax free (2004, 2005); 3 years tax at 12%
                (2006-08)Qingdao
                Sheng Yuan Dairy Co., Ltd.
            
            33%
            
            Waiver
                of 3% local tax for taxable years ending before Jan. 1, 2008Heilongjiang
                Luobei Sheng Yuan Dairy Co., Ltd.
            
            33%
            
            2
                years tax free (2006, 2007); 3 years tax at 16.5%
                (2008-10)Bei’an
                Yipin Dairy Co., Ltd.
            
            33%
            
            2
                years tax free (2005, 2006); 3 years tax at 16.5%
                (2007-09)Zhangjiakou
                Sheng Yuan Dairy Co., Ltd.
            
            33%
            
            2
                years tax free (2006, 2007); 3 years tax at 16.5%
                (2008-10)Mei
                Tai Technology (Qingdao) Co., Ltd.
            
            33%
            
            2
                years tax free (2008, 2009); 3 years tax at 16.5%
                (2010-12)Inner
                Mongolia Sheng Yuan Food Co., Ltd.
            
            33%
            
            2
                years tax free (2008, 2009); 3 years tax at 16.5%
                (2010-12)




On
      March
      16, 2007, the National People’s Congress of China enacted the New EIT Law, which
      will become effective on January 1, 2008. The New EIT Law imposes a unified
      enterprise income tax rate of 25% on all domestic enterprises and
      foreign-invested enterprises unless they qualify for certain tax incentives.
      Under the New EIT Law, enterprises that were established and already enjoyed
      preferential tax treatments before March 16, 2007 will continue to enjoy them
      (1) in the case of reduced tax rates, for a period of five years from January
      1,
      2008, subject to certain phase-out rules, or (ii) in the case of fixed-term
      tax
      holidays, until the expiration of such term. Because the detailed implementing
      rules for the New EIT Law have not been promulgated, it is not clear how these
      transitional rules will be applied.




In
      addition, the New EIT Law sets the top rate of withholding tax on dividends
      to
      20% and, unlike the Income Tax Law for Foreign-Invested Enterprises and Foreign
      Enterprises currently in effect, does not specifically exempt withholding tax
      on
      dividends paid by foreign-invested enterprises to foreign investors. Although
      the New EIT Law provides for the possibility of exemption or reduction of such
      withholding tax, the details await the forthcoming implementing rules. The
      ultimate withholding tax rate on dividends is subject to reduction by applicable
      tax treaty between China and the tax residence of the foreign investor. We
      are
      actively monitoring the withholding tax on dividends and are evaluating
      appropriate organizational changes to minimize any unfavorable tax consequences,
      to the extent practicable.





Our
      subsidiaries Inner Mongolia Meng Yuan Dairy Co., Ltd. and Heilongjiang
      Baoquanling Sheng Yuan Dairy Co., Ltd. are not entitled to preferential tax
      treatment. The applicable enterprise income tax rate for both entities is 33%
      for taxable years ending before January 1, 2008, and 25%
      thereafter.




26


**I.
      GOVERNMENT SUBSIDIES**





Government
      grants for revenue and/or expenses should be recognized in income when the
      related revenue and/or expense are recorded. Government grants related to
      property, plant, and equipment should be netted against the depreciation
      expenses of the related assets over the useful lives of these assets. Government
      subsidies were $1.1 million, $734,000 and $271,000 for the fiscal years ended
      March 31, 2007 and 2006 and December 31, 2004, respectively. There were no
      government subsidies for the three month transition period ended March 31,
      2005
      and March 31, 2004.





**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, 2007**Balance
                sheet
            
            
            RMB
            
            
            7.734
            
            
            to
                US $
            
            
            1Operating
                statement
            
            
            RMB
            
            
            7.876
            
            
            to
                US $
            
            
            1**March
                31, 2006**Balance
                sheet
            
            
            RMB
            
            
            8.017
            
            
            to
                US $
            
            
            1Operating
                statement
            
            
            RMB
            
            
            8.147
            
            
            to
                US $
            
            
            1**March
                31, 2005**Balance
                sheet
            
            
            RMB
            
            
            8.277
            
            
            to
                US $
            
            
            1Operating
                statement
            
            
            RMB
            
            
            8.277
            
            
            to
                US $
            
            
            1**December
                31, 2004**Balance
                sheet
            
            
            RMB
            
            
            8.277
            
            
            to
                US $
            
            
            1Operating
                statement
            
            
            RMB
            
            
            8.277
            
            
            to
                US $
            
            
            1





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 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 $1.9 million, 1.3 million and $(95,000) for the fiscal years ended
      March 31, 2007 and 2006 and December 31, 2004, respectively. The other
      comprehensive income/(loss) was $(9,000) and $ 6,000 (unaudited) for the three
      month transition period ended March 31, 2005 and March 31, 2004,
      respectively.




27




**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, 2007 and 2006 due to the relatively short-term nature of these instruments.





**N.
      REVENUE RECOGNITION**





The
      Company recognize revenue when title and risk and rewards for the products
      are
      transferred to the customer, price is fixed and determinable, and collect
      ability is reasonably assured. At the time of the sale, the Company also record
      estimates for a variety of sales deductions, including value added taxes,
      rebates, discounts and incentives, trade promotions and product returns. Sales
      deductions are reported as a reduction of revenue. Most of the Company’s
      nutritional product sales are made through distributors. The Company’s revenue
      arrangement with most of its distributors requires distributor advance payment
      prior to any shipment and delivery of goods by the Company to such distributors.
      Under this distributor arrangement, evidenced by purchase order together with
      advance payment, sales revenue is realized and earned upon acceptance of
      delivery of products by the distributors. The Company applies this revenue
      recognition policy uniformly to all our nutritional products, including all
      dairy-based pediatric and adult nutritional products.







A
      small
      fraction of the Company’s nutritional product sales are through supermarket
      retailers directly. The Company’s 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 collect
      ability.





28


**O.
      DEDUCTIONS FROM REVENUE**





The
      Company’s gross sales are subject to various deductions, primarily comprised of
      rebates and discounts to distributors and retailers. These deductions represent
      estimates of the related obligations, requiring the use of judgment when
      estimating the impact of these sales deductions on gross sales for a reporting
      period. The Company reports these adjustments as a reduction of gross sales
      to
      arrive at net sales.




·
            The
                Company offers rebates to key distributors, group purchasing organizations
                and other direct and indirect customers to sustain and increase the
                Company’s product market share. These rebate programs provide that
                distributors receive a rebate after attaining certain performance
                parameters relating to product purchases, formulary status and/or
                pre-established market share milestones relative to competitors.
                Since
                rebates are contractually agreed upon, the Company estimate rebates
                based
                on the specific terms in each agreement, historical experience,
                anticipated reimbursement channel mix and product growth rates. The
                Company considers the sales performance of products subject to rebates
                and
                other contract discounts and adjusts the provision periodically to
                reflect
                actual experience.




·
            The
                Company records a provision for estimated sales returns due to package
                damage and shelf life expiration, which the Company estimates through
                a
                comparison of historical return data to related sales. The Company
                uses
                historical rates of return and adjusts for known or expected changes
                in
                the marketplace when appropriate. Sales returns amount to approximately
                1%
                of gross product sales.





·
            The
                Company offers cash discounts to distributors and retailers to encourage
                prompt payment. The Company accrues cash discounts, which are typically
                1-2% of gross sales, at the time of invoicing and are recorded as
                revenue
                deductions.




·
            The
                Company generally records discounts, rebates or other deductions
                shown on
                the invoice directly as a reduction in the gross to net sales value
                and
                they do not pass through the provision
                account.




**P.
      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 $4.0 million, $2.8 million and $2.1
      million for the fiscal years ended March 31, 2007, 2006 and December 31, 2004
      respectively, and was $645,000 and $823,000 (unaudited) for the three month
      transition period ended March 31, 2005 and March 31, 2004,
      respectively.





**Q.
      ADVERTISING AND PROMOTION EXPENSES**





Advertising
      and promotion expenses include salaries for all salesmen all over the Mainland
      China and are expensed as incurred. The advertising costs and promotion
      expenses were $52.3 million, $20.9 million and $8.5 million for the fiscal
      years
      ended March 31, 2007 and 2006 and December 31, 2004 respectively, and were
      $1.1
      million and $373,000 (unaudited) for the three month transition period ended
      March 31, 2005 and March 31, 2004, respectively.




29


**R.
      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.





**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 other comprehensive income/(loss) for
      the
      fiscal years ended March 31, 2007 and 2006 and December 31, 2004 were $1.9
      million, $1.3 million and $(95,000), respectively. The other comprehensive
      income/(loss) was $ (9,000) and $6,000 (unaudited) for the three month
      transition period ended March 31, 2005 and March 31, 2004,
      respectively.





**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.
      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the Financial Accounting Standard Board (“FASB”) issued Interpretation No.
      48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
      Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
      tax positions. This interpretation requires that the Company recognize in its
      financial statements the impact of a tax position if that position is more
      likely than not of being sustained on audit, based on the technical merits
      of
      the position. FIN 48 is effective for fiscal years beginning after December
      15,
      2006 which is the beginning of the Company’s fiscal 2008. The Company is
      currently assessing the potential effect of adopting FIN 48 on its financial
      statements, but preliminary analysis shows the effect to be immaterial.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 “Defining Fair Value Measurement” (“SFAS 157”) which defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      FAS
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, which is the Company’s fiscal 2009. The Company is
      currently evaluating the impact of adopting FAS 157 on its financial statements.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, which is the Company’s fiscal 2009. The Company is currently evaluating
      the impact of adopting FAS 157 on its financial statements.




