**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **x**
              **Quarterly
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934**
 
 For
        the
        quarterly period ended June 30, 2007
 
 or
 
 ** ̈**
              **Transition
                  Report Pursuant to Section 13 of 15(d) of the Securities Exchange
                  Act of
                  1934**
 
 For
        the
        Transition Period From  to
 
 Commission
        File number: 000-50601
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 
 DELAWARE
              
              13-4306188**(State
                  or other jurisdiction of**
                **incorporation
                  or organization)**
              
              **(IRS
                  Employer Identification No.)**
 
 2275
        Research Blvd., Suite 500
 Rockville,
        Maryland 20850
 
 (301)
        840-3888
 
 Check
        whether the Registrant (1) has filed all reports required to be filed by
        Section
        13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
        months (or for such shorter period that the Registrant was required to file
        such
        reports ( pending
        legal opinion), and (2) has been subject to such filing requirements for
        the
        past 90 days.
 
 Yes x No  ̈
 
 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.
 
 Large
        accelerated filer  ̈ Accelerated
        filer  ̈ Non-accelerated filer x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2of the Exchange Act).
 
 Yes  ̈ No x
 
 As
        of
        September 28, 2007, there were 54,000,713 shares of Common Stock, par value
        $0.0001 per share, issued and outstanding
  
  **EXPLANATORY
        NOTE**
 
 On
        August
        15, 2007, Synutra International, Inc. (“Synutra” or the “Company”) filed a
        timely Notification of Late Filing on Form 12b-25 with the U.S. Securities
        and
        Exchange Commission (the “SEC”) to report that it would be unable to file its
        Quarterly Report on Form 10-Q as and for the fiscal quarter ended June 30,
        2007
        by the prescribed due date of August 14, 2007. Further, the Company was unable
        to file its Form 10-Q within the five-day extension period provided in Rule
        12b-25 under the Exchange Act of 1934, as amended (the “Exchange Act”). On
        August 17, 2007, the Company filed a current report on Form 8-K stating that
        management had concluded that Synutra’s financial statements as of and for the
        fiscal year ended March 31, 2007 and for each fiscal quarter ended June 30,
        2006, September 30, 2006 and December 31, 2006 should not be relied upon.
        On
        August 20, 2007, the Company received a staff determination letter from The
        Nasdaq Stock Market stating that the Company’s common stock is subject to
        delisting from The Nasdaq Global Market for the Company’s failure to file its
        Form 10-Q. Finally, on October 2, 2007, the Company filed a current report
        on
        Form 8-K announcing that Lawrence Lee, a member of Synutra’s Board of Directors,
        resigned from his position on the Board to become Synutra’s Chief Financial
        Officer.
 
 The
        Company’s failure to file timely its Form 10-Q was due to management’s
        assessment of accounting errors and irregularities identified during the
        preparation of the Form 10-Q. On October 5, 2007, as a result of such
        assessment, the Company filed an amended Annual Report on Form 10-K with
        restated financial statements as of and for the year ended March 31, 2007
        (the
“Form 10-K/A”). The Company will file amended Quarterly Reports on Form 10-Q
        with restated financial statements as of and for each fiscal quarter ended
        September 30, 2006 and December 31, 2006, as soon as practicable. The assessment
        and nature of the errors and irregularities identified during the preparation
        of
        the Form 10-Q are discussed in detail in the Form 10-K/A.
 
 Further,
        the Company’s dismissal of its independent registered public accounting firm,
        Rotenberg & Co. LLP, engagement of Deloitte Touche Tohmatsu CPA Ltd. as its
        new independent auditors effective July 27, 2007 and assessment of the
        accounting errors and irregularities identified during the preparation of
        this
        Form 10-Q are described in the Company’s previously-filed Exchange Act documents
        as follows:
 
 ·
            the
                Current Report on Form 8-K filed on July 27,
                2007; ·
            the
                Current Report on Form 8-K/A filed on August 9,
                2007; ·
            the
                Company’s Notification of Late Filing on Form 12b-25 filed on August 15,
                2007; ·
            the
                Current Report on Form 8-K filed on August 17, 2007; ·
            the
                Current Report on Form 8-K filed on August 24, 2007;
                and ·
            the
                Current Report on Form 8-K filed on October 2,
                2007. 
 In
        addition, aspects of the restatement are described in Note 3 to the Notes
        to
        Condensed Consolidated Financial Statements to this Form 10-Q.
 
 2
  **SYNUTRA
        INTERNATIONAL, INC.**
  **FORM
        10-Q**
 For
        the
        Quarter Ended June 30, 2007
 
 **INDEX**
  PART
                  I. FINANCIAL INFORMATIONItem
                  1. Financial Statements (unaudited):Condensed
                  Consolidated Statements of Income for the Three Months Ended June 30,
                  2007 and 2006
              
              
              4Condensed
                  Consolidated Balance Sheets as of June 30, 2007 and March 31,
                  2007
              
              
              5Condensed
                  Consolidated Statements of Cash Flows for the Three Months Ended
                  June 30,
                  2007 and 2006
              
              
              7Notes
                  to the Condensed Consolidated Financial Statements
              
              
              8Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              
              
              20Item
                  3. Quantitative and Qualitative Disclosures About Market
                  Risk
              
              
              30Item
                  4T. Controls and Procedures
              
              
              31PART
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              
              
              33Item
                  1A. Risk Factors
              
              
              33Item
                  2. Unregistered Sales of Equity Securities and Use of Proceeds
              
              
              48Item
                  3. Defaults Upon Senior Securities
              
              
              46Item
                  4. Submission of Matters to a Vote of Security Holders
              
              
              46Item
                  5. Other Information
              
              
              46Item
                  6. Exhibits
              
              
              47Signatures
              
              
              48
 
 3
  **PART
        I**
 **FINANCIAL
        INFORMATION**
 **ITEM
        1. FINANCIAL STATEMENTS**
 **SYNUTRA
        INTERNATIONAL, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
 **(in
        thousands, except earning per share data)**
 **(unaudited** **)**
 **Three
                      Months Ended June 30****2007**
                  
                  **2006****(As
                      restated,**
                    **see
                      note 3)**Net
                      sales
                  
                  $
                  67,492
                  
                  $
                  49,107Cost
                      of sales
                  
                  
                  30,430
                  
                  
                  27,647**Gross
                      profit**
                  
                  
                  **37,062**
                  
                  
                  **21,460**Selling
                      & distribution expenses
                  
                  
                  7,574
                  
                  
                  5,042Advertising
                      and promotion expenses
                  
                  
                  18,448
                  
                  
                  6,474General
                      & administrative expenses
                  
                  
                  2,880
                  
                  
                  1,032Total
                      operating expense
                  
                  
                  28,902
                  
                  
                  12,548**Income
                      from operations**
                  
                  
                  **8,160**
                  
                  
                  **8,912**Interest
                      expense
                  
                  
                  2,174
                  
                  
                  345Interest
                      income
                  
                  
                  (352
                  )
                  
                  (61
                  )Other
                      expenses/(income)
                  
                  
                  265
                  
                  
                  (138
                  )**Income
                      before provision for income tax**
                  
                  
                  **6,073**
                  
                  
                  **8,766**Provision
                      for income tax
                  
                  
                  729
                  
                  
                  795**Net
                      income before minority interests**
                  
                  
                  **5,344**
                  
                  
                  **7,971**Minority
                      interests
                  
                  
                  4
                  
                  
                  —**Net
                      income attributable to shareholders**
                  
                  $
                  **5,340**
                  
                  $
                  **7,971**Other
                      comprehensive income
                  
                  
                  (1,098
                  )
                  
                  (39
                  )**Comprehensive
                      income**
                  
                  
                  **6,438**
                  
                  
                  **8,010****Earning
                      per share—basic**
                  
                  **$**
                  **0.11**
                  
                  $
                  **0.16****Earning
                      per share—diluted**
                  
                  **$**
                  **0.11**
                  
                  $
                  **0.16****Weighted
                      average common share outstanding-basic**
                  
                  
                  50,667
                  
                  
                  50,001**Weighted
                      average common share outstanding-diluted**
                  
                  
                  50,786
                  
                  
                  50,001
 
 The
        accompanying notes are an integral part of the unaudited condensed consolidated
        financial statements.
  4
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 **CONDENCED
        CONSOLIDATED BALANCE SHEETS**
 **(** **in
        thousands, except per share information** **)**
 **(Unaudited)**
 **June****30,**
                  **2007**
                
                **March****31,**
                  **2007****ASSETS****Current
                    Assets:**Cash
                    and cash equivalents
                
                $
                116,143
                
                $
                20,836Restricted
                    cash
                
                
                9,054
                
                
                12,930Accounts
                    receivable, net of allowance for doubtful accounts of $201 and
                    $241,
                    respectively
                
                
                8,703
                
                
                6,760Inventories
                
                
                18,821
                
                
                16,406Other
                    receivable
                
                
                3,771
                
                
                2,019Due
                    from related parties
                
                
                16,749
                
                
                11,742Advances
                    to suppliers
                
                
                2,151
                
                
                1,206Deferred
                    expenses and other current assets
                
                
                602
                
                
                252**Total
                    current assets**
                
                
                **175,994**
                
                
                **72,151**Property,
                    plant and equipment, net
                
                
                63,214
                
                
                51,472Land
                    use rights, net
                
                
                3,051
                
                
                3,024Deferred
                    tax assets
                
                
                1,292
                
                
                432Other
                    assets
                
                
                1,214
                
                
                192**TOTAL
                    ASSETS**
                
                **$**
                **244,765**
                
                **$**
                **127,271**
 **LIABILITIES
                    AND SHAREHOLDERS' EQUITY****Current
                    Liabilities:**Bank
                    loans
                
