**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 September 30, 2008
 
 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
 (Address
        of Principal Executive Offices, Zip Code)
 
 (301)
        840-3888
 (Registrant's
        Telephone Number, Including Area Code)
 
 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), 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, a non-accelerated filer or a smaller reporting company.
        See
        definition of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
        accelerated filer  ̈ Accelerated
        filer x Non-accelerated
        filer  ̈ (Do not
        check if a smaller reporting company)  Smaller
        reporting company  ̈
 
 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
        November 10 ,
        2008,
        there were 54,000,713 shares of Common Stock issued and
        outstanding.
  
  **TABLE
        OF CONTENTS**
  PagePART
                  IItem
                  1. Financial Statements (unaudited)
              
              
              3Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              
              
              13Item
                  3. Quantitative and Qualitative Disclosures About Market
                  Risk
              
              
              22Item
                  4. Controls and Procedures
              
              
              22PART
                  IIItem
                  1. Legal Proceedings
              
              
              23Item
                  1A. Risk Factors
              
              
              23Item
                  2. Unregistered Sales of Equity Securities and Use of Proceeds
              
              
              31Item
                  3. Defaults Upon Senior Securities
              
              
              31Item
                  4. Submission of Matters to a Vote of Security Holders
              
              
              31Item
                  5. Other Information
              
              
              31Item
                  6. Exhibits
              
              
              32Signatures
              
              
              33
  2
 
 **PART
        I**
 **FINANCIAL
        INFORMATION**
  **ITEM
        1. FINANCIAL STATEMENTS.**
  **SYNUTRA
        INTERNATIONAL, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        thousands, except share par value)**
 **(unaudited)**
 
 **September 30,**
                **2008**
              
              **March 31,**
                **2008**ASSETSCurrent
                  Assets:Cash
                  and cash equivalents
              
              $
              52,223
              
              $
              97,425Restricted
                  cash
              
              
              36,436
              
              
              9,744Accounts
                  receivable, net of allowance of $206 and $185 respectively
              
              
              19,672
              
              
              11,325Inventories
              
              
              56,176
              
              
              61,853Due
                  from related parties
              
              
              1,730
              
              
              -Deferred
                  tax assets
              
              
              1,030
              
              
              1,448Income
                  tax receivable
              
              
              11,397
              
              
              -Prepaid
                  expenses and other current assets
              
              
              20,921
              
              
              12,701Assets
                  held for sale
              
              
              -
              
              
              1,316Total
                  current assets
              
              
              199,585
              
              
              195,812Property,
                  plant and equipment, net
              
              
              128,869
              
              
              85,719Land
                  use rights, net
              
              
              4,763
              
              
              4,496Deferred
                  tax assets
              
              
              2,538
              
              
              2,077Other
                  assets
              
              
              6,368
              
              
              8,115TOTAL
                  ASSETS
              
              $
              342,123
              
              $
              296,219LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCurrent
                  Liabilities:Short-term
                  debt
              
              $
              78,197
              
              $
              21,228Long-term
                  debt and capital lease obligations - current portion
              
              
              -
              
              
              1,923Accounts
                  payable
              
              
              40,817
              
              
              26,438Due
                  to related parties
              
              
              5,535
              
              
              2,970Advances
                  from customers
              
              
              6,936
              
              
              9,465Income
                  tax payable
              
              
              -
              
              
              4,168Product
                  recall provision
              
              
              37,987
              
              
              -Other
                  current liabilities
              
              
              16,912
              
              
              18,390Total
                  current liabilities
              
              
              186,384
              
              
              84,582Long-term
                  debt and capital lease obligations
              
              
              5,417
              
              
              34,184Deferred
                  revenue
              
              
              4,693
              
              
              4,559Other
                  long term liabilities
              
              
              1,467
              
              
              1,250Total
                  liabilities
              
              
              197,961
              
              
              124,575Minority
                  interest
              
              
              387
              
              
              385Shareholders’
                  equity:Common
                  stock, $.0001 par value: 250,000 authorized; 54,001 issued and
                  outstanding
                  at September 30, 2008 and March 31, 2008, respectively
              
              
              5
              
              
              5Additional
                  paid-in capital
              
              
              76,607
              
              
              76,607Retained
                  earnings
              
              
              42,839
              
              
              76,875Accumulated
                  other comprehensive income
              
              
              24,324
              
              
              17,772Total
                  shareholders’ equity
              
              
              143,775
              
              
              171,259TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              342,123
              
              $
              296,219
 
 The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.
  3
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **AND
        COMPREHENSIVE INCOME**
 **(in
        thousands except earnings per share data)**
 **(unaudited)**
 
 **Three Months Ended**
              
              **Six Months Ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Net
                  sales
              
              $
              94,791
              
              $
              86,202
              
              $
              222,171
              
              $
              153,694Cost
                  of sales
              
              
              121,514
              
              
              39,576
              
              
              181,999
              
              
              70,006Gross
                  profit (loss)
              
              
              (26,723
              )
              
              46,626
              
              
              40,172
              
              
              83,688Selling
                  and distribution expense
              
              
              10,658
              
              
              8,316
              
              
              22,081
              
              
              15,890Advertising
                  and promotion expenses
              
              
              18,637
              
              
              22,006
              
              
              50,733
              
              
              40,454General
                  and administrative expenses
              
              
              6,790
              
              
              3,667
              
              
              10,720
              
              
              6,547Total
                  operating expenses
              
              
              36,085
              
              
              33,989
              
              
              83,534
              
              
              62,891Income
                  (loss) from operations
              
              
              (62,808
              )
              
              12,637
              
              
              (43,362
              )
              
              20,797Interest
                  expense
              
              
              545
              
              
              2,594
              
              
              1,066
              
              
              4,768Interest
                  income
              
              
              186
              
              
              848
              
              
              384
              
              
              1,200Other
                  income (expense), net
              
              
              813
              
              
              223
              
              
              379
              
              
              (42
              )Income
                  (loss) before provision (benefit) for income tax and minority
                  interests
              
              
              (62,354
              )
              
              11,114
              
              
              (43,665
              )
              
              17,187Provision
                  (benefit) for income tax
              
              
              (12,675
              )
              
              1,334
              
              
              (9,631
              )
              
              2,063Net
                  income (loss) before minority interests
              
              
              (49,679
              )
              
              9,780
              
              
              (34,034
              )
              
              15,124Minority
                  interests
              
              
              1
              
              
              8
              
              
              2
              
              
              12Net
                  income (loss) attributable to shareholders
              
              $
              (49,680
              )
              $
              9,772
              
              $
              (34,036
              )
              $
              15,112Other
                  comprehensive income
              
              
              1,255
              
              
              1,500
              
              
              6,552
              
              
              2,598Total
                  comprehensive income (loss)
              
              $
              (48,425
              )
              $
              11,272
              
              $
              (27,484
              )
              $
              17,710Earnings
                  (loss) per share - basic
              
              $
              (0.92
              )
              $
              0.18
              
              $
              (0.63
              )
              $
              0.29Earnings
                  (loss) per share - diluted
              
              $
              (0.92
              )
              $
              0.18
              
              $
              (0.63
              )
              $
              0.29Weighted
                  average common share outstanding - basic
              
              
              54,001
              
              
              54,001
              
              
              54,001
              
              
              52,339Weighted
                  average common share outstanding - diluted
              
              
              54,001
              
              
              54,132
              
              
              54,001
              
              
              52,465
 
 The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.
  4
 **SYNUTRA
        INTERNATIONAL, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **(unaudited)**
  **Six Months Ended**
                **September 30,****2008**
              
              **2007**Cash
                  flow from operating activities:Net
                  income (loss)
              
              $
              (34,036
              )
              $
              15,112Adjustments
                  to reconcile net income (loss) to net cash (used in) provided
                  by operating activities:Amortization
                  of debt discount
              