30


**4.
      ACCOUNTS RECEIVABLE (Restated)**





The
      Company's accounts and notes receivables as at March 31, 2007 and 2006 are
      summarized as follows:





(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Trade
                receivables
            
            $
            5,688
            
            $
            2,957Less:
                Allowance for doubtful accounts
            
            
            (241
            )
            
            (417
            )Trade
                receivable, net
            
            $
            5,447
            
            $
            2,540Notes
                receivable
            
            
            1,313
            
            
            -Total
                of accounts and notes receivable, net
            
            
            6,760
            
            
            2,540





The
      activity in the Company allowance for doubtful accounts during the fiscal years
      ended March 31, 2007 and 2006 is summarized as follows:





(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Balance
                at beginning of year
            
            $
            417
            
            $
            202Additions
                (deductions) during the year
            
            
            (176
            )
            
            215Balance
                at end of year
            
            $
            241
            
            $
            417





**5.
      PROPERTY, PLANT AND EQUIPMENT (Restated)**





(
                In thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006****Property,
                plant and equipment Cost:**Buildings
                and leasehold improvement
            
            $
            16,638
            
            $
            7,252Plant
                and machinery
            
            
            23,284
            
            
            7,206Office
                equipment and furnishings
            
            
            1,984
            
            
            988Motor
                vehicles
            
            
            1,040
            
            
            1,211$
            42,946
            
            $
            16,657**Less:
                Accumulated depreciation:**Buildings
                and leasehold improvement
            
            
            1,798
            
            
            1,265Plant
                and machinery
            
            
            3,450
            
            
            2,306Office
                equipment and furnishings
            
            
            472
            
            
            336Motor
                vehicles
            
            
            590
            
            
            630Total accumulated depreciation
            
            
            6,310
            
            
            4,537Construction
                in progress
            
            
            14,836
            
            
            21,198Property,
                plant and equipment, net
            
            $
            51,472
            
            $
            33,318





The
      Company recorded depreciation expense of $1.8 million, $1.4 million and $1.3
      million for the fiscal years ended March 31, 2007 and 2006 and December 31,
      2004, respectively. Depreciation expense was $313,000 and $310,000 (unaudited)
      for the three month transition period ended March 31, 2005 and March 31, 2004,
      respectively.




The
      Company had pledged certain of its property, plant and equipment as collateral
      to secure bank loans with financial institutions in the PRC. The amounts of
      assets pledged at cost were $32.7 million and $11.6 million as of March 31,
      2007
      and 2006, respectively.





**6.
      LAND USE RIGHTS (Restated)**





(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006****Cost:**
            
            $
            3,177
            
            $
            1,660**Less:
                Accumulated amortization:**
            
            
            153
            
            
            114**Land
                use rights, net**
            
            $
            3,024
            
            $
            1,546





The
      Company recorded amortization expense of $40,000, $38,000 and $34,000 for the
      fiscal years ended March 31, 2007 and 2006 and December 31, 2004, respectively.
      Amortization expense was $6,500 and $8,000 (unaudited) for the three month
      transition period ended March 31, 2005 and March 31, 2004,
      respectively.




31


**7.
      INVENTORIES (Restated)**





The
      Company's inventories at March 31, 2007 and 2006 are summarized as
      follows:





(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Raw
                materials
            
            $
            4,522
            
            $
            1,985Work-in-progress
            
            
            7,714
            
            
            7,586Finished
                goods
            
            
            3,217
            
            
            2,132Packing
                materials and other consumables
            
            
            953
            
            
            86Total
                Inventories
            
            $
            16,406
            
            $
            11,789





**8.
      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




(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            $
            978
            
            $
            226Sheng
                Zhi Da Dairy Group Corporation
            
            
            -
            
            
            (268
            )Beijing
                Kelqin Dairy Co. Ltd
            
            
            3,015
            
            
            1,708St.
                Angel (Beijing Business Service)
            
            
            -
            
            
            1,761Beijing
                Honnete Dairy Corporation Ltd
            
            
            7,207
            
            
            4,185Beijing
                Ao Naier Feed Stuff LLC
            
            
            462
            
            
            298Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            80
            
            
            692Total
                Due from Related Companies
            
            $
            11,742
            
            $
            8,602





b.
            Due
                to related parties





(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            $
            728
            
            $
            705Sheng
                Zhi Da Dairy Group Corporation
            
            
            1,338
            
            
            2,193Beijing
                Kelqin Dairy Co. Ltd
            
            
            863
            
            
            64St.
                Angel (Beijing Business Service)
            
            
            5
            
            
            -Beijing
                Honnete Dairy Corporation Ltd
            
            
            -
            
            
            1,339Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            1
            
            
            -Total
                Due to Related Companies
            
            $
            2,935
            
            $
            4,301





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





**a.**
            **Due
                from related parties**




32




(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Trade
                receivables
            
            $
            4,535
            
            $
            2,018Advance
                to suppliers
            
            
            7,207
            
            
            -Prepayments
            
            
            -
            
            
            4,526Other
                receivables
            
            
            -
            
            
            2,058**Total**
            
            **$**
            **11,742**
            
            $
            **8,602**





**b.**
            **Due
                to related parties**




(In
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Trade
                payables
            
            $
            1,685
            
            $
            4,301Other
                payables
            
            
            1,250
            
            
            -**Total**
            
            **$**
            **2,935**
            
            $
            **4,301**




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 Company is not obligated to provide any type
      of
      financial support to these related 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.




33




**9.
      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 following:





(in
                thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Computer
                software and applications
            
            $
            463
            
            $
            426Less:
                Accumulated amortization
            
            
            (332
            )
            
            (162
            )Intangible
                assets, net
            
            $
            131
            
            $
            265





Amortization
      expense for fiscal years ended March 31, 2007 and 2006 and December 31, 2004
      was
      $157,000, $87,000 and $47,000, respectively. Amortization expense was $22,000
      and $12,000 (unaudited) for the three month transition period ended March 31,
      2005 and March 31, 2004, respectively. Estimated amortization expense for
      each of the five succeeding fiscal years is as follow:





**Year
                Ending March 31,**
              (In
                thousands)2008
            
            
            462009
            
            
            452010
            
            
            342011
            
            
            32012
            
            
            1





**10.
      BANK LOANS (Restated)**





At
      March
      31, 2007 and 2006, the Company had short-term loans from banks at the amount
      of
      $53.1 million and $36.7 million, respectively, bearing interest ranging from
      5.85% to 6.48% per annum. Such loans are extendable for not less than one year
      to March 2008. The loans were secured by the pledge of certain fixed assets
      held
      by the Group and its subsidiaries. The value of equipment pledged were $32.7
      million and $11.6 million during the year ended March 31, 2007 and 2006
      respectively.





**11.
      INCOME TAXES (Restated)**





The
      income tax expense reconciled to the tax expense computed at the statutory
      rate
      was approximately as follows during the year ended March 31 **,** 2007:




(In
                thousands)
            
            **March
                31,**
              **2007**Tax
                expense computed at federal statutory rate
            
            $
            7,938Foreign
                Rate Benefit
            
            $
            (5,915
            )Other
                Benefit
            
            $
            (427
            )Total
                income tax expenses
            
            $
            1,596





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes Significant components of the Company’s
      net deferred tax assets are approximately as follows:




(In
              thousands)
            
            **March
                31,**
              **2007**
            
            **March
                31,**
              **2006**Net
                  deferred tax asset:Net
                  operating loss carry-forward
            
            $
            432
            
            $
            -Total
            
            $
            432
            
            $
            -





At
      March
      31, 2007, operating loss carry-forwards of approximately $517,000 of U.S Synutra
      expiring through 2027 are available to offset future taxable income. No
      valuation allowance is deemed necessary. Qingdao Shengyuan Dairy Co., Ltd.,
      one
      of our subsidiaries in China, have recorded net losses in the past, which they
      may carry forward for five fiscal years from the end of the period in which
      the
      loss was recorded to offset future net income for tax purposes. We cannot,
      however, give any assurances that the subsidiary will record sufficient net
      income for tax purposes within the carry forward periods to realize the full
      tax
      benefit of these past net losses. The net operating loss of Qingdao Shengyuna
      Diary Co.,Ltd were $634,000 for the fiscal years ended March31, 2007. Subject
      to
      an enterprise income tax of 33%, the deferred tax assets of the company are
      $214,000, as of March31, 2007.





The
      Company’s income before income taxes was comprised of the following for the
      fiscal years ended March 31, 2007 and 2006, the three month transition period
      ended March 31, 2005 and March 31, 2004, and the fiscal year ended December
      31,
      2004, respectively:




**Year
                Ended**
              **March
                31,**
            
            **Three
                Months Ended**
              **March
                31,**
            
            **Year
                Ended**
              **December
                31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2004**(In
                thousands)
            
            
            
            
            
            
            
            **(Unaudited)**United
                States
            
            $
            (126
            )
            $
            (317
            )
            $
            (20
            )
            $
            6
            
            $
            (79
            )PRC
            
            
            21,596
            
            
            12,799
            
            
            3,123
            
            
            1,435
            
            
            2,373Total
            
            $
            21,470
            
            $
            12,482
            
            $
            3,103
            
            $
            1,441
            
            $
            2,294





Income
      taxes are calculated on a separate entity basis.