                $
                83,212
                
                $
                53,104Accounts
                    payable
                
                
                16,074
                
                
                12,085Due
                    to related parties
                
                
                4,644
                
                
                2,935Advances
                    from customers
                
                
                6,539
                
                
                4,263Tax
                    payables
                
                
                2,018
                
                
                1,329Other
                    current liabilities
                
                
                8,673
                
                
                6,716**Total
                    current liabilities**
                
                
                **121,160**
                
                
                **80,432**Long
                    term debts
                
                
                **1,773**
                
                
                —Deferred
                    income
                
                
                4,202
                
                
                4,138**Total
                    liabilities**
                
                
                **127,135**
                
                
                **84,570****Minority
                    interest**
                
                
                **372**
                
                
                —**Shareholders'
                    equity:**Common
                    Stock, $.0001 par value: 250,000 authorized; 54,001 and 50,001
                     issued and outstanding at June 30, 2007 and March 31,2007,
                    respectively
                
                
                5
                
                
                5Additional
                    paid-in capital
                
                
                76,669
                
                
                8,226Retained
                    earnings
                
                
                36,554
                
                
                31,538Accumulated
                    other comprehensive income
                
                
                4,030
                
                
                2,932**Total
                    shareholders' equity**
                
                
                **117,258**
                
                
                **42,701****TOTAL
                    LIABILITIES AND SHAREHOLDERS' EQUITY**
                
                **$**
                **244,765**
                
                $
                **127,271**
 
 The
          accompanying notes are an integral part of the unaudited condensed consolidated
          financial statements
  5
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **(unaudited)**
 
 **Three
                  Months Ended**
                **June
                  30****2007**
              
              **2006****(As restated,**
                **see
                  note 3)****Cash
                  flow from operating activities:**Net
                  income
              
              $
              5,340
              
              $
              7,971Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesAmortization
                  of discount on bank loans
              
              
              1,032
              
              
              —Depreciation
                  and amortization
              
              
              993
              
              
              372Bad
                  debt expense
              
              
              (34
              )
              
              (19
              )Loss
                  on disposal of property, plant and equipment
              
              
              45
              
              
              —Deferred
                  income tax
              
              
              (291
              )
              
              —Minority
                  interest
              
              
              4
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (2,370
              )
              
              (5,878
              )Inventories
              
              
              (254
              )
              
              3,325Advances
                  to suppliers
              
              
              (924
              )
              
              (599
              )Due
                  from related parties
              
              
              (1,465
              )
              
              1,219Other
                  assets
              
              
              (817
              )
              
              (988
              )Accounts
                  payable
              
              
              2,452
              
              
              (3,766
              )Due
                  to related parties
              
              
              21
              
              
              (2,097
              )Advances
                  from customers
              
              
              2,338
              
              
              (177
              )Tax
                  payables
              
              
              681
              
              
              (87
              )Other
                  liabilities
              
              
              572
              
              
              1,079**Net
                  cash provided by operating activities**
              
              
              **7,323**
              
              
              **355****Cash
                  flow from investing activities:**Acquisition
                  of property, plant and equipment
              
              
              (9,124
              )
              
              (719
              )Disposal
                  of investment in an subsidiary
              
              
              (1,046
              )
              
              —Purchases
                  of intangible assets
              
              
              (50
              )
              
              (3
              )Change
                  in restricted cash
              
              
              4,046
              
              
              1,418Advance
                  to related companies
              
              
              (3,324
              )Acquisition
                  of a subsidiary
              
              
              190
              
              
              —**Net
                  cash (used in) provided by investing activities**
              
              
              **(9,308**
              **)**
              
              **696****Cash
                  flow from financing activities****:**Proceeds
                  from bank loans
              
              
              55,866
              
              
              7,824Repayment
                  of bank loans
              
              
              (24,959
              )
              
              (3,752
              )Proceeds
                  from issuance of common stock, net of issuance costs of
                  $145
              
              
              65,857**Net
                  cash provided by financing activities**
              
              
              **96,764**
              
              
              **4,072**Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              528
              
              
              39**Net
                  change in cash and cash equivalents**
              
              **$**
              **94,779**
              
              **$**
              **5,123**Cash
                  and cash equivalents, beginning of period
              
              
              20,836
              
              
              5,676**Cash
                  and cash equivalents, end of period**
              
              $
              **116,143**
              
              $
              **10,838****Supplementary
                  cash flows disclosure**Interest
                  paid
              
              $
              **1,088**
              
              $
              **345**Income
                  taxes paid
              
              $
              **537**
              
              $
              **796**
 
 The
        accompanying notes are an integral part of the condensed consolidated financial
        statements.
  6
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.
        DESCRIPTION OF BUSINESS**
 
 Synutra
        International, Inc., through
        its subsidiary companies in the People’s Republic of China (“PRC” or “China”),
        is principally engaged in the production, distribution, and sales of dairy
        based
        pediatric and adult nutrition products. The Company’s extensive sales network
        covers 24 provinces, 227 cities, and more than 800 counties throughout China.
        The Company’s fiscal year end is March 31.
  **2.
        BASIS OF PRESENTATION**
 
 The
        Company is responsible for the unaudited condensed consolidated financial
        statements included in this document, which have been prepared in accordance
        with accounting principles generally accepted in the United States of America
        (“GAAP”) and include all normal and recurring adjustments that management of the
        Company considers necessary for a fair presentation of its financial position
        and operating results.  The Company prepared these statements following the
        requirements of the SEC for interim reporting.  As permitted under those
        rules, the Company condensed or omitted certain footnotes or other financial
        information that are normally required by GAAP for annual financial
        statements.  These statements should be read in combination with the
        consolidated financial statements in the Company’s Annual Report on Form 10-K/A
        for the year ended March 31, 2007.
  These
        statements include the accounts of the Company and its subsidiaries.  All
        significant intercompany accounts and transactions have been eliminated in
        consolidation.
  Revenues,
        expenses, assets and liabilities can vary during each quarter of the year.
        Therefore, the results and trends in these interim financial statements may
        not
        be the same as those for the full year.
  **Segment
        Reporting**
  Statement
        of Financial Accounting Standards (“SFAS”) No. 131, "Disclosures About Segments
        of an Enterprise and Related Information," establishes standards for reporting
        information about operating segments in annual financial statements and requires
        selected information of these segments be presented in interim financial
        statements. Operating segments are defined as components of an enterprise
        about
        which separate financial information is available that is evaluated regularly
        by
        the chief operating decision maker, or decision making group, in making
        decisions on how to allocate resources and assess performance. The Company
        has
        determined that it operates its business in one reportable segment based
        upon
        the manner in which internal information is produced and evaluated by its
        chief
        operating decision making group, as defined under SFAS No. 131, which consists
        of the Company’s chief executive officer and chief financial officer.
  7
  **Recently
        Issued Accounting Pronouncements**
  In
        September 2006, the Financial Accounting Standards Board ("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. SFAS 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”), which 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 SFAS 159 on its financial statements.
  **3.
        RESTATEMENT**
  Subsequent
        to the issuance of the Company’s Quarterly Report on Form 10-Q/A Amendment No. 2
        for the fiscal quarter ended June 30, 2006, filed with the SEC on February
        13,
        2007, management determined that the condensed consolidated statement of
        income
        for the three months ended June 30, 2006 should be restated for the following
        items:
 
 Ÿ
            The
                amount of free products provided to our customers is revised as cost
                of
                sales for the fiscal quarter ended June 30 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 expenses of $224,000 for the fiscal quarter
                ended June 30 2006. 
 Ÿ
            The
                cash consideration given to our retailers, who purchased our products
                directly from our distributors, is revised 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 an increase
                in
                advertising and promotion expenses of $230,000 for the fiscal quarter
                ended June 30, 2006. 
 Ÿ
            In
                fiscal quarter ended June 30, 2006, 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 quarter ended June 30, 2006. Subsequent
                to
                the Original Filing, we determined that the $4.1 million should be
                deferred and netted against the depreciation expenses for the assets
                acquired as this method effectively matches the related depreciation
                for
                the costs 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 the same amount for the fiscal quarter
                ended June 30, 2006.We
                did not recognize any of the subsidy during the fiscal year as the
                asset
                had not yet been placed in service.  8
  Ÿ
            The
                amount of subsidy income, other thanthe
                government grant relating to Zhan Lan Qi discussed above,which
                used to be reported as a separate line item, has been combined into
                other
                expenses/ (income). The effect of the reclassification is an increase
                of
                $138,000 on other expenses/ (income).  The
        results of the restatement on the condensed consolidated statement of income
        for
        the three months ended June 30, 2006 are as follows:
  **Three
                  Months Ended June 30, 2006****(Unaudited)**(In
                  thousands)
              
              **(As previously
                  reported)**
              
              **Restatement
                  adjustment**
              
              **(As restated
                  )**Net
                  sales
              
              $
              49,337
              
              $
              (230
              )
              $
              .49,107Cost
                  of sales
              
              
              27,423
              
              
              224
              
              
              27,647**Gross
                  profit**
              
              
              **21,914**
              
              
              (454
              )
              
              **21,460**Advertising
                  and promotion expenses
              
              
              6,928
              
              
              (454
              )
              
              6,474General&
                  administrative expenses
              
              
              994
              
              
              38
              
              
              1,032Total
                  operating expense
              
              
              12,964
              
              
              (416
              )
              
              12,548**Income
                  from operations**
              
              
              **8,950**
              
              
              (38
              )
              
              **8,912**Interest
                  expenses
              
              
              409
              
              
              (64
              )
              
              345Subsidy
                  income
              
              
              (1,387
              )
              
              1,387
              
              
              —Other
                  expenses/ (income)
              
              
              (25
              )
              
              (113
              )
              