              
              -
              
              
              2,325Amortization
                  of debt issuance costs
              
              
              160
              
              
              -Depreciation
                  and amortization
              
              
              3,350
              
              
              2,014Bad
                  debt expense
              
              
              307
              
              
              (3
              )Gain
                  (loss) on disposal of property, plant and equipment
              
              
              (7
              )
              
              128Deferred
                  income tax
              
              
              60
              
              
              (129
              )Minority
                  interest
              
              
              2
              
              
              12Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (8,267
              )
              
              (1,813
              )Inventories
              
              
              7,716
              
              
              (14,012
              )Due
                  from related parties
              
              
              (3,111
              )
              
              (454
              )Prepaid
                  expenses and other current assets
              
              
              (6,418
              )
              
              (1,067
              )Accounts
                  payable
              
              
              9,831
              
              
              17,330Due
                  to related parties
              
              
              5,552
              
              
              (1,692
              )Advances
                  from customers
              
              
              (2,889
              )
              
              (494
              )Income
                  tax receivable
              
              
              (16,302
              )
              
              155Product
                  recall provision
              
              
              37,987
              
              
              -Other
                  liabilities
              
              
              (5,713
              )
              
              (3,441
              )Net
                  cash (used in) provided by operating activities
              
              
              (11,778
              )
              
              13,971Cash
                  flow from investing activities:Acquisition
                  of property, plant and equipment
              
              
              (33,966
              )
              
              (13,974
              )Disposal
                  of investment in a subsidiary
              
              
              -
              
              
              (1,046
              )Change
                  in restricted cash
              
              
              (27,174
              )
              
              7,204Advance
                  to related companies
              
              
              -
              
              
              (3,324
              )Advance
                  repaid by related companies
              
              
              -
              
              
              3,324Acquisition
                  of a subsidiary
              
              
              (205
              )
              
              190Net
                  cash used in investing activities
              
              
              (61,345
              )
              
              (7,626
              )Cash
                  flow from financing activities:Proceeds
                  from short-term debt
              
              
              41,078
              
              
              61,656Repayment
                  of borrowings
              
              
              (16,771
              )
              
              (57,898
              )Payment
                  on capital lease obligations
              
              
              (518
              )
              
              -Proceeds
                  from issuance of common stock, net of issuance costs of
                  $145
              
              
              -
              
              
              65,857Net
                  cash provided by financing activities
              
              
              23,789
              
              
              69,615Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              4,132
              
              
              1,399Net
                  change in cash and cash equivalents
              
              
              (45,202
              )
              
              77,359Cash
                  and cash equivalents, beginning of period
              
              
              97,425
              
              
              20,836Cash
                  and cash equivalents, end of period
              
              $
              52,223
              
              $
              98,195Supplemental
                  cash flow information:Interest
                  paid
              
              $
              1,845
              
              $
              2,375Income
                  tax paid
              
              $
              5,794
              
              $
              1,538Non-cash
                  investing and financing activities:Purchase
                  of property, plant and equipment by accounts payable
              
              $
              4,188
              
              $
              2,321Assets
                  acquired under capital lease
              
              $
              5,350
              
              $
              -Acquisition
                  of subsidiary by accounts payable
              
              $
              821
              
              $
              -
 
 The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements
 5
 
 **SYNUTRA
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**
 
 **1.**
              **ORGANIZATION
                  AND PRINCIPAL ACTIVITIES**
  Directly
        or through its wholly owned subsidiary, Synutra Inc., an Illinois corporation
        (“Synutra Illinois”), Synutra International, Inc. (collectively with
        its subsidiaries, the “Company” or “Synutra”) owns all or majority of the
        equity interests of the companies in the People’s Republic of China (“China” or
“PRC”) that are principally engaged in the production, marketing and
        distribution of dairy based nutritional products under the Company’s own
        brands in China. The Company is a leader in sales of infant formula products
        in
        China.
  The
        Company produces, markets and sells nutritional products under “Sheng Yuan”, or
“Synutra”, its master brand, and several sub-brands, including “Super”,
“U-Smart”, and “U-Strong”. The Company focuses on selling premium infant formula
        products, which are supplemented by more affordable infant
        formula products targeting the mass market as well as other
        nutritional products and ingredients.
  The
        Company has opportunistically utilized excess capacity and resources to provide
        toll packaging, toll drying services and sales of ingredients and materials
        to
        industrial customers. These businesses, however, are not the Company’s core
        businesses and do not contribute significantly to the Company’s results of
        operations.
 
 **2.**
              **BASIS
                  OF PRESENTATION**
 
 The
        Company is responsible for the unaudited 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 U.S. Securities and Exchange Commission (the “SEC”) for
        interim reporting.  As permitted under those rules, the
        Company 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 and its subsequent
        amendments, if any, for the fiscal year ended March 31, 2008.
  These
        statements include the accounts of the Company and its subsidiaries, which
        include Beijing Sheng Yuan Huimin Technology Service Co., Ltd., a variable
        interest entity, and its subsidiaries. All significant inter-company
        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.
 
 **3.**
              **RECENTLY
                  ADOPTED ACCOUNTING PRONOUNCEMENTS**
  On
        April 1, 2008, the Company adopted Financial Accounting Standards Board
        (FASB) Statement of Financial Accounting Standards (SFAS) No. 157,
“Fair Value Measurements” (FAS 157) with respect to financial assets and
        liabilities and elected to defer the adoption of FAS 157 for nonfinancial
        assets
        and liabilities as permitted by Financial Accounting Standards Board
        (FASB) Staff Position No. SFAS 157-2 (FSP 157-2). SFAS 157 defines
        fair value, establishes a framework for measuring fair value and expands
        disclosures about fair value measurements. The adoption of SFAS 157 for
        financial assets and liabilities had no effect on the financial position,
        results of operations or cash flows. The Company will adopt FSP 157-2 for
        nonfinancial assets and liabilities on April 1, 2009, and is currently
        evaluating the impact such adoption will have on the financial
        statements.
 
 In
        February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial
        Assets and Financial Liabilities”. The standard requires unrealized gains and
        losses to be included in earnings for items reported using the fair value
        option. SFAS No.159 permits companies to choose to measure many financial
        instruments and certain other items at fair value. SFAS No.159 is effective
        for
        financial statements issued for fiscal years beginning after November 15,
        2007.
        The Company did not elect the fair value option described in SFAS No.159
        for
        financial instruments and certain other items.
  6
 
 **4.**
              **RECENTLY
                  ISSUED ACCOUNTING PRONOUNCEMENTS**
 
 In
        December 2007, the FASB issued SFAS No. 141 (R), “Business
        Combinations” (“SFAS No. 141(R)”).
        SFAS No. 141(R) requires an entity to recognize the assets
        acquired, liabilities assumed, contractual contingencies, and contingent
        consideration at their fair value on the acquisition date.  Subsequent
        changes to the estimated fair value of contingent consideration will be
        reflected in earnings until the contingency is settled. 
SFAS No. 141(R) also requires acquisition-related costs and
        restructuring costs to be expensed as incurred rather than treated as part
        of
        the purchase price. The adoption of SFAS No. 141(R) will change
        the Company’s accounting treatment for business combinations on a prospective
        basis beginning April 1, 2009.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements” to improve the relevance, comparability, and
        transparency of financial information provided to investors by requiring
        all
        entities to report noncontrolling (minority) interests in subsidiaries in
        the
        same way as required in the consolidated financial statements. Moreover,
        SFAS
        No. 160 eliminates the diversity that currently exists in accounting for
        transactions between an entity and noncontrolling interests by requiring
        they be
        treated as equity transactions. SFAS No. 160 is effective for fiscal years,
        and interim periods within those fiscal years, beginning on or after
        December 15, 2008. Earlier adoption is prohibited. The Company is currently
        evaluating whether the adoption of SFAS No. 160 will have a significant
        effect on its consolidated financial position, results of operations or cash
        flows.
  In
        March 2008, the FASB issued SFAS No. 161, “Disclosures about
        Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
        133.” SFAS No. 161 provides new disclosure requirements for an entity’s
        derivative and hedging activities. SFAS No. 161 is effective for periods
        beginning after November 15, 2008. The Company has not yet determined the
        impact on its consolidated financial statements of adopting
        SFAS No. 161.
  In
        April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). This
        position amends the factors an entity should consider when developing renewal
        or
        extension assumptions used in determining the useful life over which to amortize
        the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
        Other Intangible Assets.” FSP FAS 142-3 requires an entity to consider its own
        historical experience in renewing or extending similar arrangements in
        determining the amortizable useful life. Additionally, this position requires
        expanded disclosure regarding renewable intangible assets. FSP FAS 142-3
        is
        effective for fiscal years beginning after December 15, 2008. The guidance
        for determining the useful life of a recognized intangible asset must be
        applied
        prospectively to intangible assets acquired after the effective date. Early
        adoption is prohibited. The Company expects to adopt FSP FAS 142-3 as of
        April 1, 2009.
 