34




The
      provisions for income taxes for the fiscal years ended March 31, 2007 and 2006,
      the three month transition period ended March 31, 2005 and March 31, 2004,
      and
      the fiscal year ended December 31, 2004, respectively, are summarized as
      follows:




**Year
                Ended**
              **March
                31,**
            
            **Three
                Months Ended**
              **March
                31,**
            
            **Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
              **(Unaudited)**
            
            **2004**(In
                thousands)Current
            
            $
            2,023
            
            
            1,446
            
            
            32
            
            $
            19
            
            $
            76Deferred
            
            
            (427
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,596
            
            $
            1,446
            
            $
            32
            
            $
            19
            
            $
            76





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 $7.1 million, $4.1 million and
      $757,000 for the fiscal years ended March 31, 2007 and 2006 and December 31,
      2004, 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 $1.6 million, $1.4 million and
      $76,000 for the fiscal years ended March 31, 2007 and 2006 and December 31,
      2004, respectively. The reduced tax rates or tax holidays accorded to the
      Company resulted in tax savings of $5.5 million, $2.7 million and $681,000,
      respectively. The per share effect of the total tax savings was $0.11, $0.05
      and
      $0.01 for the fiscal years ended March 31, 2007 and 2006 and December 31, 2004,
      respectively. The actual corporate income tax was $32,000 and $19,000
      (unaudited) for the three month transition period ended March 31, 2005 and
      March
      31, 2004, respectively. The reduced tax rates or holidays accorded to the
      Company resulted in tax savings of $992,000 and $ 457,000 (unaudited),
      respectively. The per share effect of the total tax savings was $0.02 and $0.01
      (unaudited) for the three month transition period ended March 31, 2005 and
      March
      31, 2004, respectively .




35




**12.
      EARNINGS PER SHARE (EPS) (Restated)**





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 Company had no outstanding options or warrants, but
      if
      these existed, they would 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.




**Year
                Ended**
              **March
                31,**
            
            **Three
                Months Ended**
              **March
                31,**
            
            **Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2004****(Unaudited)**(In thousands
              except
              for per share data)Numerator:Net
                income attributable to common shareholders
            
            $
            19,874
            
            $
            11,035
            
            $
            4,436
            
            $
            934
            
            $
            (380
            )Denominator:Denominator
                for basic income per share—weighted average shares
            
            $
            50,001
            
            
            48,834
            
            
            46,000
            
            
            46,000
            
            
            46,000Denominator
                for diluted income per share—weighted average shares and assumed
                conversions
            
            
            50,001
            
            
            48,834
            
            
            46,000
            
            
            46,000
            
            
            46,000Basic
                and diluted net income per share
            
            $
            0.40
            
            $
            0.23
            
            $
            0.10
            
            $
            0.02
            
            $
            (0.01
            )




36





**13.
      RELATED PARTY TRANSACTIONS (Restated)**





The
      following related party transactions occurred during the fiscal years ended
      March 31, 2007 and 2006, the three month transition period ended March 31,
      2005,
      and the fiscal year ended December 31, 2004:





**Sales
      to Related Companies**





In
      the
      fiscal years ended March 31, 2007, 2006, the transition period for the three
      months ended March 31, 2005 and year ended December 31, 2004, the Company’s
      sales to the related parties included 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
      Beijing Luding Xueyuan for direct sales, catalogue sales, and regional retail
      outlets distribution. Terms of all the sales are at market price.





The
      following tables categorize sales to related companies as main product sales
      and
      ancillary product sales as presented in the income statements:





**a.
      Main Product Sales to Related Companies**


(In
                  thousands)
              
              Year
                  Ended March 31,
              
              Three
                  Months Ended March 31,
              
              Year
                  Ended December 31,2007
              
              2006
              
              2005
              
              2004
              
              2004UnauditedBeijing
                  Honnete Dairy Corporation Ltd
              
              
              -
              
              
              1,254
              
              
              -
              
              
              
              
              
              -St.
                  Angel (Beijing Business Service)
              
              
              -
              
              
              1,048
              
              
              113
              
              
              -
              
              
              210Beijing
                  Kelqin Diary Co. Ltd.
              
              
              5,230
              
              
              —
              
              
              -
              
              
              -
              
              
              -Beijing
                  Ludin Xueyuan Trading Co. Ltd
              
              
              686
              
              
              527
              
              
              270
              
              
              -
              
              
              -Total
              
              $
              6,553
              
              $
              2,829
              
              $
              383
              
              $
              -
              
              $
              210




37




**b.
      Ancillary Product Sales to Related Companies**


Year
                  Ended March 31,
              
              Three
                  Months Ended
                March
                  31,
              
              Year
                  Ended December 31,(In
                thousands)
              
              2007
              
              2006
              
              2005
              
              2004
              
              2004UnauditedBeijing
                  Kelqin Dairy Co. Ltd
              
              $
              311
              
              $
              2,260
              
              $
              122
              
              $
              -
              
              $
              262Sheng
                  Zhi Da Dairy Group Corporation
              
              
              -
              
              
              376
              
              
              687
              
              
              -
              
              
              351Heilongjiang
                  Baoquanling Shen Yuan Dairy Co. Ltd
              
              
              3,401
              
              
              3,542
              
              
              806
              
              
              214
              
              
              2,197Beijing
                  Honnete Dairy Corporation Ltd
              
              
              6,128
              
              
              11,901
              
              
              -
              
              
              -
              
              
              -Beijing
                  Ao Naier Feed Stuff LLC
              
              
              130
              
              
              75
              
              
              17
              
              
              -
              
              
              -Beijing
                  Ludin Xueyuan Trading Co. Ltd
              
              
              260
              
              
              -
              
              
              -
              
              
              -
              
              
              -St.
                  Angel (Beijing Business Service)
              
              
              32
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              10,262
              
              $
              18,154
              
              $
              1,632
              
              $
              214
              
              $
              2,810Total
                  of main product and ancillary product sales to related companies
              
              $
              16,815
              
              $
              20,983
              
              $
              2,015
              
              $
              214
              
              $
              3,020





**Purchases
      from Related Companies**





In
      the
      fiscal year ended March 31, 2007, 2006 and the three month transition period
      ended March 31, 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 conducted at market prices.




Year
                  Ended
                March
                  31,
              
              Three
                  Months Ended
                March
                  31,
              
              Year
                  Ended December 31,(In
                thousands)
              
              2007
              
              2006
              
              2005
              
              2004
              
              2004UnauditedBeijing
                  Kelqin Dairy Co. Ltd
              
              $
              3,033
              
              $
              955
              
              $
              97
              
              $
              350
              
              $
              1,159Sheng
                  Zhi Da Dairy Group Corporation
              
              
              -
              
              
              2,145
              
              
              999
              
              
              -
              
              
              1,214Heilongjiang
                  Baoquanling Sheng Yuan Dairy Co. Ltd
              
              
              15,139
              
              
              11,987
              
              
              1,309
              
              
              1,448
              
              
              7,385Beijing
                  Honnete Dairy Corporation Ltd
              
              
              11,460
              
              
              6,655
              
              
              2,190
              
              
              747
              
              
              3,118St.
                  Angel (Beijing Business Service)
              
              
              19
              
              
              59
              
              
              -
              
              
              -
              
              
              32Total
              
              $
              29,651
              
              $
              21,801
              
              $
              4,595
              
              $
              2,545
              
              $
              12,908





**14.
      COMMITMENTS AND CONTINGENCIES (Restated)**





**A.
      CAPITAL COMMITMENTS**





As
      of
      March 31, 2007, the Company had no significant capital commitments required
      for
      disclosure. **





**B.
      LEASE COMMITMENTS**





The
      lease
      commitments of the Company for fiscal years ending March 31 are as
      follows:





38





(In
                thousands)
            
            **Inception**
              **date**
            
            **Expiration**
              **date**
            
            **Monthly**
              **payment**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Total**20-Apr-05
            
            
            14-Dec-09
            
            $
            7
            
            $
            87
            
            
            87
            
            
            61
            
            
            -
            
            
            -
            
            
            
            
            
            235Office
                facilities in Beijing(SOHO2903-2905)
            
            
            15-Dec-04
            
            
            14-Dec-09
            
            $
            11
            
            
            132
            
            
            132
            
            
            93
            
            
            -
            
            
            -
            
            
            
            
            
            356Office
                facilities in Beijing
            
            
            1-Jan-06
            
            
            31-Dec-07
            
            $
            4
            
            
            37
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            37Office
                facilities in Beijing
            
            
            1-Aug-06
            
            
            31-Dec-07
            
            $
            3
            
            
            31
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            31Warehouses
                in Qingdao
            
            
            8-Aug-06
            
            
            8-Aug-07
            
            $
            2
            
            
            7
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            7Warehouses
                in Qingdao
            
            
            5-Dec-06
            
            
            5-May-07
            
            $
            2
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            2Warehouses
                in Qingdao
            
            
            18-Jan-07
            
            
            17-Jan-08
            
            $
            6
            
            
            59
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            59**Total
                rent expenses**
            
            
            
            
            
            
            
            
            
            
            $
            355
            
            
            219
            
            
            154
            
            
            -
            
            
            -
            
            
            
            
            
            728





**C.
      LEGAL PROCEEDINGS**





N/A





**D.
      GUARANTEES (Restated)**





As
      at
      March 31, 2007, the Company had provided a guarantee to the Zhangbei Branch
      of
      the Agriculture Bank of China in respect of bank loans of $ 1.1 million in
      total
      extended to 104 farmers in the Zhangbei Area. These bank loans mature on
      December 25, 2007. Total amounts of bank loans under this guarantee arrangement
      were $1.1 million and $1.1  million
      as of March 31, 2006, and December31, 2004, respectively. The potential loss
      from this guarantee could not be estimated as the Company was unable to assess
      the financial position of individual farmers. However, based on general economic
      information available for this area, the Company believes that these loans
      will
      be repaid by the farmers upon maturity. Therefore, no liability was recorded
      on
      the balance sheet in relation to these guarantees. Total amounts of bank loans
      under this guarantee arrangement were $1.1 million and $1.5  million
      (unaudited) for the transition period ended March 31, 2005, and March 31, 2004,
      respectively




**15.
      SEGMENTS**





The
      Company has determined that it operates its business in one reportable segment
      based upon the manner in which internal financial information is produced and
      evaluated by its chief operating decision maker (“CODM”) (the Company’s Chief
      Executive Officer).