              (138
              )**Income
                  before provision for income tax**
              
              
              **10,015**
              
              
              (1,249
              )
              
              **8,766****Net
                  income**
              
              **$**
              **9,220**
              
              **$**
              (1,249
              )
              **$**
              **7,971****Earning
                  per share—basic and diluted.**
              
              $
              **0.18**
              
              
              
              
              $
              0.16
 
 The
        condensed consolidated statement of cash flows for the three months ended
        June
        30, 2006 should be restated for the following items:
 
 Ÿ
            Impacts
                of the restatement of the condensed consolidated income statement
                discussed above. 
 Ÿ
            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 $15.0 million is reclassified and is presented as an individual
                item on
                our consolidated balance sheets as of June 30, 2006. In addition,
                the
                increase in restricted cash of $4.0 million and $1.4 million is
                reclassified from operating to investing activities in the consolidated
                statements of cash flows for the three months ended June 30, 2007
                and 2006
                respectively. 
 Ÿ
            Certain
                advances to contractors have now been included as construction in
                progress
                in investing rather than operating
                activities.  9
  Ÿ
            Certain
                short-term notes payable balances are revised as short term bank
                loan, as
                the ultimate lender of the note is an accredited financial institution..
                Change in notes payable balance is recorded in cash produced from
                operating activities while change in short-term bank loans balances
                is
                recorded as financing activities. 
 Ÿ
            Previously
                we recorded a bank note with an original maturity of less than one
                year in
                long term liabilities, which is revised to accounts and notes payable
                and
                recorded in financing activities. Change in long term liabilities
                is
                recorded in cash produced from operating activities while change
                in
                short-term bank loans balances is recorded as financing
                activities. 
 Ÿ
            Bank
                loans, net is revised to be presented as borrowing and repayment
                separately. 
 The
        results of the restatements on the condensed consolidated statement of cash
        flows for the three months ended June 30, 2006 are as follows:
 
 **Three
                  Months Ended June 30, 2006****(Unaudited)**(In
                  thousands)
              
              **(As****previously**
                **reported)**
              
              **Restatement
                  adjustment**
              
              **(As restated
                  )****Cash
                  flow from operating activities:**Net
                  income
              
              $
              9,220
              
              
              (1,249
              )
              $
              7,971Changes
                  in operating assets and liabilities:Advances
                  to suppliers
              
              
              (1,974
              )
              
              1,375
              
              
              (599
              )Other
                  current assets
              
              
              (718
              )
              
              (270
              )
              
              (988
              )Accounts
                  and note payable
              
              
              820
              
              
              (4,586
              )
              
              (3,766
              )Other
                  payables and accrued liabilities
              
              
              933
              
              
              146
              
              
              1,079**Net
                  cash provided by operating activities**
              
              
              **4,939**
              
              
              **(4,584**
              **)**
              
              **355****Cash
                  flow from investing activities:**Change
                  in restricted cash
              
              
              —
              
              
              **1,418**
              
              
              1,418**Net
                  cash (used in) provided by investing activities**
              
              
              **(722**
              **)**
              
              **1,418**
              
              
              **696****Cash
                  flow from financing activities:**Borrowing
                  of bank loans
              
              
              —
              
              
              **7,824**
              
              
              7,824Repayment
                  of bank loans
              
              
              (514
              )
              
              **(3,238**
              )
              
              (3,752
              )**Net
                  cash provided by (used in) financing activities**
              
              
              **(514**
              **)**
              
              **4,586**
              
              
              **4,072****Net
                  change in cash and cash equivalents**
              
              
              **3,703**
              
              
              **1,420**
              
              
              **5,123****Cash
                  and cash equivalents, beginning of period**
              
              
              **22,134**
              
              
              **(16,458**
              **)**
              
              **5,676****Cash
                  and cash equivalents, end of period**
              
              $
              **25,877**
              
              
              **(15,039**
              **)**
              **$**
              **10,838**
  10
  **4.
        BUSINESS COMBINATION**
 
 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 total consideration of $ 1.41 million. As of June 30,
        2007,
        this consideration had not been paid. 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 will be used to erect a new dairy processing
        facility to produce infant formula products. At completion, the BQL production
        expansion will result in a total capacity of 18,000 tons per year of infant
        and
        pediatric nutritional products. The production technology upgrade and capacity
        augmentation are integral parts of the company’s long-term technological
        development strategy to move from the current industry practice of spray-drying
        technologies to dry-blending technologies in China.
 
 The
        acquisition of BQL has been reflected as a transfer of assets between entities
        under common control and results in a change in reporting entity in accordance
        with SFAS 154, "Accounting Changes and Error Corrections." The Company has
        elected not to recast prior period financial statements and financial
        information for comparative purposes as BQL was not determined to be
        material.
 
 **5.
        INVENTORIES**
 
 The
        Company's inventories at June 30, 2007 and March 31, 2007 are summarized
        as
        follows:
  **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands )Raw
                  materials
              
              $
              3,030
              
              $
              4,522Work-in-progress
              
              
              10,577
              
              
              7,714Finished
                  goods
              
              
              3,952
              
              
              3,217Packing
                  materials and other consumables
              
              
              1,262
              
              
              953**Total
                  Inventories******
              
              **$**
              **18,821******
              
              **$**
              **16,406**
  **6.
        DUE FROM/(TO) RELATED PARTIES**
 
 **A.
        Classification of related party balances by name**
 
 **a.
        Due from related parties**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands)Beijing
                  Honnete Dairy Corporation Ltd
              
              $
              14,354
              
              $
              7,207Beijing
                  Kelqin Dairy Co. Ltd
              
              
              2,118
              
              
              3,015Beijing
                  Luding Xueyuan Trading Co. Ltd
              
              
              277
              
              
              80Heilongjiang
                  Baoquanling Sheng Yuan Dairy Co. Ltd
              
              
              —
              
              
              978Beijing
                  Ao Naier Feed Stuff LLC
              
              
              —
              
              
              462**Total
                  Due from Related Companies**
              
              **$**
              **16,749**********
              
              **$**
              **11,742******
  11
  **b.
        Due to related parties**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands )Beijing
                  Kelqin Dairy Co. Ltd
              
              $
              1,622
              
              $
              863Sheng
                  Zhi Da Dairy Group Corporation
              
              
              2,959
              
              
              1,338Beijing
                  Honnete Dairy Corporation Ltd
              
              
              60
              
              
              —St.
                  Angel (Beijing Business Service)
              
              
              3
              
              
              5Beijing
                  Luding Xueyuan Trading Co. Ltd
              
              
              —
              
              
              1Heilongjiang
                  Baoquanling Sheng Yuan Dairy Co.,Ltd
              
              
              —
              
              
              728**Total
                  Due to Related Companies**
              
              **$**
              **4,644**
              
              **$**
              **2,935**
 
 Above-mentioned
        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.
 
 **B.
        Classification of related party balances by nature**
 
 **a.** **Due
        from related parties**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands)Trade
                  receivables
              
              $
              2,395
              
              $
              4,535Advance
                  to suppliers
              
              
              11,030
              
              
              7,207Other
                  advance
              
              
              3,324
              
              
              —**Total**
              
              **$**
              **16,749**
              
              $
              **11,742**
 
 Advance
        to suppliers relates to an agreement between the Company and Beijing Honnette
        Dairy Corporation Limited for a guaranteed whey protein supply of 3,000 tons
        within the period of six months from July 1 to December 31, 2007.
 
 **b.
        Due to related parties**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands)Trade
                  payables
              
              $
              1,685
              
              $
              1,685Other
                  payables
              
              
              2,959
              
              
              1,250**Total**
              
              **$**
              **4,644**
              
              $
              **2,935**
 
 Of
        the
        above-mentioned other payable, an amount of $1.41 million relates the
        consideration to be paid to Sheng Zhi Da Dairy Group Corporation for the
        acquisition of BQL.
 
 12
  **7.
        PROPERTY, PLANT AND EQUIPMENT, NET**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands)**Cost:**Buildings
                  and leasehold improvements
              
              $
              18,418
              
              $
              16,638Plant
                  and machinery
              
              
              25,340
              
              
              23,284Office
                  equipment and furnishings
              
              
              2,033
              
              
              1,984Motor
                  vehicles
              
              
              1,147
              
              
              1,04046,938
              
              
              42,946**Less:
                  Accumulated depreciation:**Buildings
                  and leasehold improvement
              
              
              2,008
              
              
              1,798Plant
                  and machinery
              
              
              4,187
              
              
              3,450Office
                  equipment and furnishings
              
              
              536
              
              
              472Motor
                  vehicles
              
              
              540
              
              
              590Total
                  of accumulated depreciation
              
              
              7,271
              
              
              6,310Construction
                  in progress
              
              
              23,547
              
              
              14,836Property,
                  plant and equipment, net
              
              $
              63,214
              
              $
              51,472
 
 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 $27.0 million and $32.7 million as of June 30
        and
        March 31, 2007, respectively.
 
 **8.
        LAND USE RIGHTS**
 
 **June 30,**
                **2007**
              
              **March 31,**
                **2007**(In
                  thousands)Cost:
              
              $
              3,223
              
              $
              3,177Less:
                  Accumulated amortization:
              
              
              172
              
              
              153Land
                  use right, net
              
              $
              3,051
              
              $
              3,024
 
 The
        Company recorded amortization expense of $18,918 and $9,000 for the three
        months
        ended June 30, 2007 and 2006, respectively.
 