 **5.**
              **PRODUCT
                  RECALL**
 
 On
        September 16, 2008, the Company announced a compulsory recall on certain
        lots of
        U-Smart products and a voluntary recall on all other products that
        use
        milk supplied from the regions of Hebei and Inner Mongolia which
        include U-Smart, U-Strong, adult formula products and rice powder products.
 
 The
        compulsory recall was due to the fact that certain lots of the Company’s U-Smart
        series of products had been contaminated by melamine, a substance not approved
        for use in food and linked to recent illnesses among infants and children
        in
        China. The Company has completed the recall of all eight lots of its U-Smart
        products that were found to be contaminated with melamine following testing
        by
        the Chinese government.
 
 The
        Company believes that the melamine contamination resulted from tainted milk
        supplies provided by third-party suppliers in the Hebei and Inner Mongolia
        regions. As a result the Company made the voluntary recall on all other products that
        use
        milk supplied from these regions which
        includes U-Smart, U-Strong, adult formula products and rice powder products,
        produced before September 16, 2008. In addition, out of an abundance of caution,
        the Company also recalled certain Stage 4 Super products, although no Super
        products have been found to be contaminated with melamine. The Company has
        substantially completed the voluntary recall of all of the products identified
        above.
        The Company is working with distributors nationwide to provide replacement
        products that are free of melamine and safe for consumption.
 
 The
        estimated cost of the product recall is $77.4 million which has been recognized
        as a charge to cost of sales and selling and distribution expenses in the
        Company’s consolidated statement of income for the fiscal quarter ended
        September 30, 2008, of which $38.0 million was recorded as a product recall
        provision in the consolidated balance sheet as of September 30, 2008. This
        amount includes the replacement cost of the recalled products of $36.0 million,
        the write-down and write-off of affected inventory of $39.5 million, and
        logistical expenses associated with the recall of $1.9 million. These costs
        represent the Company’s estimate of probable costs based on available data and
        take into account factors such as expected return rates for the affected
        units,
        unit replacement costs, logistical expenses and expenses relating to the
        hiring
        of temporary contractors to assist with the Company’s recall
        efforts.
 
 Should
        actual product recall costs differ from the estimated costs, the Company
        would
        have to reassess the impact of the product recall on the Company’s financial
        results and revise the estimated product recall accrual accordingly. The
        following is a summary of the expenses related to the product recall that
        were
        recorded during the fiscal quarter ended September 30, 2008:
 
 Product
                  recall expenses recorded in:-
                  Cost of sales
              
              $
              75,563-
                  Selling and distribution expenses
              
              
              1,860Total
              
              $
              77,423
  7
 
 **6.**
              **INVENTORIES**
  The
        Company’s inventories at September 30, 2008 and March 31, 2008 are summarized as
        follows:
 
 **September 30,**
                **2008**
              
              **March 31,**
                **2008****(In
                  thousands)**Raw
                  materials
              
              $
              34,422
              
              $
              30,550Work-in-progress
              
              
              10,052
              
              
              16,786Finished
                  goods
              
              
              11,702
              
              
              14,517Total
                  Inventories
              
              $
              56,176
              
              $
              61,853
 
 **7.**
              **DUE
                  FROM/TO RELATED PARTIES AND RELATED PARTY
                  TRANSACTIONS**
  **A.**  **Classification
        of related party balances by name**
 
 **a.
        Due from related parties**
 
 **September 30,**
                **2008**
              
              **March 31,**
                **2008****(In thousands)**Sheng
                  Zhi Da Dairy Group Corporation
              
              $
              1,730
              
              $
              —Total
                  Due from Related Parties
              
              $
              1,730
              
              $
              —
  In
        June
        2008, the Company sold two commercial buildings to Sheng Zhi Da Dairy Group
        Corporation, an entity 100% controlled by the Company's CEO, at the carrying
        value of $1.7 million. The balance due from Sheng Zhi Da Dairy Group Corporation
        represents the unpaid transaction amount.
 
 **b.
        Due to related parties**
  **September 30,**
                **2008**
              
              **March 31,**
                **2008****(In
                  thousands)**Sheng
                  Zhi Da Dairy Group Corporation
              
              $
              2,085
              
              $
              2,404St.
                  Angel (Beijing) Business Service Co., Ltd.
              
              
              6
              
              
              4Beijing
                  Honnete Dairy Co., Ltd.
              
              
              3,444
              
              
              562Total
                  Due to Related Parties
              
              $
              5,535
              
              $
              2,970
  8
  **B.**  **Sales
        to related parties**
  In
        the
        three and six months ended September 30, 2007, the Company’s sales to the
        related parties included milk fat and non-fat dry milk to Kelqin and the
        Company’s name brand products to Luding Xueyuan for direct sales, catalogue
        sales, and regional retail outlets distribution. There were no such sales
        to the
        related parties in the three and six months ended September 30,
        2008.
 
 The
        following tables categorize sales to related companies as main product sales
        and
        ancillary product sales as presented in the income statements:
  **a.
        Main product sales to related parties**
  **Three Months Ended**
              
              **Six Months Ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(In
                  thousands)**Beijing
                  Kelqin Dairy Co., Ltd.
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,293Beijing
                  Luding Xueyuan Trading Co., Ltd.
              
              
              -
              
              
              655
              
              
              -
              
              
              1,057Total
              
              $
              -
              
              $
              655
              
              $
              -
              
              $
              2,350
 
 **b.
        Ancillary product sales to related parties**
 
 **Three Months Ended**
              
              **Six Months Ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(In
                  thousands)**Beijing
                  Kelqin Dairy Co., Ltd.
              
              
              -
              
              
              189
              
              
              -
              
              
              199Total
              
              $
              -
              
              $
              189
              
              $
              -
              
              $
              199Total
                  of main product and ancillary product sales to related
                  companies
              
              $
              -
              
              $
              844
              
              $
              -
              
              $
              2,549
  **C.**  **Purchases
        from related parties**
  In
        the
        three and six months ended September 30, 2008 and 2007, the Company’s purchases
        from related parties included whey protein powders from Kelqin and Honnete,
        and
        catalogues, brochures, and marketing materials from St. Angel and Sheng Long
        Media.
 
 **Three Months Ended**
              
              **Six Months Ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(In
                  thousands)**Beijing
                  Kelqin Dairy Co., Ltd.
              
              $
              -
              
              $
              1,320
              
              $
              -
              
              $
              3,261Beijing
                  Honnete Dairy Co., Ltd.
              
              
              6,119
              
              
              1,406
              
              
              8,000
              
              
              2,655St.
                  Angel (Beijing) Business Service Co., Ltd.
              
              
              -
              
              
              -
              
              
              1,639
              
              
              -Beijing
                  Sheng Long Media Co., Ltd.
              