Majority
      of the consolidated revenue is generated from sales in Mainland China which
      comprises 93% of the consolidated revenue in fiscal year ended March 31, 2007,
      the remaining 7% is generated from sales to US. All of the revenue was generated
      from sales in Mainland China in years ended March 31, 2006 and December 31,
      2004
      and the three month transition period ended March 31, 2005. No single customer
      accounted for more than 5% of the Company's total sales in the above years
      or
      periods.





All
      of
      the Company’s long-live assets are located in China.





**16.
      SUBSEQUENT EVENTS (Restated)**





On
      April
      12, 2007, the Company announced that it has transferred trading of its common
      stock from the Over-The-Counter Bulletin Board to the NASDAQ Global Market
      as of
      April 12, 2007. The Company's shares will continue to trade under the present
      symbol "SYUT"; no new shares will be issued in conjunction with this listing.





On
      April
      19, 2007, the Company, Liang Zhang, and Xiuqing Meng, on the one hand, and
      ABN
      AMRO Bank N.V., Hong Kong branch (“ABN”), on the other hand, entered into a Loan
      Agreement (the “Loan Agreement”) pursuant to which ABN agreed to make loans (the
“loans”) to the Company for a period of sixty days from the closing of Loan
      Agreement (the “Closing”) up to $35,000,000 (the “Commitment Amount”). The
      principal amount, and any unpaid accrued interest thereon, is due on October
      19,
      2007 (the “Maturity Date”). The loans may be prepaid without penalty prior to
      the Maturity Date. The loans bear interest at the one-month London interbank
      offered rate for deposits in US dollars plus 2.5% with interest payable on
      the
      last day of each month. The Company is required to pay to ABN a commitment
      fee
      of 1% on the daily amount of the unused Commitment Amount. The loans are secured
      by a pledge of 25,000,000 shares of the Company’s Common Stock owned by Beams
      Power Investment Limited, a British Virgin Islands company, the capital stock
      of
      which is beneficially owned by Liang Zhang, the Chief Executive Officer of
      the
      Company. Pursuant to the Loan Agreement, Liang Zhang and Xiuqing Meng, Mr.
      Zhang’s wife, are guaranteeing the Company’s obligations thereunder. The
      proceeds of the loans will be used to fund the expansion of infant formula
      production facilities, to establish a plant for the production of Chondroitin,
      and to purchase fixed assets for the production of nutritional food bars.





In
      addition, pursuant to a USD facility side letter agreement dated April 19,
      2007
      between the Company and ABN, the Company is obligated to issue warrants to
      purchase up to 400,000 shares of the common stock. Upon Closing, 200,000 shares
      were issued at $8.84 per share. The remaining 200,000 shares will be issued
      on
      the earlier of (i) the completion of a private placement of debt or a loan
      to
      the Company in amount sufficient to repay the loans, or (ii) on October 19,
      2007.




39




In
      May,
      2007, the Company’s US subsidiary, Synutra, Inc. (“Synutra Illinois”) entered
      into a definitive agreement with Boom Healthy Development Limited (“Boom”) for
      Boom to acquire 100% of Synutra Illinois equity interest in Beian Yipin Dairy
      Co., Ltd. (“Beian”) for a consideration of RMB 15,313,327.06 or approximately
      USD $2.01 million, equivalent of Beian’s total book asset as of March 31, 2007.
      With a Spray-drying capacity of 3,000 tons per year, Beian is engaged in the
      production and processing of adult dairy based nutritional products and various
      milk powder products. Beian has been a consistent supplier of milk powder and
      infant formula products to the Company and is expected to continue this business
      relationship.





On
      May
      24, 2007, the Company entered into a Common Stock Purchase Agreement (the
“Purchase Agreement”) with Warburg Pincus Private Equity IX, L.P. (the
“Investor”), pursuant to which the Investor agreed to acquire 4 million shares
      of common stock (the “Common Shares”), par value $0.0001 per share, of the
      Company for an aggregate purchase price of sixty six million dollars
      ($66,000,000). The closing of the transaction took place on June 15, 2007.
      The
      Company intends to use the net proceeds from this financing for general
      corporate purposes. Pursuant to the terms of the Purchase Agreement so long
      as
      Investor owns at least 50% of the Common Shares acquired by the Investor
      pursuant to the Purchase Agreement, the Investor shall have the right to
      designate a person to serve on the Board of Directors of the Company (the
“Investor Designee”), and the Company agreed to use its best efforts to
      nominate and cause the Investor Designee to be elected to the
      Company’s Board of Directors.





In
      May
      2007, the Company acquired an 80% equity interest which was previously held
      by
      Mr. Liang Zhang, our Chief Executive Officer, in Baoquanling Shengyuan Diary
      Co., Ltd. (“BQL”) for consideration of $ 1.41 million. Immediately after the
      acquisition, the Company entered into an agreement with Junchuan Ranch of
      Heilongjiang Province (“Junchuan Ranch”), who held the remaining 20% equity
      interest in BQL, to make a capital injection in an aggregate amount of $ 4.74
      million into BQL. After the capital injection, the Company increased its holding
      to 94.62%. Junchuan Ranch holds the remaining 5.38% interest. In this
      transaction, the Company’s capital injection of $ 4.74 million was used to erect
      a new dairy processing facility to produce infant formula products.





**17.
      QUARTERLY FINANCIAL DATA (UNAUDITED) (Restated)**





Summarized
      quarterly financial information in fiscal 2007 and 2006 is as follows:


(In
                  thousands except per share data)
              
              **Fiscal
                  Year 2007**
              
              **Fiscal
                  Year 2006****First**
              
              **Second**
              
              **Third**
              
              **Fourth**
              
              **Total**
              
              **First**
              
              **Second**
              
              **Third**
              
              **Fourth**
              
              **Total**Revenue
              
              
              49,107
              
              
              45,617
              
              
              56,314
              
              
              65,567
              
              
              216,605
              
              
              21,164
              
              
              30,172
              
              
              43,805
              
              
              37,148
              
              
              132,289Gross
                  Profit
              
              
              21,460
              
              
              23,409
              
              
              28,131
              
              
              33,705
              
              
              106,705
              
              
              9,508
              
              
              14,548
              
              
              15,875
              
              
              15,705
              
              
              55,636Net
                  Income
              
              
              7,971
              
              
              4,921
              
              
              2,919
              
              
              4,063
              
              
              19,874
              
              
              1,724
              
              
              1,337
              
              
              3,778
              
              
              4,196
              
              
              11,035Earnings
                  per share, basic and diluted
              
              
              0.16
              
              
              0.10
              
              
              0.06
              
              
              0.08
              
              
              0.40
              
              
              0.04
              
              
              0.03
              
              
              0.08
              
              
              0.08
              
              
              0.23
 
 40
  **18.
        RESTRICTED NET ASSETS**
 
 Relevant
        PRC statutory laws and regulations permit payments of dividends by the Company’s
        PRC subsidiaries only out of their retained earnings, if any, as determined
        in
        accordance with PRC accounting standards and regulations. In addition, PRC
        laws
        and regulations require that annual appropriations of 10% of after-tax income
        should be set aside prior to payment of dividends as a general reserve fund.
        As
        a result of these PRC laws and regulations, the Company’s PRC subsidiaries and
        PRC affiliates are restricted in their ability to transfer a portion of their
        net assets to the Company in the form of dividends, loans or advances. Such
        restricted portions amounted to approximately $20,951,000 **** as
        of
        March 31, 2006 and approximately $35,165,000 as of March 31,
        2007.
 