 **9.
        BANK LOANS AND WARRANTS**
  On
        April
        19, 2007, the Company entered into a Loan Agreement with ABN AMRO Bank N.V.,
        Hong Kong branch (“ABN”), in an amount of $35 million. The principal amount and
        any unpaid accrued interest thereon, are due on October 19, 2007. The loan
        was
        personally guaranteed by Mr. Liang Zhang, the Company’s Chief Executive Officer,
        and his spouse.
  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.
  13
  The
        200,000 warrants issued upon consummation of the loan agreement are exercisable.
        All of the warrants may be exercised up to the third anniversary of the
        completion of a Qualified Public offering, as defined in the warrant agreement.
  The
        fair
        value of the warrants was $2,711,760 at the grant date, estimated on the
        basis
        of the Black-Scholes-Merton option-pricing formula with the following
        assumptions:
  **2007**Expected
                  volatility
              
              
              43.86
              %Risk-free
                  interest rate
              
              
              4.66
              %Expected
                  dividend yield
              
              
              0.00
              %Contractual
                  life of the warrant (years)
              
              
              4.2
  The
        proceeds of the 2007 loan were allocated to the debt and the warrants based
        on
        their relative values, resulting in $32,413,313 and $2,586,687 being allocated
        to the debt and warrants, respectively. This amount has been recorded as
        an
        increase to additional paid in capital with a corresponding debt discount,
        which
        is being amortized over the term of the loan utilizing the effective interest
        method .
  The
        above
        loan agreement was attached with financial covenants that do not permit (1)
        the
        Company’s consolidated interest coverage ratio as of the end of any fiscal
        quarter to be lower than 4.00; (2) the Company’s consolidated leverage ratio as
        of the end of any fiscal quarter to be higher than 4.25. The Company has
        performed an analysis of the above ratios and confirmed that these financial
        covenants have been satisfied as of June 30, 2007.
  As
        at
        June 30, 2007 and March 31, 2007, the Company had short-term loans from banks
        in
        the amount of $83 million and $53 million, respectively, bearing interest
        ranging from 5.85% to 7.82% per annum. Such loans are extendable for terms
        of no
        less than one year to June 2008. The loans were secured by the pledge of
        certain
        fixed assets held by the Company and its subsidiaries. The value of the fixed
        assets pledged was $27 million and $32.7 million as of June 30, 2007 and
        March
        31, 2007, respectively.
  As
        at
        June 30, 2007, BQL had a 3 year long-term loan from Junchuan Ranch of
        Heilongjiang Province in the amount of $1.77 million bearing interest 3.24%
        per
        annum. The loan was secured by the pledge of certain fixed assets held by
        BQL
        and by a personal guarantee from the Company’s Chief Executive Officer and his
        spouse.
  14
  **10.
        INCOME TAXES**
 
 The
        Company’s income before income taxes was comprised of the following for the
        three months ended June 30, 2007 and 2006, respectively.
  **Three Months Ended June 30,****2007**
              
              **2006**(In
                  thousands )
              
              
              
              **(As Restated)**United
                  States
              
              $
              (1,467
              )
              $
              26PRC
              
              
              7,540
              
              
              8,740**Total
                  Income Before Tax**
              
              **$**
              ******6,073**
              
              **$**
              **8,766**
  In
        July  2006,
        the  FASB  issued  Interpretation  No.
        48,
        Accounting  for  Uncertainty  in
        Income  Taxes—an
        interpretation  of
        FASB  Statement  No.
        109
        (“FIN 48”),  which
        clarifies  the  accounting  and
        disclosure  for
        uncertainty  in
        tax  positions.  FIN
        48
        prescribes  a
        more-likely-than-not  threshold  for  financial  statement
        recognition  and
        measurement  of
        a
        tax  position  taken  or
        expected  to
        be
        taken  in
        a
        tax  return.  This
        interpretation also  provides  guidance  on
        de-recognition  of
        income  tax  assets  and
        liabilities,  classification  of
        current  and
        deferred  income  tax  assets  and
        liabilities,  accounting  for  interest  and
        penalties  associated  with
        tax  positions,
        accounting  for  income  taxes  in
        interim  periods  and
        income  tax  disclosures.


The
        Company adopted the provisions of FIN 48 effective April 1, 2007. Based on
        its
        FIN 48 analysis documentation, the Company has made its assessment of the
        level
        of tax authority for each tax position (including the potential application
        of
        interest and penalties) based on the technical merits, and has measure the
        unrecognized tax benefits associated with the tax positions. As of April
        1,
        2007, the Company has recorded FIN 48 liabilities of approximately USD 375,473
        for its PRC subsidiaries. It also recognized interest and/or penalties
        associated to the uncertain tax positions of USD 31,515 in the FIN 48 tax
        provision.




For
      the quarter ended
      June 30, 2007, the unrecognized tax benefit did not change significantly and
      the
      amount of interest and penalties related to uncertain tax position is
      immaterial.





The
      years 2001
      to
      2007 remain subject to
      examination by
      the PRC tax authorities.





The
      Company has concluded that there are no material uncertain tax positions for
      the
      U.S. subsidiary. The years 2003 to 2007 remain subject to examination by the
      United States tax authorities.




Undistributed
      earnings of the Company’s PRC subsidiaries of approximately USD 39 million at
      June 30, 2007, are considered to be indefinitely reinvested and, accordingly,
      no
      provision for federal and state income taxes have been provided thereon. Upon
      distribution of those earnings in the form of dividends or otherwise, the
      Company would be subject to both U.S. income taxes (subject to an adjustment
      for
      foreign tax credits) and withholding taxes payable to the PRC.





15




On
      March
      16, 2007, the National People’s Congress approved and promulgated a new tax law,
      which will take effect beginning January 1, 2008. The Company’s PRC subsidiaries
      will then measure and pay enterprise income tax pursuant to the New Tax Law.
      Under the new tax law, foreign investment enterprise and domestic companies
      are
      subject to a uniform tax rate of 25%. The new tax law provides a five-year
      transition period from its effective date for those enterprises which were
      established before the promulgation date of the new tax law and which were
      entitled to a preferential lower tax rate under the then effective tax laws
      or
      regulations.





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





The
      provisions for income taxes for the three months ended June 30, 2007 and 2006,
      respectively, are summarized as follows:





**Three
                Months Ended June 30,****2007**
            
            **2006****(As restated)**(In
                thousands )Current
            
            $
            990
            
            $
            795Deferred
                tax benefit
            
            
            (261
            )
            
            —**Total**
            
            **$**
            **729**
            
            **$**
            **795**





**11.
      COMMON STOCK**





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 $66 million, net of issuance costs
      of
      $ 145,000. 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
      the 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.





16





**12.
      ACCUMULATED OTHER COMPREHENSIVE INCOME**




The
      following provides a summary of comprehensive income :





**June 30,**
              **2007**
            
            **March 31,**
              **2007**(In
                thousands)Beginning
                Accumulated Comprehensive Income
            
            $
            2,932
            
            $
            1,056Change
                in accumulated translation adjustment
            
            
            1,098
            
            
            1,876**Accumulated
                Comprehensive Income**
            
            **$**
            **4,030**
            
            **$**
            **2,932**





**13.
      NET INCOME PER SHARE (EPS)**





For
      purposes of calculating basic and diluted earnings per share, we used the
      following weighted average common shares outstanding (in
      thousands,):





**Three Months Ended June 30,****2007**
            
            **2006****(As restated)**(In
                thousands)Net
                income
            
            $
            5,340
            
            $
            7,971Basic
                weighted average common shares outstanding
            
            
            50,667
            
            
            50,001Dilutive
                potential common shares from warrants
            
            
            119
            
            
            —Diluted
                weighted average shares outstanding
            
            
            50,786
            
            
            50,001Net
                income per share - basic
            
            $
            0.11
            
            $
            0.16Net
                income per share - diluted
            
            $
            0.11
            
            $
            0.16





**14.
      COMMITMENTS AND CONTINGENCIES**





**A.
      Purchase Commitments**





As
      of
      June 30, 2007, the Company had outstanding commitments in the amount of $11.1
      million for the purchase of whey protein.





**B.
      Capital commitments**





As
      of
      June 30, 2007, the Company’s capital commitments amounted to $2.9 million in
      relation to asset improvement and plant expansion. **





**C.
      Lease commitments**





The
      Company is a party to various operating leases involving offices and warehouses.
      Total rental expenses for operating leases are $99,000 and $66,000 for the
      three
      months ended June 30, 2007 and 2006, respectively.





17




**D.
      Legal proceedings**





None.





**E.
      Guarantees**





As
      at
      June 30, 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. 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.





18





**ITEM
      2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS**




*Sections
      of this Form 10-Q including, in particular, our Management’s Discussion and
      Analysis of Financial Condition and Results of Operations above, contain
      forward-looking statements.  These forward-looking statements are not
      guarantees of future performance and are subject to certain risks, uncertainties
      and assumptions that are difficult to predict; therefore, actual results may
      differ materially from those expressed, implied or forecasted in any such
      forward-looking statements.*




*Expressions
      of future goals and expectations or similar expressions including, without
      limitation, “may,” “will,” “should,” “could,” “expects,” “does not currently
      expect,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,”
“potential,” “targets,” or “continue,” reflecting something other than
      historical fact are intended to identify forward-looking statements.  The
      factors described below in PART II. OTHER INFORMATION -- Item 1A. Risk Factors
      could cause our actual results to differ materially from those described in
      the
      forward-looking statements.  Unless required by law, we undertake no
      obligation to update publicly any forward-looking statements, whether as a
      result of new information, future events or otherwise.  However, readers
      should carefully review the reports and documents we file from time to time
      with
      the SEC, particularly our Quarterly Reports on Form 10-Q, Annuak Report on
      form
      10-K and any Current Reports on Form 8-K.*





**Available
      Information**





The
      Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
      Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a)
      and 15(d) of the Exchange Act, are available on the SEC website. The public
      may
      read and copy any materials filed by the Company with the SEC at the SEC’s
      Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
      20549.  The public may obtain information on the operation of the Public
      Reference Room by calling the SEC at 1-202-551-8090.  The SEC maintains an
      Internet site that contains reports, proxy and information statements and other
      information regarding issuers that file electronically with the SEC at
      http://www.sec.gov.  The contents of these websites are not incorporated
      into this filing.  Further, the Company’s references to the URLs for these
      websites are intended to be inactive textual references only.