              
              -
              
              
              831
              
              
              154
              
              
              833Total
              
              $
              6,119
              
              $
              3,557
              
              $
              9,793
              
              $
              6,749
  9
 
 **8.**
              **PROPERTY,
                  PLANT AND EQUIPMENT, NET**
 
 **September 30,**
                **2008**
              
              **March 31,**
                **2008****(In thousands)**Property,
                  plant and equipment, cost:Buildings
              
              $
              40,908
              
              $
              27,004Plant
                  and machinery
              
              
              43,202
              
              
              38,430Office
                  equipment and furnishings
              
              
              2,888
              
              
              2,534Motor
                  vehicles
              
              
              2,612
              
              
              1,340Others
              
              
              466
              
              
              348Total
                  cost
              
              $
              90,076
              
              $
              69,656Less:
                  Accumulated depreciation:Buildings
              
              
              3,520
              
              
              2,831Plant
                  and machinery
              
              
              9,164
              
              
              6,933Office
                  equipment and furnishings
              
              
              923
              
              
              705Motor
                  vehicles
              
              
              653
              
              
              545Others
              
              
              236
              
              
              197Total
                  accumulated depreciation
              
              
              14,496
              
              
              11,211Construction
                  in progress
              
              
              53,289
              
              
              27,274Property,
                  plant and equipment, net
              
              $
              128,869
              
              $
              85,719
  Construction
        in progress primarily represents the construction of manufacturing facilities
        and administrative buildings.
  The
        Company recorded depreciation expense of $1.7 million and $1.0 million for
        the
        three months ended September 30, 2008 and 2007, respectively, and recorded
        depreciation expense of $3.3 million and $1.9 million for the six months
        ended
        September 30, 2008 and 2007, respectively.
 
 **9.**
              **DEBT
                  AND CAPITAL LEASE
                  OBLIGATION**
  On
        October 11, 2007, ABN and another lender provided a three year term loan,
        or the New ABN Loan, to the Company in the aggregate amount of $35 million.
        The
        principal amount, and any unpaid accrued interest on the New ABN Loan, will
        be
        due on October 11, 2010 and may be prepaid without penalty. The proceeds of
        the New ABN Loan were used to pay the outstanding principal and accrued interest
        of a six-month term loan provided to the Company by ABN on April 19, 2007,
        or the Original ABN Loan. The New ABN Loan bears interest at LIBOR for deposits
        in U.S. dollars plus 3.5% with interest payable on the last day of each
        three-month period. The loan is secured by a pledge of 10,000 shares of common
        stock, or 100% of the outstanding common stock of Synutra Illinois.
 
 The
        loan
        agreement for the New ABN Loan provides for mandatory prepayment upon the
        occurrence of certain events, and contains customary covenants for financings
        of
        this type, including restrictions on the incurrence of liens, payment of
        dividends, and disposition of properties. The loan agreement for the New
        ABN
        Loan also contains certain financial covenants, including a requirement to
        maintain specified leverage and interest coverage ratio, tangible net worth,
        and
        indebtedness to tangible net worth ratio. The
        Company has performed an analysis of the relevant ratios and found that due
        to
        the net loss which resulted from the estimated costs of the product recall,
        including inventory write-down and write-off in this fiscal quarter, the
        Company
        was not able to meet the financial covenant requirements for leverage ratio
        and
        interest coverage ratio as of September 30, 2008. Further, the Company
        anticipates that it may have difficulty meeting these financial covenant
        requirements for the next several fiscal quarters. The Company has requested
        the
        lenders to waive these financial covenants for the fiscal quarters ended
        September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009.
        As of
        the date of the filing of this 10-Q, the waiver has not been granted.
        Accordingly, the Company has reclassified the outstanding balance of $34.3
        million under the loan to current liabilities since the Company considers
        this
        debt potentially callable by the bank. The Company may also incur additional
        expenses in connection with the change of loan arrangements.
  In
        addition to the New ABN Loan, as of September 30, 2008 and March 31, 2008,
        the Company had short-term loans from banks in the amount of $ 43.9
        million (including new borrowings of $36.8 million with a weighted average
        interest rate of 6.21% during the three months ended September 30, 2008)
        and
        $21.2 million, respectively. The weighted average interest rate on short-term
        loans outstanding at September 30, 2008 and March 31, 2008 was 6.41% and
        7.08%, respectively. The loans were secured by the pledge of cash deposit
        and
        certain fixed assets held by the Company and its subsidiaries. The value
        of cash
        and cash equivalentspledged was $33.6 million and nil as of September 30, 2008 and
        March 31, 2008, respectively. The value of fixed assets pledged was $18.2
        million and $18.1 million as of September 30, 2008 and March 31, 2008,
        respectively.
 
 The
        Company has a capital lease agreement in place related to office buildings.
        The
        capital lease obligations of $5.4 million are included in long-term
        debt.
 
 10
  **10.**
              **INCOME
                  TAX**
  The
        effective tax rate is based on expected income, statutory tax rates and tax
        planning opportunities available in the various jurisdictions in which the
        Company operates. For interim financial reporting, the Company estimates
        the
        annual tax rate based on projected taxable income for the full year and records
        a quarterly income tax provision in accordance with the anticipated annual
        rate.
        As the year progresses, the Company refines 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 the
        expected effective tax rate for the year. When this occurs, the Company adjusts
        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 the effective tax rate and
        in
        evaluating the tax positions.
  The
        Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes, an Interpretation of FASB Statement No. 109,” on April 1,
        2007. The Company recognizes a tax benefit associated with an uncertain tax
        position when, in management's 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, the Company
        initially and subsequently measures the tax benefit as the largest amount
        that
        it judges to have a greater than 50% likelihood of being realized upon ultimate
        settlement with a taxing authority. The 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. The effective tax rate includes the net impact of changes in
        the
        liability for unrecognized tax benefits and subsequent adjustments as considered
        appropriate by management.
  The
        effective tax rate for the six months ended September 30, 2008 of 22.1% was
        up
        10.1% from the 12.0% effective rate for the six months ended September 30,
        2007.
        This increase was due primarily to the expiration of the tax holidays enjoyed
        by
        our major subsidiaries.
  **11.**
              **EARNINGS
                  PER SHARE (EPS)**
  For
        purposes of calculating basic and diluted earnings per share, the Company
        used
        the following weighted average common shares outstanding:
 **Three Months Ended**
                
                **Six Months Ended****September 30,**
                
                **September 30,****2008**
                
                **2007**
                
                **2008**
                
                **2007****(In
                    thousands except for per share data)**Net
                    income (loss) attributable to common shareholders
                
                $
                (49,680
                )
                $
                9,772
                
                $
                (34,036
                )
                $
                15,112Basic
                    weighted average common shares outstanding
                
                
                54,001
                
                
                54,001
                
                
                54,001
                
                
                52,339Dilutive
                    potential common shares from warrant
                
                
                -
                
                
                131
                
                
                -
                
                
                126Diluted
                    weighted average shares outstanding
                
                
                54,001
                
                
                54,132
                
                
                54,001
                
                
                52,465Earnings
                    (loss) per share—basic
                
                $
                (0.92
                )
                $
                0.18
                
                $
                (0.63
                )
                $
                0.29Earnings
                    (loss) per share—diluted
                
                $
                (0.92
                )
                $
                0.18
                
                $
                (0.63
                )
                $
                0.29
 
 The
        warrants to purchase 400,000 shares of common stock granted to ABN in connection
        with the original ABN Loan were excluded from the computation of diluted
        earnings per share for the three and six months ended September 30, 2008
        as they
        would be anti-dilutive. There were no anti-dilutive warrants excluded from
        the
        computation of diluted earnings per share for the three and six months ended
        September 30, 2007.
  **12.**
              **SEGMENT
                  REPORTING AND GEOGRAPHIC
                  INFORMATION**
  The
        Company has determined that it operates its business in one reportable segment
        based upon the manner in which internal financial information is produced
        and
        evaluated by its chief operating decision maker (“CODM”) (the Company’s Chief
        Executive Officer).
  11
 