 **19.
        RESTATEMENT**
 
 **A.
        THE CURRENT AMENDMENT (AMENDMENT NO. 2)**
 
 **Fiscal
        Year Change and Transition Period**
 
 On
        July
        15, 2005, pursuant to a Share Exchange Agreement dated as of June 14, 2005
        among
        Vorsatech Ventures, Inc., Thomas Braun, Beams Power Investment Limited, Strong
        Gold Finance Ltd. and Synutra Illinois, Vorsatech Venture, Inc. 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
        its six subsidiaries (the “Exchange”). As a result of this Exchange, Synutra
        Illinois became a wholly owned subsidiary of Vorsatech Ventures, Inc. In
        conjunction with this transaction, Synutra Illinois changed its corporate
        year
        end from December 31 to March 31. On August 22, 2005, the Company filed an
        amendment to a current report on Form 8-K providing financial statements
        of
        Synutra, Inc. required by Rule 3-05(b) of Regulation S-X that included audited
        financials for years ended December 31, 2003 and 2004, and unaudited financials
        for the six and three months ended June 30, 2005. In subsequent filings
        including Form 10-K for the year ended March 31, 2007, the Company presented
        audited financial statements covering 12-month periods ended March 31, 2005,
        2006, and 2007. These filings should have included, but did not include,
        audited
        financials for the three-month transition period ended March 31, 2005, resulting
        in incorrect reporting periods in these filings.  Accordingly, we are
        filing the Form 10-K/A to include such transition period and related
        disclosures.
 
 **Restricted
        Net Assets and Schedule 1**
 
 In
        the
        on-going assessment, the Company also analyzed its financial position, changes
        in financial position and results of operations of the parent company as
        of the
        same dates and for the same periods for which audited consolidated financial
        statements have been presented, and determined that the restricted net assets
        of
        the Company’s consolidated subsidiaries not available for distribution to the
        Company as of March 31, 2007 exceeded certain thresholds. In this amendment,
        Schedule 1 has been provided as part of the financial statement pursuant
        to the
        requirements of Rules 12-04(a) and 4-08(e)(3) of Regulation S-X to present
        condensed financial information of the parent company for the yearly periods
        ended March 31, 2007 and 2006. We also added a disclosure in Notes to the
        Financial Statements to describe our assessment of the restricted net assets
        of
        the Company’s consolidated subsidiaries in Note 18 above.
  41
 **Adjustment**
 
 Subsequent
        to Amendment No. 1, we also identified that in the consolidated statements
        of
        cash flows for the year ended March 31, 2006, depreciation and amortization
        was
        understated by $508,000 in the adjustments to reconcile net income to net
        cash
        provided by operating activities, and acquisition of property, plant and
        equipment was understated by the same amount. As a result of this adjustment,
        net cash provided by operating activities increased by $508,000 and net cash
        used in investing activities increased by the same amount in the consolidated
        statements of cash flows for the year ended March 31, 2006.
 
 **Consolidated
        Statement of Cash Flows**
  The
        year
        ended March 31, 2006
 
 The
        following table shows the consolidated statements of cash flows for the fiscal
        years indicated, showing previously reported amounts and restated amounts
        giving
        effect to the Restatement Adjustments described above in Note 19, Amendment
        No.2.
 
 **Fiscal
                  Year 2006**(In
                  thousands)
              
              **As
                  Reported in**
                **Original
                  Filing**
              
              **As
                  Restated in Amendment No.1**
              
              **As
                  Restated in Amendment No.2****Cash
                  flow from operating activities:**Depreciation
                  and amortization
              
              $
              914
              
              $
              914
              
              $
              1,422Notes
                  payable
              
              
              (708
              )
              
              (1,825
              )
              
              (1,825
              )**Net
                  cash provided by operating activities**
              
              
              **11,102**
              
              
              **9,986**
              
              
              **10,494****Cash
                  flow from investing activities:**Acquisition
                  of property, plant and equipment
              
              
              (669
              )
              
              (669
              )
              
              (1,177
              )Restricted
                  cash
              
              
              -
              
              
              (6,184
              )
              
              (6,184
              )**Net
                  cash used in investing activities**
              
              
              **(7,731**
              **)**
              ****
              **(13,915**
              **)**
              ****
              **(14,423**
              **)****Cash
                  flow from financing activities:**Borrowing
                  of bank loans
              
              
              933
              
              
              14,747
              
              
              14,747Repayment
                  of bank loans
              
              
              -
              
              
              (12,698
              )
              
              (12,698
              )**Net
                  cash provided by financing activities**
              
              
              **1,404**
              
              
              **2,520**
              
              
              **2,520****Net
                  change in increase in cash and cash equivalents**
              
              
              **4,775**
              
              
              (1,409
              )
              
              (1,409
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              **16,085**
              
              
              **5,812**
              
              
              **5,812****Cash
                  and cash equivalents, end of period**
              
              $
              **22,134**
              
              $
              **5,677**
              
              $
              **5,677**
  42
 **B.
        AMENDMENT NO. 1**
 
 **Adjustments**
 
 Subsequent
        to the Original Filing, we identified the following issues in our consolidated
        financial statements and have made the adjustments as follows:
 
 ·
              In
                  fiscal year 2007, we acquired certain fixed assets from Zheng Lan
                  Qi
                  County and subsequently established a new subsidiary with these
                  assets. In
                  conjunction with the acquisition, the local government provided
                  an
                  irrevocable subsidy of $4.1 million which we recognized as subsidy
                  income
                  for the fiscal year ended March 31, 2007. Subsequent to the Original
                  Filing, we determined that the $4.1 million should be deferred
                  and netted
                  against the depreciation expenses of the assets acquired, as this
                  method
                  effectively matches the related depreciation of the cost of assets
                  with the corresponding grant income. The effect of this adjustment
                  is a
                  decrease in subsidy income by $4.1 million and an increase in deferred
                  subsidy by $4.1 million for the fiscal year ended March 31, 2007.
                  We did
                  not recognize any of the subsidy during the fiscal year as the
                  asset had
                  not yet been placed in service.
 
 ·
              The
                  Company has recognized revenue upon shipment rather than upon delivery
                  to
                  the distributors' site. The effect of the difference between the
                  shipment
                  and delivery is a decrease in sales and an increase in advances
                  from
                  customers of $1.6 million for the year ended March 31, 2007. In
                  addition,
                  Cost of sales is reduced and inventory is increased by $692,000
                  for the
                  same period.
 
 ·
              The
                  cash consideration given to our retailers, who purchased our products
                  directly from our distributors, is reclassified as a reduction
                  of sales.
                  It was recorded as advertising and promotion expense in the Original
                  Filing. The effects of the reclassification are a decrease in sales
                  and
                  advertising and promotion expense of $1.2 million and $0.4 million
                  for the
                  fiscal years ended March 31, 2007and 2006, respectively.
 
 ·
              The
                  amount of free products provided to our customers is reclassified
                  as cost
                  of sales for the fiscal years ended March 31, 2007 and 2006. It
                  had been
                  recorded as advertising and promotion expense in the Original Filing.
                  The
                  effects of this adjustment are an increase in cost of sales and
                  a decrease
                  in advertising and promotion expense of $1.0 million and $1.2 million
                  for
                  the fiscal years ended March 31, 2007 and 2006, respectively.
 
 ·
              We
                  have reviewed our consolidated income tax provision and recognized
                  net
                  operating loss carried forwards of one of our subsidiaries as additional
                  deferred tax assets. As a result, our consolidated income tax provision
                  decreased by $209,000 for the year ended March 31, 2007.
 
 ·
              Restricted
                  cash, included as cash and cash equivalents in the Original Filing,
                  represents cash deposited with the banks as guarantee for the issuance
                  of
                  promissory notes. Under US GAAP, restricted cash does not meet
                  the
                  definition of cash and cash equivalents, and separate disclosure
                  on the
                  face of balance sheet is required. In addition, the change in the
                  restricted cash balance, given its use to secure promissory notes,
                  should
                  have been presented as an investing activity. Therefore, restricted
                  cash
                  of $12.9 million and $16.4 million is reclassified and is presented
                  as an
                  individual item on our consolidated balance sheets as of March
                  31, 2007
                  and 2006, respectively. In addition, the increase (decrease) in
                  restricted
                  cash of $3.5 million ($6.2 million) is reclassified from operating
                  to
                  investing activities in the consolidated statements of cash flows
                  for the
                  years ended March 31, 2007 and 2006, respectively.
 
 ·
              We
                  recognized $1.1 million in previously deferred advertising expense
                  for the
                  year ended March 31, 2007 as the associated advertising and promotion
                  expenses had been provided. We also reclassified $0.4 million in
                  amounts
                  classified as deferred advertising expenses to other receivables.
  43
  ·
              As
                  at March 31, 2007, the Company had provided bank loan guarantees
                  of $1.1
                  million in total, extended to 104 farmers in the Zhangbei area.
                  This was
                  incorrectly presented as gross other receivable and other payable
                  in the
                  Original filing. The Company has revised the balance sheet to eliminate
                  both the other receivable and other
                  payable.
 
 ·
              Land
                  use rights, which represents a prepaid lease payment, is reclassified
                  as
                  an individual line item on our consolidated balance sheets as of
                  March 31,
                  2007 and 2006, respectively. It was included as part of property,
                  plant and equipment, net in the Original
                  Filing.
 
 ·
              A
                  balance of $4.9 million in long-term liabilities as of March 31,
                  2006,
                  which was due on December, 2006, has been reclassified as short-term
                  bank
                  loans due to its maturity of less than one
                  year.
 
 ·
              Certain
                  short-term notes payable balances, in the amounts of $17.5 million
                  and
                  $18.5 million, are reclassified as short-term bank loans as of
                  March 31,
                  2007 and 2006, respectively, as the ultimate lender of the note
                  is an
                  accredited financial institution.
 
 ·
              We
                  reclassified $1.8 million in advances to suppliers to construction
                  in
                  progress under property, plant and equipment as of March 31, 2007,
                  as the
                  goods had been delivered and used in construction.
 