**EXECUTIVE
      OVERVIEW**





Through
      its seven operating subsidiaries in China, the Company is engaged in different
      stages of the development, production, packaging, marketing and sales of dairy
      based nutritional products for infants, children, pregnant women and nursing
      mothers, and other adults. These products are manufactured through typical
      dairy
      spray-drying processes that combine fresh cow milk, whey protein, various lipids
      and fatty acids, in addition to other nutrients including a variety of vitamins
      and minerals. These products are retail-packaged and sold under the brand names
      of Super, U-Smart, U-Strong, and National Standards. The Company sells
      its
      products in 24 provinces, 264 cities and more than 1,320 counties in China
      through its direct sales force, third-party wholesalers, and retail
      supermarkets. Approximately 90% of the Company’s net sales for the three months ended June 30,
      2007 was from pediatric nutritional products and the rest from adult nutritional
      and other products. The Company continues to produce and sell retail packaged
      rice cereals, which extends its diary based nutritional product lines. As
      supplemental foods to infant and children formula products, management believes
      that rice cereal products possess significant market potential. The Company
      also
      exports chondroitin sulfate, or cartilage, a nutraceutical supplement ingredient
      for distribution and sale in North American markets.





19




Since
      the
      fiscal year ended March 31, 2007, the Company has continued to experience
      significant growth in the premium infant formula products and line extensions.
      These premium products and line extensions were designed to capture the fastest
      growing segment of the infant formula market in China. Building on expanded
      production capacities through new installations and acquisition in the previous
      year, the Company is implementing new production processes aimed at enhancing
      manufacturing efficiency and cost reduction. The Company is also focusing on
      research and development efforts to improve quality and stability of certain
      key
      ingredients and nutrients while reducing cost.





The
      Company continues to carry out its integrated marketing program that leverages
      its vast existing sales network throughout the country and builds on expanded
      advertising and marketing campaigns targeting both national and regional or
      local audiences. Key to the integrated marketing program is a focused team
      of
      marketing professionals with medical and healthcare expertise and experience
      in
      the fields of women’s health and pediatric nutrition. Other components to this
      companywide program include enhancing consistency in customer communications
      on
      brand image and product messages, increasing customer care and feedback
      responses, integrating customer data collection with customer service activities
      and direct sales efforts, and expanding consumer education and outreach
      programs, all aimed at solidifying the Company’s lead in brand recognition among
      domestic manufacturers and achieving broader recognition among the market
      leaders in China.





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 $66 million, net of issuance costs
      of
      $ 145,000. 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
      the 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.





20




**RESULTS
      OF OPERATIONS**





**Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006**





**Net
      Sales**




Net
      Sales
      for the three months ended June 30, 2007 increased by $18.4 million or
      37.4% to $67.5 million from $49.1 million for the three months ended June 30,
      2006. The increase in the volume of products sold was due in part to greater
      market penetration as a result of the implementation of various incentive
      programs to the sales force, such as aligning bonuses with sales performance
      down to the store level, and increased promotional efforts in the medium sized
      city markets and rural markets. We believe that these incentive programs
      enhanced the sales force productivity of our sales force. In addition, the
      Company launched a series of advertising campaigns which have boosted the
      popularity of the Company’s products. Our sales volume has not been
      significantly affected by seasonal changes.





The
      net
      sales of our traditional main products, such as the dairy based nutritional
      products for infants, children and adults under the brand names of Super,
      U-Smart, U-Strong, and National Standards, increased by $24.0 million, or 71.0%
      to $57.8 million for the three months ended June 30, 2007 from $33.8 million
      for
      the three months ended June 30, 2006, principally as a result of the following
      factors:





a.
            The
                tons sold of traditional products increased to 8,200 tons in the
                three
                months ended June 30, 2007 from 5,700 tons in the three months ended
                June
                30, 2006, resulting in an increase of $14.8 million in gross sales.





b.
            Higher
                average selling price also contributed to the increase of gross sales.
                For
                the three months ended June 30, 2007, the average selling price of
                the
                Company’s traditional main products increased from $5,930 to $7,040 per
                ton, resulting in an increase of $9.2 million in gross sales.




Net
      sales
      of nutritional supplement ingredients were $5.8 million and $8.5 million for
      the
      three months ended June 30, 2007 and 2006, respectively, a decrease of $2.7
      million or 31.8%. The Company’s toll drying, blending, and packaging services
      generated $2.6 million and $6.7 million for the three months ended June, 2007
      and 2006, respectively, a decrease of $4.1 million or 67.2%. The [net] sales
      of
      industry material, anhydrous milk-fat, non-fat dry milk were $1.3 million and
      $75,000 for three months ended June 30, 2007 and 2006, respectively, an increase
      of $1.2 million. The overall decrease in the sales of these ancillary products
      and services was, mainly due to the scarcity of whey protein and the Company’s
      inability to sell ancillary products to other industry customers.





In
      the
      three months ended June 30, 2007, the Company achieved approximately 98.9%
      of
      its sales revenue of the $57.8 million in traditional products through its
      wholesale distributor networks and about 1.1% through supermarket retailers.
      Of
      the total $33.8 million of main products sales generated in the three months
      ended June 30, 2006, about 98.8% were from distributors and about 1.2% from
      supermarket retailers.





Management
      believes that the overall infant formula industry in China is experiencing
      rapid
      growth due to improved purchasing power and increased consumer recognition
      for
      branded products. Management also believes Synutra’s brand name product lines
      have gained recognition in its marketplaces and has captured a greater portion
      of the increased growth experienced by the industry.





21




**Cost
      of Sales**





Cost
      of
      sales for the three months ended June 30, 2007 increased to $30.4 million from
      $27.6 million for the three months ended June 30, 2006. The 10.1% increase
      in
      cost of sales of $2.8 million was a result of increases in both the price and
      volume of raw materials purchased.





The
      cost
      of sales for traditional products increased by $8.3 million, or 61.9% to $21.7
      million for the three months ended June 30, 2007 from $13.4 million for the
      three months ended June 30, 2006. The increase of 2,500 tons sold of the
      traditional main products resulted in a $5.9 million increase in cost. Due
      to
      the increase in sales of our premium products, the average cost per unit
      increased by $300 per metric ton, resulting in a $2.5 million increase in cost
      of sales for the three months ended June 30, 2007.





The
      cost
      of nutritional supplement ingredients was $5.4 million and $7.4 million for
      the
      three months ended June 30, 2007 and 2006, respectively, a decrease of $2.0
      million or 27.0%. The cost of ancillary services for toll drying, blending,
      and
      packaging was $2.5 million and $6.8 million for the three months ended June
      30,
      2007 and 2006 respectively, a decrease of $4.3 million or 63.2%. The cost of
      sales of industrial materials, anhydrous milk-fat, and non-fat dry milk were
      $838,000 and $44,000 for the three months ended June, 2007 and 2006
      respectively, an increase of $794,000.





Prices
      of
      raw milk and whey protein, which are major components of the cost of sales
      of
      our traditional products, have experienced increases during the year. Management
      expects that the prices of these materials may continue to rise due to a general
      increases in commodities prices, especially for agriculture products. This
      will
      in turn affect the unit cost of sales for our products.





**Gross
      Profit**





Gross
      profit was $37.1 million or 54.9% of sales for the three months ended June
      30,
      2007, compared to $21.5 million or 43.7% of sales for the three months ended
      June 30, 2006, an increase of $15.6 million or 72.7%, primarily due to the
      sales
      of traditional products which contributed $36.1 million or 97.3% of gross
      profits for the three months ended June 30, 2007, versus $20.5 million or 95.3%
      gross profits for the three months ended June 30, 2006.





In
      the
      three months ended June 30, 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 increased average selling prices recorded during
      the
      period. Due to the implementation of targeted sales incentive programs, sales
      of
      the higher margin lines of products increased more, contributing to the increase
      in gross margin.





**Selling
      and Distribution Expenses**





Selling
      and distribution expenses increased by $2.5 million or 50% to $7.5 million
      for
      the three months ended June 30, 2007, as compared to $5.0 million for the three
      months ended June 30, 2006. The increase in selling and distribution
      expenses was partially due to increased transportation and travel expenses
      in
      proportion to the increase in sales volume. In addition, total compensation
      to
      the sales force increased by $847,341 from $1.6 million in the three months
      ended June 30, 2006 to $2.4 million in the three months ended June 30, 2007,
      due
      to the implementation of incentive program and the increase in the number of
      sales people from 1,881 at June 30, 2006 to 2,125 at June 30, 2007 in response
      to expanding business and greater market penetration. Shipping and handling
      expenses increased by $232,513 from $943,791 in the three months ended June
      30,
      2006 to $1.2 million in the three months ended June 30, 2007, in proportion
      to
      the increase in sales and travel expenses increased by $201,000 from $410,000
      in
      the three months ended June 30, 2006 to $611,000 in the three months ended
      June
      30, 2007. The Company continued to expand its selling efforts both in rural
      and
      urban areas by utilizing motorized marketing and sales teams to expand the
      reach
      of its products and to build brand image by participating in trade shows and
      in
      other marketing activities. These efforts accounted for most of the increases
      in
      expenses.