 **13.**
              **SUBSEQUENT
                  EVENTS**
  **A.**
              **Acquisition
                  of assets from Beijing Huilian Food Co., Ltd.
                  (“Huilian”)**
  On
        July
        14, 2008, Sheng Yuan Nutrition, a Chinese operating subsidiary of the Company,
        entered into an asset purchase agreement (the “Agreement”) with Beijing Huilian
        Food Co., Ltd. (“Huilian”), a baby food producer in China, to purchase various
        assets from Huilian, including, but not limited to, Huilian’s plant in Beijing
        (together with the buildings and equipment at the plant), the “Hui Li Duo”
series registered trademarks for Huilian’s products, Huilian’s baby food
        formulas, and Huilian’s production procedures. Pursuant to the Agreement, within
        45 business days after the first installment of the purchase price is paid,
        both
        parties have to use their best efforts to submit to the relevant government
        authorities applications to effect the transfer of the land, buildings and
        trademarks.
  The
        purchase price for the assets is RMB45 million (approximately US$6.6 million)
        and will be paid in three installments, as follows: (i) first installment
        of
        RMB4.5 million, or 10%, was paid on July 21, 2008; (ii) second installment
        of
        RMB31.5 million, or 70%, is payable upon the parties obtaining receipts from
        the
        relevant government authorities with respect to the transfer applications
        required under the Agreement; and (iii) third installment of RMB9.0 million,
        or
        20%, is payable within five business days after the transfer of the assets
        is
        completed and the government approvals for the transfer have been obtained.
 
 The
        Company has assumed control on all material assets from October 8, 2008.
        The
        acquisition will be recorded in the fiscal quarter ending December 31,
        2008.
 
 **B.**
              **Borrowings
                  under new bank loans**
 
 Due
        to
        the significant reduction in the Company’s sales in the short term caused by the
        melamine contamination incident, the Company’s operating cash flow was adversely
        affected. The Company is liaising with local banks to obtain additional
        financing for working capital needs. During October
        2008 ,
        the
        Company secured bank loans of $22.0 million with a weighted average interest
        rate of 6.75%. The maturity dates of these new borrowings range from October
        21,
        2009 to October 29, 2009. The loans are secured by the pledge of certain
        fixed
        assets held by the Company’s subsidiaries.
  12
 
 **ITEM
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS.**
  Sections
        of this Quarterly Report on Form 10-Q (the “Form 10-Q”) including, in
        particular, the Company’s Management’s Discussion and Analysis of Financial
        Condition and Results of Operations 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,” “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 in the Company’s Annual Report on Form 10-K under Part I. Item
        1A. Risk Factors and below in Part II. Other Information – Item 1A. Risk Factors
        could cause the Company’s actual results to differ materially from those
        described in the forward-looking statements. Unless required by law, the
        Company undertakes 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 the Company files from time to time with the SEC, particularly
        its
        Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports
        on
        Form 8-K and all amendments to those reports.
 
 **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 Securities Exchange Act of 1934, as amended (the “Exchange
        Act”), are
        filed
        with the SEC. Such
        reports and other information filed by the Company with the SEC are available
        on
        the Company’s website at http://www.synutra.com when such reports 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
        1-800-SEC-0330. 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.
 
 **OVERVIEW**
  We
        are a
        leading infant formula company in China. We principally produce, market and
        sell
        our products under “Sheng Yuan,” or “Synutra,” our master brand, and several
        sub-brands, including “Super,” “U-Smart” and “U-Strong.” We focus on selling
        premium infant formula products, which are supplemented by more affordable
        infant formulas targeting the mass market as well as other nutritional products
        and ingredients. We sell our products through an extensive nationwide sales
        and
        distribution network covering 29 provinces and provincial-level municipalities
        in China. As of September 30, 2008, this network comprised over 430
        distributors and over 1,200 sub-distributors who sell our products in over
        70,000 retail outlets. Our extensive sales, and distribution network, combined
        with our strong customer service and infant nutrition education programs,
        has
        helped us build brand recognition and customer loyalty in our primary markets,
        which, prior to 2007, mainly comprised small to mid-size cities and rural
        areas
        in China. By leveraging our strong brand recognition in our primary markets,
        we
        have begun to expand into many of China’s major urban centers, which have
        historically been dominated by several large multinational firms.
  We
        have
        opportunistically utilized excess capacity and resources to provide toll
        packaging services, toll drying services, and sales of ingredients and materials
        to industrial customers. These businesses, however, are not our core businesses
        and do not contribute significantly to our results of operations.
  13
  On
        September 16, 2008, we announced a compulsory recall on certain lots of our
        U-Smart products and a voluntary recall on all other products that
        used
        milk supplied from the regions of Hebei and Inner Mongolia which
        include U-Smart, U-Strong, adult formula products and rice powder products.
 
 The
        compulsory recall was due to the fact that certain lots of our U-Smart series
        of
        products have been contaminated by melamine, a substance not approved for
        use in
        food and linked to recent illness among infants and children in China. We
        have
        completed the recall of all eight lots of our U-Smart products that were
        found
        to be contaminated with melamine following testing by the Chinese
        government.
 
 We
        believe that the melamine contamination resulted from tainted milk supplies
        provided by third-party suppliers in the Hebei and Inner Mongolia regions.
        As a
        result we made the voluntary recall on all other products that
        use
        milk supplied from these regions which
        include U-Smart, U-Strong, adult formula products and rice powder products,
        produced before September 16, 2008. In addition, out of an abundance of caution,
        we also recalled certain Stage 4 Super products, although no Super
        products have been found to be contaminated with melamine. The Company has
        substantially completed the voluntary recall of all of the products identified
        above.
 
 The
        estimated cost of the product recall is $77.4 million which has been recognized
        as a charge to cost of sales and selling and distribution expenses in our
        consolidated statement of income for the fiscal quarter ended September 30,
        2008, of which $38.0 million was recorded as a product recall provision in
        our
        consolidated balance sheet as of September 30, 2008. This amount includes
        the
        replacement cost of the recalled products of $36.0 million, write-down and
        write-off of affected inventory of $39.5 million, and logistical expenses
        associated with the recall of $1.9 million. These costs represent our estimate
        of probable costs based on available data and take into account factors such
        as
        expected return rates for the affected units, unit replacement costs, logistical
        expenses and expenses relating to the hiring of temporary contractors to
        assist
        with our recall efforts. Should actual product recall costs differ from the
        estimated costs, we will have to reassess the negative impact of the product
        recall on our financial results and revise the estimated product recall accrual
        accordingly.
 
 Our
        product recall does not involve any cash pay-out to our distributors or
        customers. Rather, both distributors and customers receive new products of
        the
        same value in exchange for recalled products. Since the product recall was
        ongoing during both our second and third fiscal quarters, the recall will
        negatively impact our financial results for the third fiscal quarter and
        result
        in a significant reduction of revenue for such quarter as products shipped
        during such quarter will be used to replace recalled products. We cannot,
        however, determine the extent and scope of such impact on our financial
        results for the quarter ending December 31, 2008 at this time.
 
 We
        do not
        anticipate that the product recall will negatively impact our results for
        the
        fiscal quarter ending March 31, 2009 or subsequent fiscal quarters, although
        we
        currently cannot provide any assurance in this regard. Although management
        is
        not aware of any additional significant issues associated with the melamine
        contamination incident, there can be no assurance that additional issues
        will
        not be identified in the future and this may have an adverse effect on our
        results of operations. See Part II. Other Information - Item 1A. *Risk
        Factors -* *We
        are highly dependent upon consumers’ perception of the safety and quality of our
        products as well as similar products distributed by other companies in our
        industry, particularly as they relate to the health and safety of infants
        and
        children. Any ill effects, product liability claims, recalls, adverse publicity
        or negative public perception regarding particular ingredients or products
        or
        our industry in general, or stemming from contamination of our products,
        or
        counterfeiting or other substandard imitations, could harm our reputation
        and
        damage our brand, result in costly and damaging recalls and government sanctions
        and possibly litigation and materially and adversely affect our results of
        operations* .
 