 **Reclassification**
 
 In
        addition to the above correcting adjustments, we also made reclassifications
        on
        our consolidated financial statements as follows for the current period and
        the
        prior period presentation has been conformed:
 
 ·
              Accounts
                  receivable and notes receivable have been combined as accounts
                  receivable.
                  They used to be reported separately. The combined amounts of accounts
                  receivable were $6.7 million and $2.5 million as of March 31, 2007
                  and
                  2006, respectively.
 
 ·
              Deferred
                  expenses and short-term investment have been combined as deferred
                  expense
                  and other current assets. They used to be reported separately.
                  The
                  combined amounts of deferred expense and other current assets were
                  $252,000 and $139,000 as of March 31, 2007 and 2006,
                  respectively.
 
 ·
              Intangible
                  assets and other long-term deferred costs have been combined as
                  other
                  assets. They used to be reported separately. The combined amounts
                  of other
                  assets were $193,000 and $356,000 as of March 31, 2007 and 2006,
                  respectively.
 
 ·
              Construction
                  in progress had been included under property, plant and equipment,
                  net. It
                  used to be reported separately. The amounts of construction in
                  progress
                  were $14.8 million and $21.2 million as of March 31, 2007 and 2006,
                  respectively.
  44
  ·
              Accounts
                  payable and notes payable have been combined as accounts payable.
                  They were reported separately in previous year. The combined amounts
                  of accounts payable were $12.1 million and $13.1 million as of
                  March 31,
                  2007 and 2006, respectively.
 
 ·
              Accrued
                  expense and other payable have been combined as other current liabilities.
                  They were reported separately in previous year. The combined amounts
                  of other current liabilities were $6.7 million and $5.1 million
                  as of
                  March 31, 2007 and 2006,
                  respectively.
 
 ·
              Retained
                  earnings and reserves have been combined as retained earnings.
                  They were reported separately in previous year. The combined amounts
                  of retained earnings and reserves were $31.5 million and $11.7
                  million as
                  of March 31, 2007 and 2006,
                  respectively.
 
 ·
              Government
                  grants other than those related to assets, which were reported as a
                  separate line item in previous year, have been reported as other
                  income,
                  net. The effect of the reclassification is an increase of $ 1.1
                  million,
                  $271,000 and $734,000 on other income, net for the years ended
                  March 31,
                  2007, 2006 and 2005, respectively. These subsidies are not related
                  to
                  fixed asset government explained
                  above.
  **Consolidated
        Balance Sheets**
  Two
        years
        ended March 31, 2007 and 2006
 
 The
        following table sets forth the consolidated balance sheets for the Company
        as of
        the dates indicated, showing previously reported amounts and restated amounts
        giving effect to the Restatement Adjustments described above in Note 19,
        Amendment No.1.
  
 **Fiscal
                  Year 2007**
              
              **Fiscal
                  Year 2006**(In
                  thousands)
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1**
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1****ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              33,766
              
              $
              (12,930
              )
              $
              20,836
              
              $
              22,134
              
              $
              (16,457
              )
              $
              5,677Restricted
                  cash
              
              
              -
              
              
              12,930
              
              
              12,930
              
              
              -
              
              
              16,457
              
              
              16,457Notes
                  receivable
              
              
              1,313
              
              
              (1,313
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Accounts
                  receivable
              
              
              5,447
              
              
              1,313
              
              
              6,760
              
              
              2,540
              
              
              -
              
              
              2,540Inventories
              
              
              15,714
              
              
              692
              
              
              16,406
              
              
              11,789
              
              
              -
              
              
              11,789Other
                  receivable, net
              
              
              2,694
              
              
              (675
              )
              
              2,019
              
              
              2,230
              
              
              -
              
              
              2,230Deferred
                  expenses
              
              
              1,786
              
              
              (1,534
              )
              
              252
              
              
              126
              
              
              (30
              )
              
              96Advances
                  to suppliers
              
              
              3,073
              
              
              (1,867
              )
              
              1,206
              
              
              354
              
              
              -
              
              
              354**Total
                  current assets**
              
              
              **75,535**
              
              
              **(3,384**
              **)**
              
              **72,151**
              
              
              **47,818**
              
              
              **(30**
              **)**
              
              **47,788****Property,
                  plant and equipment, net**
              
              
              43,470
              
              
              (3,086
              )
              
              40,384
              
              
              13,728
              
              
              (1,608
              )
              
              12,120**Construction
                  in progress**
              
              
              9,220
              
              
              1,868
              
              
              11,088
              
              
              21,198
              
              
              -
              
              
              21,198**Land
                  use rights, net**
              
              
              -
              
              
              3,024
              
              
              3,024
              
              
              -
              
              
              1,546
              
              
              1,546**Deferred
                  tax assets**
              
              
              218
              
              
              214
              
              
              432
              
              
              -
              
              
              -
              
              
              -**Other
                  Assets**
              
              
              131
              
              
              62
              
              
              193
              
              
              265
              
              
              92
              
              
              357**TOTAL
                  ASSETS**
              
              
              **128,574**
              
              
              **(1,303**
              **)**
              
              **127,271**
              
              
              **83,009**
              
              
              -
              
              
              **83,009****Current
                  Liabilities:**Bank
                  loans
              
              
              35,649
              
              
              17,455
              
              
              53,104
              
              
              13,134
              
              
              23,546
              
              
              36,680Notes
                  payable
              
              
              17,972
              
              
              (17,
                  972
              )
              
              -
              
              
              19,113
              
              
              (19,113
              )
              
              -Accounts
                  payable
              
              
              11,568
              
              
              517
              
              
              12,085
              
              
              12,580
              
              
              499
              
              
              13,079Advances
                  from customers
              
              
              2,620
              
              
              1,643
              
              
              4,263
              
              
              933
              
              
              -
              
              
              933Other
                  payables
              
              
              6,518
              
              
              (1,119
              )
              
              5,399
              
              
              4,569
              
              
              -
              
              
              4,569**Total
                  current liabilities**
              
              
              **79,909**
              
              
              **523**
              
              
              **80,432**
              
              
              **57,126**
              
              
              **4,932**
              
              
              **62,058****Long
                  term debts**
              
              
              -
              
              
              -
              
              
              -
              
              
              4,932
              
              
              (4,932
              )
              
              -**Deferred
                  income**
              
              
              -
              
              
              4,138
              
              
              4,138
              
              
              -
              
              
              -
              
              
              -**Total
                  liabilities**
              
              
              **79,909**
              
              
              **4,661**
              
              
              **84,570**
              
              
              **62,058**
              
              
              -
              
              
              **62,058**Retained
                  earnings
              
              
              37,395
              
              
              (5,857
              )
              
              31,538
              
              
              11,664
              
              
              -
              
              
              11,664Accumulated
                  other comprehensive income
              
              
              3,039
              
              
              (107
              )
              
              2,932
              
              
              1,056
              
              
              -
              
              
              1,056**Total
                  shareholders' equity**
              
              
              **48,665**
              
              
              **(5,964**
              **)**
              
              **42,886**
              
              
              **20,951**
              
              
              -
              
              
              **20,951****TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              **$**
              **128,574**
              
              **$**
              **(1,303**
              **)**
              **$**
              **127,271**
              
              **$**
              **83,009**
              
              **$**
              -
              
              **$**
              **83,009**
 
 45
 
 **Consolidated
        Statements of Income**
  Two
        years
        ended March 31, 2007
 
 The
        following tables show the Consolidated Statements of Income for the fiscal
        years
        indicated, showing previously reported amounts and restated amounts giving
        effect to the Restatement Adjustments described above in Note 19, Amendment
        No.1.
  **Fiscal
                  Year 2007**
              
              **Fiscal
                  Year 2006**(In
                  thousands except earnings per share data)
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1**
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1**Net
                  sales
              
              $
              219,404
              
              $
              (2,799
              )
              $
              216,605
              
              $
              132,692
              
              $
              (403
              )
              $
              132,289Cost
                  of sales
              
              
              109,551
              
              
              349
              
              
              109,900
              
              
              75,423
              
              
              1,230
              
              
              76,653**Gross
                  profit**
              
              
              **109,853**
              
              
              **(3,148**
              **)**
              
              **106,705**
              
              
              **57,269**
              
              
              **(1,633**
              **)**
              
              **55,636**Advertising
                  and promotion expenses
              
              
              53,467
              
              
              (1,145
              )
              
              52,322
              
              
              22,541
              
              
              (1,633
              )
              
              20,908General
                  and administrative expenses
              
              
              6,819
              
              
              212
              
              
              7,031
              
              
              5,698
              
              
              198
              
              
              5,896Total
                  operating expense
              
              
              85,847
              
              
              (933
              )
              
              84,914
              
              
              43,733
              
              
              (1,435
              )
              
              42,298**Income
                  from operations**
              
              
              **24,006**
              
              
              **(2,215**
              **)**
              
              **21,791**
              
              
              **13,536**
              
              
              **(198**
              **)**
              
              **13,338**Subsidy
                  income
              
              
              5,173
              
              
              (5,173
              )
              
              -
              
              
              734
              
              
              (734
              )
              
              -Interest
                  expense
              
              
              (2,119
              )
              
              223
              
              
              (1,896
              )
              
              (1,982
              )
              
              198
              
              
              (1,784
              )Other
                  income, net
              
              
              120
              
              
              1,099
              
              
              1,219
              
              
              (45
              )
              