22




**Advertising
      and Promotion Expenses**





**Three
                Month Ended June 30********(Unaudited)**(In
                thousands)
            
            **2007**
            
            **2006**
            
            **Change in $**
            
            **Change in %**Advertising
            
            $
            5,521
            
            $
            715
            
            $
            4,806
            
            
            672.2
            %Sales
                promotion
            
            
            12,927
            
            
            5,759
            
            
            7,168
            
            
            124.5
            %**Total**
            
            **$**
            **18,448**
            
            **$**
            **6,474**
            
            **$**
            **11,974**
            
            
            **185.0**
            **%**





Advertising
      and sales promotion increased by $12.0 million or 185.0% to $18.4 million for
      the three months ended June 30, 2007, as compared to $6.5 million for the three
      months ended June 30, 2006, as a result of increased advertising and promotional
      activities. The major components of advertising and sales promotion expenses
      are
      placement of advertisements with major media outlets and points of sale and
      community promotional activities.





**General
      and Administrative Expenses**





General
      and administrative expenses increased by $1.8 million or 179.0% to $2.9 million
      for the three months ended June 30, 2007, as compared to $1.0 million for the
      three months ended June 30, 2006. Most of the increases were for staff
      salaries, management expenses, and legal, accounting, and consulting costs
      related to corporate transactions and the costs associated with operating as
      a
      U.S. public company.





**Income
      from Operations**





The
      sales
      increase of $18.4 million or 37.44% and the cost of sales increase of $2.8
      million, or 10.0% for the three months ended June 30, 2007 had led to a gross
      profit increase by $15.6 million or 72.7% compared to the three months ended
      June 30, 2006. Operational expenses also increased by approximately $16.4
      million from $12.5 million for the three months ended June 30, 2006 to $28.9
      million for the respective period ended June 30, 2007. As a result, income
      from
      operations was $8.2million for the three months ended June 30, 2007, as compared
      to $8.9 million for the three months ended June 30, 2006, a decrease of $752,000
      or 8.4%.





23




**Interest
      Expense**





Interest
      expense increased by $1.8 million to $2.2 million for the three months ended
      June 30, 2007, as compared to $345,000 for the three months ended June 30,
      2006,
      due to the amortization of debt discount and increased borrowings.





**Provision
      for Income Taxes**





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $729,000 and $795,000 for the three months ended June 30, 2007 and 2006,
      respectively. The effective tax rate of the Company was 12% and 9% for the
      three
      months ended June 30, 2007 and 2006, respectively. The effective income tax
      rate
      for the three months ended March 31, 2007 differs from the prior quarter amount
      due to tax holiday effecting of certain PRC entities.




**Net
      Income Attributable to Shareholders**





Net
      income attributable to shareholders for the three months ended June 30, 2007
      decreased by $2.6 million or 33.0% to $5.3 million from $8.0 million for the
      three months ended June 30, 2006 due to the factors discussed above.





**Earnings
      Per Share**





Basic
      and
      diluted earnings per share were $0.11 for three months ended June 30, 2007
      and
      $0.16 for three months ended June 30, 2006.





**CHANGE
      IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES**





The
      Company’s financial condition has improved during the three months ended June
      30, 2007. The cash and cash equivalent balance increased by $95.3 million to
      $116.1 million at June 30, 2007, as compared to $20.8 million at March 31,
      2007.





In
      April
      2007, we entered a loan agreement with ABN AMRO Bank, N.V., Hong Kong branch
      (“ABN”) pursuant to which ABN agreed to loan us $35 million with the principal
      and interest due in six months. The proceeds of the loans have been used to
      make
      investments in one of our subsidiaries, BQL, to fund the construction of new
      production facilities, to establish a joint venture for the production of
      Chondroitin (a dietary and nutritional supplement), to purchase fixed assets
      for
      the production of nutritional food bars, and to establish a joint venture that
      will offer prenatal diagnostic and genetic testing services.




The
      above
      loan agreement was attached with financial covenants that do not permit (1)
      the
      Company’s consolidated interest coverage ratio as of the end of any fiscal
      quarter to be lower than 4.00; (2) the Company’s consolidated leverage ratio as
      of the end of any fiscal quarter to be higher than 4.25. The Company has
      performed an analysis of the above ratios and confirmed that these financial
      covenants have been satisfied as of June 30, 2007.




24





On
      June
      15, 2007, we also completed a transaction pursuant to a purchase agreement
      dated
      May 24, 2007 with Warburg Pincus Private Equity IX, L.P. (“Warburg”) whereby
      Warburg purchased 4 million shares of common stock, par value $0.0001 per share,
      for an aggregate purchase price of $66 million, net of issuance costs of
      $145,000. The proceeds from this transaction are intended for general corporate
      purposes.





Net
      cash
      provided by operating activities for the three months ended June 30, 2007 was
      $7.3 million, resulting from net income of $5.3 million, non-cash items not
      affecting cash flows of $1.8 million, partly offset by $234,000 of changes
      in
      working capital. The changes in working capital for the three months ended
      June
      30, 2007, were primarily related to (i) a $2.4 million increase in accounts
      receivable; (ii) a $1.2 million increase in inventory and advances to suppliers
      and (iii) a $1.5 million increase in due from related parties, partly offset
      by
      a $6.1 million increase in accounts payable, due to related parties, advances
      from customers, other liabilities, tax payable and deferred income. The increase
      in these working capital balances was primarily related to increases in business
      volume. Non-cash items were primarily associated with deferred income tax
      benefit, depreciation and amortization of property and equipment and
      amortization of debt issuance costs.  Net cash provided by operating
      activities for the three months ended June 30, 2006 was $355,000, resulting
      from
      net income of $8.0 million, non-cash items not affecting cash flows of $353,000
      and $8.0 million of changes in working capital.  The changes in working
      capital for the three months ended June 30, 2006, were primarily related to
      a
      $5.9 million increase in accounts receivable, offset by a $2.7 million decrease
      in inventory and advances to suppliers and a $1.2 million decrease in due from
      related parties, partly offset by a $5.0 million decrease in accounts payable,
      due to related parties, advances from customers and other liabilities.  The
      change in these working capital balances are primarily related to increases
      in
      business volume.  Non-cash items were primarily associated with
      depreciation and amortization of property and equipment.





Net
      cash
      used in investing activities was $9.3 million for the three months ended June
      30, 2007, as compared to $696,000 for the three months ended June 30, 2006.
      This
      was due primarily to the Company’s plant expansion to increase its production
      capabilities. Cash
      invested in purchases of property and equipment was $9.1 million and $719,000
      in
      the three months ended June 30, 2007 and 2006, respectively.





Net
      cash
      provided by financing activities was $96.7 million for the three months ended
      June 30, 2007, as compared to $4.1 million for the three months ended June
      30,
      2006. The cash provided by financing activities during the three months ended
      June 30, 2007 was primarily related to the proceeds from short term bank loans
      of $55.8 million and proceeds from the issuance of common stock of $65.8
      million, partially offset by the repayment of short term borrowings of $25
      million. Net cash provided by financing activities for the three months ended
      June 30, 2006 was primarily related to the proceeds from short term bank loans
      of $7.8million partially offset by the repayment of short term borrowings of
      $3.8.





25




During
      the fiscal year ending March 31, 2008, we intend to continue to work to expand
      our product lines and product mix, as well as our product distribution network
      throughout China. We believe our existing cash, cash from operations and credit
      facilities at June 30, 2007 are adequate to fund our operations for at least
      the
      next twelve months.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





As
      disclosed in footnote 13 to the unaudited Condensed Consolidated Financial
      Statements, we do not have any special purpose entities or off-balance sheet
      financing arrangements. However, we do guarantee certain bank loans to farmers
      as discussed in footnote 13.





**CONTRACTUAL
      OBLIGATIONS**





**A.
      Purchase Commitments**





As
      of
      June 30, 2007, the Company had outstanding commitments in the amount of $11.1
      million for the purchase of whey protein.





**B.
      Capital commitments**





As
      of
      June 30, 2007, the Company’s capital commitments amounted to $2.9 million in
      relation to asset improvement and plant expansion. **





**C.
      Lease commitments**





The
      Company is a party to various operating leases involving offices and warehouses.
      Total rental expenses for operating leases are $99,000 and $66,000 for the
      three
      months ended June 30, 2007 and 2006, respectively.





**D.
      Legal proceedings**





None.





**E.
      Guarantees**





As
      at
      June 30, 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. 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.




26


**CRITICAL
      ACCOUNTING ESTIMATES AND JUDGEMENTS**





We
      follow
      certain significant accounting policies when preparing our consolidated
      financial statements. A summary of these policies is included in our latest
      Annual Report on Form 10-K/A. The preparation of these financial statements
      in
      conformity with accounting principles generally accepted in the United States
      of
      America requires us to make estimates and judgments that affect our reported
      amounts of assets, liabilities, revenues and expenses, and the related
      disclosures of contingent assets and liabilities at the date of the financial
      statements. We evaluate these estimates and judgments on an ongoing basis and
      base our estimates on historical experience, current conditions and various
      other assumptions that are believed to be reasonable under the circumstances.
      The results of these estimates form the basis for making judgments about the
      carrying values of assets and liabilities as well as identifying and assessing
      the accounting treatment with respect to commitments and contingencies. Our
      actual results may differ from these estimates.





We
      believe that the estimates, assumptions and judgments involved in the accounting
      policies described in the “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” section of our most recent Annual Report on
      Form 10-K/A have the greatest potential impact on our financial statements,
      so
      we consider these to be our critical accounting policies.


Additionally,
      due to the adoption of FIN 48 (as described in Note 10 to the unaudited
      condensed consolidated financial statements), we have revised our policy on
      income taxes with respect to accounting for uncertain tax positions. We consider
      our policy on income taxes to be a critical accounting policy due to the
      significant level of estimates, assumptions and judgments and its potential
      impact on our consolidated financial statements. We have included below a
      description of our accounting policy for income taxes, which reflects changes
      to
      our accounting policy for uncertain tax positions.