 Since
        the
        beginning of October 2008, all of our manufacturing facilities have been
        returned to service, after passing government inspections and obtaining
        permission from governing authorities. We continue to comply with random
        and
        unscheduled government testing and to conduct enhanced and systematic testing
        in-house.
 
 In
        order
        to regain customer confidence and to ensure products of the highest quality,
        we
        are now using imported milk powder from Europe and New Zealand in our U-Smart
        series products. Through our network of distributors, we have restocked 90%
        of
        our contracted shelf space nationwide with new U-Smart series products and
        Super
        series products produced after October 1, 2008. All such products have been
        found free of melamine and compliant with various government tests.
 
 In
        late
        October 2008, we launched an entirely new series of infant formula products,
        the
“Mingshan” series, aimed at the expansive lower and mid-tier Chinese markets. We
        expect shipments of Mingshan series products to reach our sales network in
        December 2008.
 
 Due
        to
        the melamine contamination incident that hit China’s infant formula industry in
        mid September, our net sales for the fiscal quarter ended September 30,
        2008 increased only slightly by 10.0% to $94.8 million from $86.2 million
        for
        the same period in the previous year. Our gross loss for the fiscal quarter
        ended September 30, 2008 was $26.7 million, as compared to gross profit of
        $46.6 million for the same period in the previous year. Our net loss for
        the
        fiscal quarter ended September 30, 2008 was $49.7 million, as compared to
        net income of $9.8 million for the same period in the previous year.
  Our
        net
        sales for the six months ended September 30, 2008 increased by 44.6% to
        $222.2 million from $153.7 million for the same period in the previous year.
        Our
        gross profit for the six months ended September 30, 2008 decreased by 52.0%
        to $40.2 million from $83.7 million for the same period in the previous year.
        Our net loss for the six months ended September 30, 2008 was $34.0 million,
        as compared to net income of $15.1 million for the same period in the
        previous year.
 
 The
        net
        loss for the three and six month periods ended September 30, 2008 compared
        to
        the same periods last year is attributable primarily to the estimated cost
        of
        product recall and decreased sales in the second half of September as a result
        of the melamine contamination incident.
  14
 
 **CRITICAL
        ACCOUNTING POLICIES**
  We
        follow
        certain significant accounting policies when preparing our consolidated
        financial statements. A summary of these policies is included in our Annual
        Report on Form 10-K for the year ended March 31, 2008 (Form 10-K). 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 have the greatest potential impact on our financial statements,
        so we
        consider these to be our critical accounting policies.
  Additionally,
        in response to the melamine contamination incident, we have established an
        accounting policy for the product recall. We consider our policy of product
        recall provision to be a critical accounting policy due to the significant
        level
        of estimates, assumptions and judgment and its potential impact on our
        consolidated financial statements. We have included below a description of
        our
        accounting policy for product recall provision.
  *Product
        Recall*
  We
        establish a reserve for product recall on a product-specific basis when
        circumstances giving rise to the recall become known. Facts and circumstances
        related to the recall, including where the product affected by the recall
        or
        withdrawal is located (e.g., with consumers, in customers’ inventory, or in the
        Company’s inventory), the expected product return rates by our distributor and
        end-customers, cost estimates for shipping and handling for returns and
        estimated replacement costs are considered when establishing a product recall
        reserve. These factors are updated and reevaluated each period and the related
        reserves are adjusted when these factors indicate that the recall reserve
        is
        either not sufficient to cover or exceeds the estimated product recall
        expenses.
  15
 
 **RESULTS
        OF OPERATIONS**
 
 **Three
        months ended September 30, 2008 and 2007**
 
 ***Net
        Sales***
 
 Net
        sales
        for the three months ended September 30, 2008 increased by 10.0% to $94.8
        million from $86.2 million for the same period in the previous year. This
        slight increase in net sales was a combined result of increased sales in
        July
        and August 2008, partially offset by decreased sales in September 2008 due
        to
        the disruption of our operations caused by the melamine contamination incident.
 
 Net
        sales
        of our nutritional products, including infant formula and other nutritional
        products for children and adults under our Super, U-Smart, and U-Strong brand
        names, accounted for 89.8% of our total sales for the fiscal quarter ended
        September 30, 2008. Net sales of our nutritional products for the fiscal
        quarter
        ended September 30, 2008 increased by 12.9% to $85.2 million from $75.4 million
        for the same period in the previous year, primarily as a result of the following
        factors:
  n
              Sales
                  volume of nutritional products decreased by 8.1% to 8,798 tons
                  for the
                  fiscal quarter ended September 30, 2008 from 9,569 tons for the
                  same
                  period in the previous year because of decreased sales in the second
                  half
                  of September as a result of the melamine contamination
                  incident.
  n
              The
                  average selling price of our nutritional products for the fiscal
                  quarter
                  ended September 30, 2008 increased by 22.8% to $9,680 per ton from
                  $7,883
                  per ton for the same period in the previous year. This increase
                  in average
                  selling price was primarily due to an increase in sales of Super
                  infant
                  formula products, which resulted in a greater proportion of higher-priced
                  products in our product mix.
 
 As
        we
        anticipate that products shipped during the third fiscal quarter will be
        used to
        replace the recalled products, and since the damage to our reputation caused
        by
        the melamine contamination incident will take time to recover, we expect
        the net
        sales of our nutritional products to be negatively impacted in the fiscal
        quarter ending December 31, 2008 although the extent and scope of such negative
        impact on net sales cannot be determined at this time.
 
 Net
        sales
        from our other activities, such as sales of industrial materials and the
        provision of certain services, such as toll drying, blending and packaging
        services, for the fiscal quarter ended September 30, 2008, decreased by 10.7%
        to
        $9.6 million from $10.8 million for the same period in the previous year
        due to
        fluctuations in our capacity and customer orders.
  ***Cost
        of Sales***
  Cost
        of
        sales for the fiscal quarter ended September 30, 2008, including product
        recall
        related expenses and purchases from third-party producers, increased by 207.0%
        to $121.5 million from $39.6 million for the same period in the previous
        year.
 
 Cost
        of
        sales for our nutritional products for the fiscal quarter ended
        September 30, 2008 increased by 257.1% to $112.8 million from $31.6 million
        for the same period in the previous year. The significant increase in the
        cost
        of sales is due primarily to the increase of the product recall related cost,
        partially offset by the decrease in the sales volume of our nutritional
        products. The portion of the estimated product recall cost, which has been
        recognized as cost of sales for the fiscal quarter ended September 30, 2008,
        was
        $75.5 million, reflecting the cost of recalled products and the write-down
        and
        write-off of affected inventory. Sales volume of nutritional products sold
        for
        the fiscal quarter ended September 30, 2008 decreased by 771 tons as compared
        to
        the same period in the previous year.
 