              735
              
              
              690**Income
                  before provision for income tax**
              
              
              **27,536**
              
              
              **(6,066**
              **)**
              
              **21,470**
              
              
              **12,482**
              
              
              -
              
              
              **12,482**Provision
                  for income tax
              
              
              1,805
              
              
              (209
              )
              
              1,596
              
              
              1,446
              
              
              -
              
              
              1,446**Net
                  income attributable to shareholders**
              
              
              **25,731**
              
              
              **(5,857**
              **)**
              
              **19,874**
              
              
              **11,035**
              
              
              -
              
              
              **11,035**Currency
                  translation adjustment
              
              $
              1,983
              
              $
              (107
              )
              $
              1,876
              
              $
              1,274
              
              $
              -
              
              $
              1,274**Comprehensive
                  income**
              
              **$**
              **27,714**
              
              **$**
              **(5,964**
              **)**
              **$**
              **21,750**
              
              **$**
              **12,309**
              
              $
              -
              
              $
              12,309**Earning
                  per share—basic and diluted**
              
              
              0.51
              
              
              (0.11
              )
              
              0.40
              
              $
              0.23
              
              $
              -
              
              $
              0.23
 
 46
 
 **Consolidated
        Statement of Cash Flows**
 Two
        years
        ended March 31, 2007
 
 The
        following tables show the consolidated statements of cash flows for the fiscal
        years indicated, showing previously reported amounts and restated amounts
        giving
        effect to the Restatement Adjustments described above in Note 19, Amendment
        No.1.
 
 **Fiscal
                  Year 2007**(In
                  thousands)
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1****Cash
                  flow from operating activities:**Net
                  income
              
              $
              25,731
              
              $
              (5,857
              )
              $
              19,874Changes
                  in operating assets and liabilities:Inventories
              
              
              (3,925
              )
              
              (691
              )
              
              (4,616
              )Advances
                  to suppliers
              
              
              (2,719
              )
              
              1,867
              
              
              (852
              )Other
                  receivable, net
              
              
              (1,037
              )
              
              674
              
              
              (363
              )Deferred
                  expenses
              
              
              (1,660
              )
              
              1,534
              
              
              (126
              )Notes
                  payable
              
              
              (1,141
              )
              
              1,159
              
              
              18Advances
                  from customers
              
              
              1,687
              
              
              1,643
              
              
              3,330Deferred
                  tax assets
              
              
              (219
              )
              
              (213
              )
              
              (432
              )Other
                  payables and accrued liabilities
              
              
              2,767
              
              
              (1,120
              )
              
              1,647Deferred
                  revenue
              
              
              -
              
              
              4,138
              
              
              4,138**Net
                  cash provided by operating activities**
              
              
              11,632
              
              
              3,134
              
              
              14,766**Cash
                  flow from investing activities:**Cash
                  used for construction in progress
              
              
              (10,763
              )
              
              (1,868
              )
              
              (12,631
              )Restricted
                  cash
              
              
              -
              
              
              3,527
              
              
              3,527**Net
                  cash provided by (used in) investing activities**
              
              
              (19,567
              )
              
              1,659
              
              
              (17,908
              )**Cash
                  flow from financing activities:**Borrowing
                  of bank loans
              
              
              17,584
              
              
              15,041
              
              
              32,
                  625Repayment
                  of bank loans
              
              
              -
              
              
              (16,200
              )
              
              (16,200
              )**Net
                  cash provided by financing activities**
              
              
              17,584
              
              
              (1,159
              )
              
              16,425**Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              1,983
              
              
              (107
              )
              
              1,876**Net
                  change in increase in cash and cash equivalents**
              
              
              9,649
              
              
              3,634
              
              
              13,283**Cash
                  and cash equivalents, beginning of period**
              
              
              22,134
              
              
              (16,457
              )
              
              5,677**Cash
                  and cash equivalents, end of period**
              
              $
              33,766
              
              $
              (12,930
              )
              $
              20,836
 
 47
  **Fiscal
                  Year 2006**(In
                  thousands)
              
              **As**
                **Reported
                  in Original Filing**
              
              **Restatement**
                **Adjustments**
              
              **As**
                **Restated
                  in Amendment No.1****Cash
                  flow from operating activities:**Notes
                  payable
              
              
              (708
              )
              
              (1,116
              )
              
              (1,825
              )**Net
                  cash provided by operating activities**
              
              
              **11,102**
              
              
              **(1,116**
              **)**
              
              **9,986****Cash
                  flow from investing activities:**Restricted
                  cash
              
              
              -
              
              
              (6,184
              )
              
              (6,184
              )**Net
                  cash used in investing activities**
              
              
              **(7,731**
              **)**
              
              **(6,184**
              **)**
              
              **(13,915**
              **)****Cash
                  flow from financing activities:**Borrowing
                  of bank loans
              
              
              933
              
              
              13,814
              
              
              14,747Repayment
                  of bank loans
              
              
              -
              
              
              (12,698
              )
              
              (12,698
              )**Net
                  cash provided by financing activities**
              
              
              **1,404**
              
              
              **1,116**
              
              
              **2,520****Net
                  change in increase in cash and cash equivalents**
              
              
              **4,775**
              
              
              (6,184
              )
              
              (1,409
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              **16,085**
              
              
              (10,273
              )
              
              **5,812****Cash
                  and cash equivalents, end of period**
              
              $
              **22,134**
              
              $
              **(16,457**
              **)**
              $
              **5,677**
  **Consolidated
        Statements of Stockholders’ Equity**
  The
        year
        ended March 31, 2007
 
 The
        following tables show the consolidated statements of stockholders’ equity for
        the fiscal year indicated, showing previously reported amounts and restated
        amounts giving effect to the Restatement Adjustments described above in Note
        19,
        Amendment No.1.
 
 
 (In
                  thousands)
              
              **Retained**
                **Earnings**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income**
              
              **Stockholders’**
                **Equity****Balance
                  at March 31, 2007 as reported in Original Filing**
              
              **$**
              **37,395**
              
              **$**
              **3,039**
              
              **$**
              **48,665**Restatement
                  Adjustments
              
              
              (5,857
              )
              
              (107
              )
              
              (5,964
              )**Balance
                  at March 31, 2007 as restated in Amendment No.1**
              
              **$**
              **31,538**
              
              **$**
              **2,932**
              
              **$**
              **42,701**
 48
  **SYNUTRA
        INTERNATIONAL, INC.**
 **ADDITIONAL
        INFORMATION - FINANCIAL STATEMENT SCHEDULE I**
 
 Synutra
        International, Inc. became a parent company to all of its consolidated
        subsidiaries in China and in the United States through a reverse acquisition
        in
        July, 2005. Since then and until December, 2006, the Company had not had
        an
        operating account and its subsidiaries in the U.S. and China carried out
        various business and financial activities in its name. During the 12-month
        periods ended March 31, 2006 and 2007, the two yearly reporting periods
        inclusive and following the said reverse acquisition, only the 12 months
        ended
        March 31, 2007 saw the parent company conduct business and financial activities
        on its own. Therefore, the following financial statements in Schedule 1 prepared
        in conformity with accounting principles generally accepted in the United
        States
        include balance sheets and income statements for the 12-month periods ended
        March 31, 2007 and 2006, and cash flow statements for the 12 months ended
        March
        31, 2007.
 
 
 **Financial
        information of parent company**
 **BALANCE
        SHEETS**
 
 **March
                  31, 2007**
              
              **March
                  31, 2006**(In
                  thousands)**ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              409
              
              $
              -**Total
                  current assets**
              
              
              409
              
              
              -Investments
                  in subsidiaries
              
              
              126,862
              
              
              83,009**TOTAL
                  ASSETS**
              
              **$**
              127,271
              
              **$**
              83,009**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  Liabilities:**Due
                  to related parties
              
              
              405
              
              
              -**Total
                  current liabilities**
              
              
              405
              
              
              -**Total
                  liabilities**
              
              
              405
              
              
              -**Shareholders'
                  equity:**Common
                  stock, $.0001 par value: 250,000 authorized; 50,001  issued and
                  outstanding at
                March
                  31, 2007 and 2006
              
              
              5
              
              
              5Additional
                  paid-in capital
              
              
              8,226
              
              
              8,226Retained
                  earnings
              
              
              118,635
              
              
              74,778**Total
                  shareholders' equity**
              
              
              126,866
              
              
              83,009**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              **$**
              127,271
              
              **$**
              83,009
 49
  **Financial
        Information of parent company**
 **STATEMENTS
        OF INCOME**
  **Year
                  Ended Mar 31,****2007**
              
              **2006**(In
                  thousands)Interest
                  income
              
              **$**
              4
              
              $
              -Equity
                  in earnings of subsidiaries
              
              
              19,870
              
              
              11,035**Net
                  income attributable to shareholders**
              
              **$**
              19,874
              
              **$**
              11,035**Earning
                  per share—basic and diluted**
              
              $
              0.40
              
              $
              0.23**Weighted
                  average common share outstanding-basic and
                  diluted**
              
              
              50,001
              
              
              48,834
 
 **Financial
        Information of parent company**
 **STATEMENTS
        OF CASHFLOWS**
  **Year
                  Ended Mar 31,**(In
                  thousands)
              
              **2007****Cash
                  flow from operating activities:**Net
                  income
              
              $
              4Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesChanges
                  in operating assets and liabilities:Due
                  to related parties
              