**Income
      Taxes**





Our
      effective tax rate is based on expected income, statutory tax rates and tax
      planning opportunities available in the various jurisdictions in which we
      operate. For interim financial reporting, we estimate the annual tax rate based
      on projected taxable income for the full year and record a quarterly income
      tax
      provision in accordance with the anticipated annual rate. As the year
      progresses, we refine the estimates of the year’s taxable income as new
      information becomes available, including year-to-date financial results. This
      continual estimation process often results in a change to our expected effective
      tax rate for the year. When this occurs, we adjust the income tax provision
      during the quarter in which the change in estimate occurs so that the
      year-to-date provision reflects the expected annual tax rate. Significant
      judgment is required in determining our effective tax rate and in evaluating
      our
      tax positions.





In
      accordance with SFAS No. 109, “Accounting for Income Taxes,” we recognize
      deferred tax assets and liabilities based on the differences between the
      financial statement carrying amounts and the tax basis of assets and
      liabilities. Deferred tax assets represent items to be used as a tax deduction
      or credit in future tax returns for which we have already properly recorded
      the
      tax benefit in the income statement. At least quarterly, we assess the
      likelihood that the deferred tax asset balance will be recovered from future
      taxable income. We take into account such factors as prior earnings history,
      expected future earnings, carry-back and carry-forward periods, and tax
      strategies that could potentially enhance the likelihood of a realization of
      a
      deferred tax asset. To the extent recovery is unlikely, a valuation allowance
      is
      established against the deferred tax asset, increasing our income tax expense
      in
      the year such determination is made.




27




APB
      Opinion No. 23, “Accounting for Income Taxes, Special Areas,” does not
      require U.S. income taxes to be provided on foreign earnings when such earnings
      are indefinitely reinvested offshore. We periodically evaluate our investment
      strategies with respect to each foreign tax jurisdiction in which we operate
      to
      determine whether foreign earnings will be indefinitely reinvested offshore
      and,
      accordingly, whether U.S. income taxes should be provided when such earnings
      are
      recorded.





We
      adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes, an Interpretation of FASB Statement No. 109” (FIN 48) effective
      April 1, 2007. In accordance with FIN 48, we recognize a tax benefit associated
      with an uncertain tax position when, in our judgment, it is more likely than
      not
      that the position will be sustained upon examination by a taxing authority.
      For
      a tax position that meets the more-likely-than-not recognition threshold, we
      initially and subsequently measure the tax benefit as the largest amount that
      we
      judge to have a greater than 50% likelihood of being realized upon ultimate
      settlement with a taxing authority. Our liability associated with unrecognized
      tax benefits is adjusted periodically due to changing circumstances, such as
      the
      progress of tax audits, case law developments and new or emerging legislation.
      Such adjustments are recognized entirely in the period in which they are
      identified. Our effective tax rate includes the net impact of changes in the
      liability for unrecognized tax benefits and subsequent adjustments as considered
      appropriate by management.





A
      number
      of years may elapse before a particular matter for which we have recorded a
      liability related to an unrecognized tax benefit is audited and finally
      resolved. The number of years with open tax audits varies by jurisdiction.
      While
      it is often difficult to predict the final outcome or the timing of resolution
      of any particular tax matter, we believe our liability for unrecognized tax
      benefits is adequate. Favorable resolution of an unrecognized tax benefit could
      be recognized as a reduction in our effective tax rate in the period of
      resolution. Unfavorable settlement of an unrecognized tax benefit could increase
      the effective tax rate and may require the use of cash in the period of
      resolution. Our liability for unrecognized tax benefits is generally presented
      as non-current. However, if we anticipate paying cash within one year to settle
      an uncertain tax position, the liability is presented as current.





We
      classify interest and penalties recognized on the liability for unrecognized
      tax
      benefits as income tax expense. For
      the  quarter  ended
      June 30, 2007, the unrecognized tax benefit did not change significantly and
      the
      amount of interest and penalties related to uncertain tax position is
      immaterial.





28




**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 as its export of protein product to
      North America is through a single importer in the US. Amount due from this
      importer accounts for a significant proportion of the Company’s total account
      receivables.





(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**





Please
      refer to footnote 2 to the condensed consolidated financial statements for
      detailed discussion.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





There
      were no material changes in quantitative or qualitative disclosure about market
      risk during the three months ended June 30, 2007. For additional information,
      refer to Management’s Discussion and Analysis of Financial Condition and Results
      of Operations as presented in our Annual Report on Form 10-K/A for the year
      ended March 31, 2007.




The
      objective of our policies is to mitigate potential income statement, cash flow
      and fair value exposures resulting from possible future adverse fluctuations
      in
      rates. We evaluate our exposure to market risk by assessing the anticipated
      near-term and long-term fluctuations in interest rates and foreign exchange
      rates. This evaluation includes the review of leading market indicators,
      discussions with financial analysts and investment bankers regarding current
      and
      future economic conditions and the review of market projections as to expected
      future rates.




29




We
      did
      not experience any material changes in interest rate exposures during the three
      months ended June 30, 2007.  Based upon economic conditions and leading
      market indicators at June 30, 2007, we do not foresee a significant adverse
      change in interest rates in the near future.




As
      of
      June 30, 2007, the carrying value of our debt is $83.2 million.  We
      estimate that the fair market value of our debt approximated the carrying value
      as of June 30, 2007 due to the short term nature of these
      obligations.





**ITEM
      4T. CONTROLS AND PROCEDURES**





**Disclosure
      Controls and Procedures**





As
      of
      June 30, 2007, the end of the period covered by this report, our Chief Executive
      Officer and our Chief Financial Officer reviewed and evaluated the effectiveness
      of our 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
      we are required to disclose in our 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. We have concluded, based
      on that evaluation, that as of the end of the period covered by this report,
      our
      disclosure controls and procedures were
      not
      effective at the reasonable assurance level because of the identification of
      material weaknesses in our internal control over financial reporting, which
      we
      view as an integral part of our 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 year-end closing process 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.





30




**Remediation
      and Changes in Internal Control over Financial Reporting**





The
      Company is in the process of developing and implementing remediation plans
      to
      address our material weaknesses in our 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 our 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 our 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 our 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 condensed
      consolidated financial statements as and for the fiscal quarter ended June
      30,
      2007 in this Form 10-Q, fairly present in all material respects 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 been any
      other changes in the Company’s internal control over financial reporting during
      the fiscal quarter ended June 30, 2007, which have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.


31


**PART
      II**


**OTHER
      INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





**None.**





**ITEM
      1A. RISK FACTORS**





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





**RISKS
      RELATED TO OUR BUSINESS**





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





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





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




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




32





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





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





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





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





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





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





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





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




33





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





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





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





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




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





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




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





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




34





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





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





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





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





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





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





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





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




35




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





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





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





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





**If
      we fail to effectively expand our operations and capacity to satisfy demand
      for
      our products, our results of operations and business prospects could be
      impaired.**





Our
      future success depends on our ability to expand our business to address growth
      in demand for our current and future products. To accomplish this expansion,
      we
      have to continuously monitor and address our capital resource needs. For
      example, during this fiscal quarter the Company entered into a loan agreement
      with ABN and a common stock purchase agreement with Warburg Pincus Private
      equity IX, L.P. to raise $35 million and $66 million, respectively. We have
      also
      entered into various short term loan agreements with banks in China. We used
      the
      capital obtained from such transactions to (i) make investments in one of our
      subsidiaries, BQL, (ii) fund the construction of new processing facilities,
      (iii) establish a joint venture for the production of Chondroitin, and (iv)
      purchase fixed assets. Our ability to add production capacity and increase
      output is subject to significant risks and uncertainties, including:




·
            
            the
                availability of additional funding to build new processing facilities,
                make additional investments in our subsidiaries, acquire additional
                businesses or production facilities, purchase additional fixed assets
                and
                purchase other raw materials on favorable terms or at all;




36




·
            
            our
                management and minimization of delays and cost overruns caused by
                problems
                with dairies; and




·
            
            our
                receipt of any necessary government approvals or permits that may
                be
                required to expand our operations in a timely manner or at all.




Our
      failure to effectively expand our capacity will harm our operating results
      and
      our business prospects.





**Our
      business is capital intensive and our growth strategy may require additional
      capital which may not be available on favorable terms or at all.**





We
      believe that our current cash, cash flow from operations and the proceeds from
      our financing initiatives with ABN and Warburg Pincus will be sufficient to
      meet
      our present and reasonably anticipated cash needs. We have, in the past, entered
      into loan agreements and common stock purchase agreements in order to raise
      additional capital. We may, in the future, require additional cash resources
      due
      to changed business conditions, implementation of our strategy to expand our
      manufacturing capacity or other investments or acquisitions we may decide to
      pursue. If our own financial resources are insufficient to satisfy our capital
      requirements, we may seek to sell additional equity or debt securities or obtain
      additional credit facilities. The sale of additional equity securities could
      result in dilution to our stockholders. The incurrence of indebtedness would
      result in increased debt service obligations and could require us to agree
      to
      operating and financial covenants that would restrict our operations. Financing
      may not be available in amounts or on terms acceptable to us, if at all. Any
      failure by us to raise additional funds on terms favorable to us, or at all,
      could limit our ability to expand our business operations and could harm our
      overall business prospects.