 Cost
        of
        sales for our other products and services for the fiscal quarter ended September
        30, 2008 increased by 9.0% to $8.7 million from $8.0 million for the same
        period
        in the previous year due to rising raw material costs.
  ***Gross
        Profit (Loss)***
  As
        a
        result of the foregoing, we recorded a gross loss of $26.7 million for the
        fiscal quarter ended September 30, 2008, as compared to a gross profit of
        $46.6
        million for the same period in the previous year. Gross loss for our nutritional
        products for the fiscal quarter ended September 30, 2008 was $27.7 million,
        as
        compared to gross profit of $43.8 million for the same period in the previous
        year primarily due to the estimated costs associated with the product recall
        including write-down and write-off of affected inventories.
  16


***Selling
      and Distribution Expenses***





Selling
      and distribution expenses for the fiscal quarter ended September 30, 2008
      increased by 28.2% to $10.7 million from $8.3 million for the same period in
      the
      previous year. This increase was primarily a result of increased compensation
      expenses for our sales force, and an increase in shipping and handling expenses
      as well as travel and entertainment expenses. Total compensation for our sales
      force for the fiscal quarter ended September 30, 2008 increased by 47.3% to
      $4.7
      million from $3.2 million for the same period in the previous year. This
      increase was primarily due to the continuation of our targeted sales incentive
      programs. In addition, the increase in the number of sales staff to 2,809 as
      of
      September 30, 2008 from 2,111 as of September 30, 2007 also contributed to
      the
      increase in compensation expense relating to our sales force. The portion of
      the
      estimated product recall cost, which was recognized as selling and distribution
      expenses for the fiscal quarter ended September 30, 2008 was $1.9 million,
      reflecting shipping and handling expenses for the recalled products. As a result
      of the product recall and business expansion, shipping and handling expenses
      for
      the fiscal quarter ended September 30, 2008 increased by 101.1% to $2.9 million
      from $1.5 million for the same period in the previous year. Travel and
      entertainment expenses for the fiscal quarter ended September 30, 2008 increased
      by 48.4% to $1.6 million from $1.1 million for the same period in the previous
      year.




***Advertising
      and Promotion Expenses***




Advertising
      and promotion expenses for the fiscal quarter ended September 30, 2008 decreased
      by 15.3% to $18.6 million from $22.0 million for the same period in the previous
      year. Advertising expenses for the fiscal quarter ended September 30, 2008,
      which accounted for 68.2% of total advertising and promotion expenses, increased
      by 22.3% to $12.7 million from $10.4 million for the same period in the previous
      year, due primarily to our continuously increased nationwide TV advertising.
      Promotion expenses for the fiscal quarter ended September 30, 2008, which
      accounted for 31.8% of total advertising and promotion expenses, decreased
      by
      49.0% to $5.9 million from $11.6 million for the same period in the previous
      year, due primarily to the disruption of sales promotion activities at retail
      stores in the aftermath of the melamine contamination incident.





***General
      and Administrative Expenses***




General
      and administrative expenses for the fiscal quarter ended September 30, 2008
      increased by 85.2% to $6.8 million from $3.7 million for the same period in
      the
      previous year. The increase in general and administrative expenses was due
      primarily to increased legal and professional expenses associated with our
      cancelled public offering, increased office expenses and increased depreciation
      and amortization expenses.





***Interest
      Income***





Interest
      income for the fiscal quarter ended September 30, 2008 decreased to $186,000
      from $0.8 million for the same period in the previous year due to decreased
      bank
      deposits.





***Interest
      Expense***




Interest
      expense for the fiscal quarter ended September 30, 2008 decreased to $545,000
      from $2.6 million for the same period in the previous year, due primarily to
      the
      amortization of debt discount associated with the issuance of warrants to ABN
      which amounted to $1.3 million in the fiscal quarter ended September 30, 2007,
      and lower average loan balances outstanding during the fiscal quarter ended
      September 30, 2008.




***Provision
      (Benefit) for Income Tax***




As
      a
      result of the net loss arising primarily from the estimated cost of the product
      recall including the write-down and write-off of affected inventory, we recorded
      an income tax credit of $12.7 million for the fiscal quarter ended September
      30,
      2008, as compared to an income tax provision of $1.3 million for the fiscal
      quarter ended September 30, 2007.




***Net
      Income (Loss) Attributable to Stockholders***




As
      a
      result of the foregoing, net loss attributable to stockholders for the fiscal
      quarter ended September 30, 2008 was $49.7 million, as compared to net income
      of
      $9.8 million for the same period in the previous year.




17




**Six
      months ended September 30, 2008 and 2007**





***Net
      Sales***





Net
      sales
      for the six months ended September 30, 2008 increased by 44.6% to $222.2 million
      from $153.7 million for the same period in the previous year. This increase
      in net sales was a combined result of increased sales from April to August
      2008,
      partially offset by decreased sales in September 2008 due to the disruption
      of
      our operations caused by the melamine contamination incident.





Net
      sales
      of our nutritional products, including infant formula and other nutritional
      products for children and adults under our Super, U-Smart, U-Strong brand names,
      accounted for 91.5% of our total sales for the six months ended September 30,
      2008. Net sales of our nutritional products for the six months ended September
      30, 2008 increased by 52.6% to $203.2 million from $133.2 million for the same
      period in the previous year, primarily as a result of the following factors:




n
            Sales
                volume of nutritional products increased by 23.6% to 21,864 tons
                for the
                six months ended September 30, 2008 from 17,696 tons for the same
                period
                in the previous year. The increase was primarily due to the significant
                business growth experienced in the months from April to August and
                partially offset by the decreased sales in the second half of September
                due to the melamine contamination
                incident.




n
            The
                average selling price of our nutritional products for the six months
                ended
                September 30, 2008 increased by 23.5% to $9,295 per ton from $7,528
                per
                ton for the same period in the previous year. This increase in average
                selling price was primarily due to an increase in sales of Super
                infant
                formula products, which resulted in a greater proportion of higher-priced
                products in our product mix.





Net
      sales
      from our other activities, such as sales of industrial materials and the
      provision of certain services, such as toll drying, blending and packaging
      services, for the six months ended September 30, 2008 decreased by 7.5% to
      $18.9
      million from $20.5 million for the same period in the previous year due to
      fluctuations in our capacity and customer orders.





***Cost
      of Sales***





Cost
      of
      sales for the six months ended September 30, 2008, including product recall
      related expenses and purchases from third-party producers, increased by 160.0%
      to $182.0 million from $70.0 million for the same period in the previous year.





Cost
      of
      sales for our nutritional products for the six months ended September 30,
      2008 increased by 209.7% to $165.1 million from $53.3 million for the same
      period in the previous year. The significant increase in the cost of sales
      is
      due primarily to the increase of the product recall related cost and the
      increase in the sales volume of our nutritional products. The portion of the
      estimated product recall cost, which has been recognized as cost of sales for
      the fiscal quarter ended September 30, 2008, was $75.5 million, reflecting
      the
      cost of recalled products and the write-down and write-off of affected
      inventory. The sales volume of nutritional products sold for the six months
      ended September 30, 2008 increased by 4,168 tons as compared to the same period
      in the previous year.





Cost
      of
      sales for our other products and services for the six months ended September
      30,
      2008 increased by 1.0% to $16.9 million from $16.7 million for the same period
      in the previous year due to an increase in raw material costs.





***Gross
      Profit (Loss)***





As
      a
      result of the foregoing, gross profit for the six months ended September 30,
      2008 decreased by 52.0% to $40.2 million from $83.7 million for the same period
      in the previous year. Gross profit for our nutritional products for the six
      months ended September 30, 2008 decreased by 52.3% to $38.2 million from $79.9
      million for the same period in the previous year due primarily to the estimated
      costs in relation to product recall including the write-down and write-off
      of
      affected inventory.




Our
      overall gross margin decreased to 18.1% for the six months ended September
      30,
      2008 from 54.5% for the same period in the previous year. Our gross margin
      for
      nutritional products and other products was 18.8% and 10.7%, respectively,
      for
      the six months ended September 30, 2008, as compared to 60.0% and 18.4%,
      respectively, for the same period in the previous year.





The
      decrease in our gross margin for nutritional products was primarily due to
      the
      estimated cost of the product recall, partially offset by an increase in the
      proportion of sales of our higher margin infant formula products.