              
              405**Net
                  cash provided by operating activities**
              
              
              409**Net
                  change in increase in cash and cash equivalents**
              
              
              409**Cash
                  and cash equivalents, beginning of period**
              
              
              -**Cash
                  and cash equivalents, end of period**
              
              **$**
              409
 
 The
        parent company financial statements have been prepared using the same accounting
        principles and policies described in the notes to the consolidated financial
        statements, with the only exception being that the company accounts for its
        subsidiaries using the equity method. Please refer to the notes to the
        consolidated financial statements presented above for additional information
        and
        disclosures with respect to these financial statements.
  **SYNUTRA
        INTERNATIONAL, INC.**
 **SCHEDULE
        II**
 **VALUATION
        AND QUALIFYING ACCOUNTS**
 **(In
        Thousands)**
 
 (In
                  thousands)
                
                **Classification**
              
              **Balance at**
                **Beginning**
                **of
                  Period**
              
              **Charged to**
                **Costs and**
                **Expenses**
              
              **Deductions**
              
              **Balance**
                **at
                  End**
                **of Period***Allowance
                  for Doubtful Accounts*Year
                  ended March 31:2007
              
              $
              420
              
              $
              573
              
              $
              (176
              )
              $
              8172006
              
              
              205
              
              
              215
              
              
              -
              
              
              420Transition
                  Period Ended March 31:2005
              
              
              170
              
              
              35
              
              
              -
              
              
              205March
                  31, 2004 (unaudited)
              
              
              101
              
              
              6
              
              
              -
              
              
              107Year
                  ended December 31:2004
              
              
              101
              
              
              69
              
              
              -
              
              
              170
 
 50
  **ITEM
        9A. CONTROLS AND PROCEDURES**
 
 **DISCLOSURE
        CONTROLS AND PROCEDURES**
 
  As
        of
        March 31, 2007, the end of the period covered by this report, October 5,
        2007,
        the filing date of Amendment No. 1, and January 14, 2008, the filing date
        of
        Amendment No. 2, the Company's Chief Executive Officer and Chief Financial
        Officer reviewed and evaluated the effectiveness of the Company's disclosure
        controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
        15d-15(e)), which are designed to ensure that material information the
        Company is required to disclose in its reports filed or submitted
        under the Exchange Act is recorded, processed, summarized, and reported within
        required time periods. Disclosure controls and procedures include, without
        limitation, controls and procedures designed to ensure that information required
        to be disclosed is accumulated and communicated to the Company’s management
        including its Chief Executive Officer and Chief Financial Officer, as
        appropriate, to allow timely decisions regarding required disclosures. The
        Company has concluded, consistent with its conclusion as expressed in Amendment
        No. 1, that based on the Company's evaluation and its ongoing assessment
        process
        to improve the effectiveness of its disclosure controls and procedures and
        internal control over financial reporting, as of the end of the period covered
        by this report, the Company's disclosure controls and procedures were not
        effective at the reasonable assurance level because of the identification
        of
        material weaknesses in the Company's internal control over financial reporting,
        which the Company views as an integral part of its disclosure controls and
        procedures.
  Management’s
        assessment identified the following material weaknesses:
  1.
        The
        Company did not maintain a sufficient complement of personnel with an
        appropriate level of technical accounting knowledge, experience, and training
        in
        the application of generally accepted accounting principles commensurate
        with
        the Company’s complex financial accounting and reporting requirements and low
        materiality thresholds.
  2.
        The
        Company did not have a robust antifraud and risk assessment process in place
        to
        regularly monitor and document the procedures, programs and controls related
        to
        its financial reporting.
 
 3.
        The
        Company did not have effective controls to ensure that significant non-routine
        transactions, accounting estimates, and other adjustments were appropriately
        reviewed, analyzed, and monitored on a timely basis.
 
 Due
        to
        these material weaknesses in internal control over financial reporting --
        as
        evidenced by the significant number and magnitude of out-of-period adjustments
        identified during the Company's ongoing assessment process to improve the
        effectiveness of its disclosure controls and procedures and internal control
        over financial reporting and the resulting restatements -- management has
        concluded that the Company’s disclosure controls and procedures were not
        effective at the reasonable assurance level. Further, management understands
        that these material weaknesses, if not remediated, could result in the Company
        not being able to meet its regulatory filing deadlines or cause a material
        misstatement in the future.
  51
 **REMEDIATION
        AND CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**
 
 The
        Company is in the process of developing and implementing remediation plans
        to
        address the material weaknesses in its internal control over financial
        reporting by adopting and implementing the Sarbanes Oxley Act for the Company's
        fiscal year ending March 31, 2008. During the second quarter of 2008, management
        conducted a program to plan the remediation of all identified material
        weaknesses and significant deficiencies using a risk-based approach based
        on the
“Internal Control — Integrated Framework” issued by the Committee of
        Sponsoring Organizations of the Treadway Commission ("COSO"). These plans
        contemplate various changes in process, procedures, policy, training and
        organizational design, and are currently being implemented. In addition,
        the
        Company will hire and/or appoint new managers in the accounting area and
        engage
        accounting professionals from external resources to address internal control
        weaknesses related to technical accounting.
  The
        following specific remedial actions are in process to address the material
        weaknesses in the Company's internal control over financial reporting described
        above:
  1.
        Reorganize and restructure the Company’s corporate accounting staff (“Corporate
        Accounting”) by (1) revising the reporting structure and establishing clear
        roles, responsibilities, and accountability, (2) hiring additional technical
        accounting personnel to address the Company's complex accounting and financial
        reporting requirements, and (3) assessing the technical accounting capabilities
        at the Company's subsidiaries to ensure the right complement of knowledge,
        skills, and training.
  2.
        Improve period-end closing procedures by (1) requiring all significant
        non-routine transactions to be reviewed by Corporate Accounting, (2) ensuring
        that account reconciliations and analyses for significant financial statement
        accounts are reviewed for completeness and accuracy by qualified accounting
        personnel, (3) implementing a process that ensures the timely review and
        approval of complex accounting estimates by qualified accounting personnel
        and
        subject matter experts, where appropriate, and (4) developing better monitoring
        controls at Corporate Accounting and at the Company's subsidiaries and (5)
        documenting and implementing antifraud programs and controls as well as
        comprehensive risk assessment procedures, programs and controls.
 
 As
        previously noted, management has augmented the resources in Corporate Accounting
        by utilizing external resources in technical accounting areas and will implement
        additional closing procedures during the remainder of fiscal 2008. As a result,
        management believes that there are no material inaccuracies or omissions
        of
        material fact and, to the best of its knowledge, believes that the consolidated
        financial statements as and for the fiscal year ended March 31, 2007 in this
        Form 10-K/A, fairly present in all material aspects the financial condition
        and
        results of operations of the Company in conformity with accounting principles
        generally accepted in the United States of America.
 
 Other
        than as described above, management does not believe that there have not
        been
        any other changes in the Company’s internal control over financial reporting
        during the fiscal year ended March 31, 2007, which have materially affected,
        or
        are reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
 52
  **PART
        IV**
 
 **ITEM
        15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES**
 
 **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)10.3
              
              Agreement
                  between the Company and the Department of Finance of Zheng Lan
                  Qi (County)
                  of Inner Mengolia, with Amendment and attached Schedule of Investment
                  Expenditures (4)10.4
              
              Agreement
                  between the Company and Mei Hua Company and its affiliates to form
                  Mei Tai
                  Technology (Qingdao) Co., Ltd. (5)21.1
              
              List
                  of Subsidiaries (6)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.
 
 (4)
              Incorporated
                  herein by reference from the Registrant’s Form 8-K filed with the
                  Securities and Exchange Commission on November 9, 2006.
 
 (5)
              Incorporated
                  herein by reference from the Registrant’s Form 8-K filed with the
                  Securities and Exchange Commission on April 24, 2007.(6)
              Incorporated
                  herein by reference from the Registrant's Form 10-K/A filed with
                  the
                  Securities and Exchange Commission on October 5,
                  2007.
 
 53
  **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 Amendment No. 2 to the report on
        Form
        10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
        on this 14 th day
        of
        January, 2008.
 
 **SYNUTRA
                  INTERNATIONAL, INC.**By:
              /s/
                  Liang ZhangLiang
                  ZhangChief
                  Executive Officer and Chairman
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Amendment
        No. 2
        to the report on Form 10-K has been signed below by the following persons
        on
        behalf of the Registrant and in the capacities.
 
 **Name**
              
              **Position**
              
              **Date**/s/
                  Liang ZhangLiang
                  Zhang
              
              Chief
                  Executive Officer, and Chairman
              
              January
                  14, 2008/s/Lawrence
                  LeeLawrence
                  Lee
              
              Chief
                  Financial Officer
              
              January
                  14, 2008/s/
                  Weiguo ZhangWeiguo
                  Zhang
              
              Chief
                  Operating Officer
              
              January
                  14, 2008/s/
                  Jinrong ChenJinrong
                  Chen
              
              Director
              
              January
                  14, 2008/s/
                  Yiu-Chun ChanYiu-Chun
                  Chan
              
              Director
              
              January
                  14, 2008/s/
                  Lei LinLei
                  Lin
              
              Director
              
              January
                  14, 2008/s/
                  Willie WuWillie
                  Wu
              
              Director,
                  Vice President
              
              January
                  14, 2008
  54