**Our
      rapid expansion could significantly strain our resources, management and
      operational infrastructure which could impair our ability to meet increased
      demand for our products and hurt our business results.**




To
      accommodate our anticipated growth, we will need to expend capital resources
      and
      dedicate personnel to implement and upgrade our accounting, operational and
      internal management systems and enhance our record keeping and contract tracking
      system. Such measures will require us to dedicate additional financial resources
      and personnel to optimize our operational infrastructure and to recruit more
      personnel to train and manage our growing employee base. If we cannot
      successfully implement these measures efficiently and cost-effectively, we
      will
      be unable to satisfy the demand for our products, which will impair our revenue
      growth and hurt our overall financial performance.




**If
      we fail to accurately project market demand for our products, our business
      expansion plan could be jeopardized and our financial condition and results
      of
      operations will suffer.**




We
      plan
      to increase our annual manufacturing capacity to meet an expected increase
      in
      demand for our products. Our decision to increase our manufacturing capacity
      was
      based primarily on our projected increases in our sales volume and growth in
      the
      size of the nutrition product market in China. If actual customer sales are
      less
      than our projected market demand, we will likely suffer overcapacity problems
      and may have to leave capacity idle, which may reduce our overall profitability
      and hurt our financial condition and results of operations.




37




**Part
      of our strategy involves the development of new products, and if we fail to
      timely develop new products or we incorrectly gauge the potential market for
      new
      products, our financial results will be adversely affected.**




We
      plan
      to utilize our in-house research and development capabilities to develop new
      products that could become new sources of revenue for us in the future and
      help
      us to diversify our revenue base. Our future research and development efforts
      will be focused on expanding our product offering beyond dairy-based nutritional
      products, such as Chondroitin, rice-based cereals and nutritional food bars.
      If
      we fail to timely develop new products or if we miscalculate market demand
      for
      new products that we develop, we may not be able to grow our sales revenue
      at
      expected growth rates and may incur expenses relating to the development of
      new
      products that are not offset by sufficient sales revenue generated by these
      new
      products.





**RISKS
      ASSOCIATED WITH DOING BUSINESS IN CHINA**





**The
      Chinese Legal System**





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





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




38




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





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





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





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





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




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





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




39




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





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





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





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





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





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





40




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





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





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





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




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





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





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





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





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




41




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





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





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





·
            discouraging
                bids for its common stock.




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





As
      of
      March 31, 2007, the Company’s directors and executive officers and their
      affiliates beneficially own approximately 87.31% of its outstanding common
      stock, based on the most recent filings by such parties with the SEC as of
      that
      date. These stockholders, if they act together, may be able to direct the
      outcome of matters requiring approval of the stockholders, including the
      election of its directors and other corporate actions such as:





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




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




42





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





As
      of
      June 18, 2007, the Company had outstanding 54,000,713 shares of common stock,
      of
      which approximately 52,907,415 shares were “restricted securities” (as that term
      is defined under Rule 144 promulgated under the Securities Act of 1933, as
      amended). The shares of restricted stock are eligible for public resale under
      Rule 144. Although Rule 144 restricts the number of shares that any one holder
      can sell during any three-month period under Rule 144, because more than one
      stockholder holds these restricted shares, a significant number of shares could
      legally be sold commencing in one year from the date of acquisition. No
      prediction can be made as to the effect, if any, that sales of the shares
      subject to Rule 144 sales commencing in one year, or the availability of such
      shares for sale, will have on the market prices prevailing from time to time.
      Nevertheless, the possibility that substantial amounts of common stock may
      be
      sold in the public market may adversely affect prevailing market prices for
      its
      common stock and could impair its ability to raise capital through the sale
      of
      its equity securities.





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




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





·
            announcements
                of technological innovations by the Company or its competitors;·
            announcements
                of new products or new contracts by the Company or its competitors;·
            actual
                or anticipated variations in its operating results due to the level
                of
                expenses and other factors;·
            changes
                in financial estimates by securities analysts and whether its earnings
                meet or exceed such estimates;·
            conditions
                and trends in the baby food and other industries;





·
            new
                accounting standards;·
            general
                economic, political and market conditions and other factors; and·
            the
                occurrence of any of the risks described in this Form 10-K.





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





The
      Company’s assessment of accounting errors and irregularities identified during
      the preparation of the Form 10-Q has resulted in the restatement of the
      Company’s financial statements as of and for the year ended March 31, 2007 and
      as and for each fiscal quarter ended June 30, 2006, September 30, 2006 and
      December 31, 2006. The results of the Restatement include a decrease in net
      income and earnings per share for the affected fiscal periods. **** These
      adverse changes to the Company’s results of operations and financial condition
      could result in a loss of investor confidence and adversely affect the market
      price of the Company’s common stock.




43




**Failure
      to achieve and maintain effective internal control over financial reporting
      in
      accordance with rules of the SEC promulgated under Section 404 of the
      Sarbanes-Oxley Act could harm our business and operating results and/or result
      in a loss of investor confidence in our financial reports, which could in turn
      have a material adverse effect on our business and stock
      price.**





Under
      rules of the SEC promulgated under Section 404 of the Sarbanes-Oxley Act of
      2002, the Company is required to furnish a report by our management on our
      internal control over financial reporting. In the course of our assessment
      of
      the effectiveness of our internal control over financial reporting as of June
      30, 2007, which assessment was conducted during this fiscal quarter in
      connection with the preparation of this report, the Company identified certain
      material weaknesses in our internal control over financial reporting. These
      material weaknesses in our internal control over financial reporting, as
      described in Item 4T. Controls and Procedures, as well as any other weaknesses
      or deficiencies that may exist or hereafter arise or be identified, could harm
      our business and operating results, and could result in adverse publicity and
      a
      loss in investor confidence in the accuracy and completeness of our financial
      reports, which in turn could have a material adverse effect on our stock price,
      and, if such weaknesses are not properly remediated, could adversely affect
      our
      ability to report our financial results on a timely and accurate
      basis.





Although
      we believe that we have and are taking steps to remediate these material
      weaknesses, as described in Item 4T. Controls and Procedures, we cannot assure
      you that this remediation will be successful or that additional deficiencies
      or
      weaknesses in our controls and procedures will not be identified. In addition,
      we cannot assure you that our independent registered public accounting firm
      will
      agree with our assessment that our material weaknesses have been remediated.





**Failure
      to satisfy Nasdaq listing requirements may have an adverse effect on our stock
      price.**





On
      August
      20, 2007, the Company received a staff determination letter from The Nasdaq
      Stock Market stating that the Company’s common stock is subject to delisting
      from The Nasdaq Global Market for the Company’s failure to file a quarterly
      report on Form 10-Q for the period ended June 30, 2007 with the SEC by the
      required deadline. Timely filing of annual and periodic reports with the SEC
      is
      required for continued listing under Nasdaq Marketplace Rule 4310(c)(14). The
      Company has appealed Nasdaq’s determination and requested a hearing before the
      Nasdaq Listing Qualification Panel (the “Panel”). This appeal and request for a
      hearing has stayed the suspension of trading in the Company’s common stock
      pending a decision by the Panel, and the Company’s stock will remain listed
      during this time period. Further, the Company believes that the Restatement
      and
      the filing of this Form 10-Q with the SEC will result in the Panel’s grant of
      the Company’s request for continued listed. However, there can be no assurance
      that the Panel will grant the Company’s request.




44




**We
      may be unable to establish and maintain an effective system of internal control
      over financial reporting, and as a result we may be unable to accurately report
      our financial results or prevent fraud.**





We
      are
      subject to provisions of the Sarbanes-Oxley Act. Section 404 of the
      Sarbanes-Oxley Act will require that we include a report from management on
      our
      internal control over financial reporting in our annual report on Form 10-K
      beginning with our annual report for the fiscal year ending March 31, 2008.
      In
      addition, our independent registered public accounting firm must attest to
      and
      report on management’s assessment of the effectiveness of our internal control
      over financial reporting. Our management may conclude that our internal controls
      are not effective. Moreover, even if our management concludes that our internal
      control over financial reporting is effective, our independent registered public
      accounting firm may disagree and may decline to attest to our management’s
      assessment or may issue an adverse opinion. Any of these outcomes could result
      in a loss of investor confidence in the reliability of our reporting processes,
      which could materially and adversely affect the trading price of your
      shares.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





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 $66,000,000. The Company claims
      an
      exemption from the registration Requirements of the Securities Act of 1933
      (the
“Act”) for the private placement of these securities pursuant to Section 4(2) of
      the Act and/or Regulation D promulgated thereunder since, among other things,
      the transaction did not involve a public offering, the investors are accredited
      investors and/or qualified institutional buyers, the investors had access to
      information about the Company and their investment, the investors took the
      securities for investment and not resale, and the Company took appropriate
      measures to restrict the transfer of the securities.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





**None.**





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





**None.**





**ITEM
      5. OTHER INFORMATION**





**None.**


45


**ITEM
      6. EXHIBITS**





**EXHIBIT**
              **NO.**
            
            **DOCUMENT
                DESCRIPTION**3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws
                (1)10.1
            
            Share
                Exchange Agreement dated as of June 14, 2005 (2)10.2
            
            License
                and Supply Agreement dated as of September 1st,
                2003 (3)10.3
            
            Agreement
                between he Company and the Department of Finance of Zheng Lan Qi
                (County)
                of Inner Mongolia, with Amendment and Schedule (4)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 10SB126 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 Securities
                and Exchange Commission on July 21, 2005.(3)
            Incorporated
                herein by reference from the Registrant’s Form 10-KSB filed with the
                Securities and Exchange Commission on June 29, 2006.(4)
            Incorporated
                herein by reference from the Registrant’s Form 8-K filed with the
                Securities and Exchange Commission on November 9,
                2006.




46


**SIGNATURES**





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





SYNUTRA
                INTERNATIONAL, INC.Date:
                October 5, 2007
            By:
            /s/ Liang
                ZhangName: 
                Liang ZhangTitle:  
                Chief Executive Officer


47