18




***Selling
      and Distribution Expenses***





Selling
      and distribution expenses for the six months ended September 30, 2008 increased
      by 39.0% to $22.1 million from $15.9 million for the same period in the previous
      year. This increase was primarily a result of increased compensation expenses
      for our sales force, and an increase in shipping and handling expenses as well
      as travel and entertainment expenses. Total compensation for our sales force
      for
      the six months ended September 30, 2008 increased by 75.7% to $9.8 million
      from
      $5.6 million for the same period in the previous year. This increase was
      primarily due to the continuation of our targeted sales incentive programs.
      In
      addition, the increase in the number of sales staff to 2,809 as of September
      30,
      2008 from 2,111 as of September 30, 2007 also contributed to the increase in
      compensation expense relating to our sales force. The portion of the estimated
      product recall cost, which was recognized as selling and distribution expenses
      for the six months ended September 30, 2008 was $1.9 million, reflecting
      shipping and handling expenses for the recalled products. As a result of the
      product recall and business expansion, shipping and handling expenses for the
      six months ended September 30, 2008 increased by 97.6% to $5.2 million from
      $2.6
      million for the same period in the previous year. Travel and entertainment
      expenses for the six months ended September 30, 2008 increased by 51.8% to
      $3.0
      million from $2.0 million for the same period in the previous year.





***Advertising
      and Promotion Expenses***





Advertising
      and promotion expenses for the six months ended September 30, 2008 increased
      by
      25.4% to $50.7 million from $40.5 million for the same period in the previous
      year. Advertising expenses for the six months ended September 30, 2008, which
      accounted for 62.1% of total advertising and promotion expenses, increased
      by
      98.0% to $31.5 million from $15.9 million for the same period in the previous
      year, due primarily to our continuously increased nationwide TV advertising.
      Promotion expenses for the six months ended September 30, 2008, which accounted
      for 37.9% of total advertising and promotion expenses, decreased by 21.6% to
      $19.2 million from $24.6 million for the same period in the previous year,
      due
      primarily to the disruption of sales promotion activities at the retail stores
      in the aftermath of the melamine contamination incident.





***General
      and Administrative Expenses***





General
      and administrative expenses for the six months ended September 30, 2008
      increased by 63.7% to $10.7 million from $6.5 million for the same period in
      the
      previous year. The increase in general and administrative expenses was primarily
      due to increased salary, social insurance and office expenses as our business
      continued to expand, increased legal and professional expenses associated with
      our cancelled public offering, and increased depreciation and amortization
      expenses.





***Interest
      Income***





Interest
      income for the six months ended September 30, 2008 decreased to $384,000 from
      $1.2 million for the same period in the previous year due to decreased bank
      deposits.




***Interest
      Expense***





Interest
      expense for the six months ended September 30, 2008 decreased to $1.1 million
      from $4.8 million for the same period in the previous year, due primarily to
      the
      amortization of debt discount associated with the issuance of warrants to ABN
      which amounted to $2.3 million in the six months ended September 30, 2007.





***Provision
      (Benefit) for Income Tax***





As
      a
      result of the net loss arising primarily from the estimated cost of the product
      recall including inventory write-down and write-off, we recorded an income
      tax
      credit of $9.6 million for the six months ended September 30, 2008, as compared
      to an income tax provision of $2.1 million for the six months ended September
      30, 2007. Our effective tax rate increased to 22.1% for the six months ended
      September 30, 2008 from 12.0% for the same period in the previous year. This
      increase in our effective income tax rate was primarily due to the expirations
      of tax holidays enjoyed by certain subsidiaries.





***Net
      Income (Loss) Attributable to Stockholders***





As
      a
      result of the foregoing, net loss attributable to stockholders for the six
      months ended September 30, 2008 was $34.0 million, as compared to net income
      of
      $15.1 million for the same period in the previous year.




19




**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      recent melamine contamination incident has significantly impacted our liquidity.
      In addition, a s
      we
      anticipate that products shipped during the third fiscal quarter will be used
      to
      replace the recalled products, and since the damage to our reputation caused
      by
      the melamine contamination incident will take time to recover, we expect the
      net
      sales of our nutritional products to be negatively impacted in the fiscal
      quarter ending December 31, 2008 although the extent and scope of such negative
      impact on net sales cannot be determined at this time.





Accordingly,
      w e
      are
      discussing with local banks to obtain short term financing to support our
      operational needs. During the three months ended September 30, 2008, we secured
      new borrowings of $36.8 million with a weighted average interest rate of 6.21%.
      In addition, during October 2008, the Company secured bank loans of $22.0
      million with a weighted average interest rate at 6.75%, with maturity
      dates ranging from October 21, 2009 to October 29, 2009. The loans are
      secured by the pledge of certain fixed assets held by the Company’s
      subsidiaries




We
      expect
      that from December 2008 we will begin to have cash inflow from normal sales
      of
      our products. If we fail to obtain future bank loans or raise additional capital
      through equity placement in the fiscal quarter ending December 31, 2008, we
      may
      encounter difficulties in working capital, see Part II. Other Information -
      Item
      1A. *Risk
      Factors -* *Our
      business is capital intensive and our growth strategy may require additional
      capital that may not be available on favorable terms or at
      all.*





Our
      cash
      and cash equivalent balance decreased by $45.2 million to $52.2 million at
      September 30, 2008, as compared to $97.4 million at March 31, 2008.





***Cash
      Flows from Operating Activities***




Net
      cash
      used in operating activities was $11.8 million for the six months ended
      September 30, 2008, as compared to net cash provided by operating activities
      of
      $14.0 million for the same period in the previous year. Net cash used in
      operating activities for the six months ended September 30, 2008 was mainly
      due
      to net loss of $34.0 million, non-cash items not affecting cash flows of $3.9
      million and a $18.3 million increase in working capital. The changes in working
      capital for the six months ended September 30, 2008, were primarily related
      to a
      $7.7 million decrease in inventories, a $9.8 million increase in accounts
      payable due to delayed payment as a result of our tightened liquidity position,
      a $8.3 million increase in accounts receivable due to our provision of an
      extended credit term to certain distributors, a $16.3 million increase in income
      tax receivable, and a $38.0 million increase in product recall
      provision.




***Cash
      Flows from Investing Activities***




Net
      cash
      used in investing activities was $61.3 million for the six months ended
      September 30, 2008, as compared to $7.6 million for the same period in the
      previous year. This was primarily due to our plant expansion to increase our
      production capacities and the addition of new projects. Cash invested in
      purchases of property and equipment was $34.0 million and $14.0 million for
      the six months ended September 30, 2008, and 2007, respectively.





Restricted
      cash increased by $27.2 million for the six months ended September 30, 2008,
      as
      compared to a decrease of $7.2 million for the same period in the previous
      year. In the six months ended September 30, 2008, $33.6 million restricted
      cash
      was used to secure a short term debt of similar amount. The loan was repaid
      in
      early October 2008 and the restricted cash amount was subsequently released.
      Other restricted cash represents cash deposited with banks as security against
      the issuance of letters of credit for the import of machinery.




***Cash
      Flows from Financing Activities***




Net
      cash
      provided by financing activities was $23.8 million for the six months ended
      September 30, 2008, as compared to net cash provided by financing activities
      of
      $69.6 million for the same period in the previous year. Cash used in financing
      activities during the six months ended September 30, 2008 resulted from the
      repayment of bank borrowing of $16.8 million and proceeds from short term
      borrowing of $41.1 million.




20




***Outstanding
      Indebtedness***




On
      October 11, 2007, ABN and another lender provided a three year term loan,
      or the New ABN Loan, to us in the aggregate amount of $35 million. The principal
      amount, and any unpaid accrued interest on the New ABN Loan, will be due on
      October 11, 2010 and may be prepaid without penalty. The proceeds of the
      New ABN Loan were used to pay the outstanding principal and accrued interest
      of
      a six-month term loan provided to us by ABN on April 19, 2007, or the
      Original ABN Loan. The New ABN Loan bears interest at LIBOR for deposits in
      U.S.
      dollars plus 3.5% with interest payable on the last day of each three-month
      period. The loan is secured by a pledge of 10,000 shares of common stock, or
      100% of the outstanding common stock, of Synutra Illinois.




The
      loan
      agreement for the New ABN Loan provides for mandatory prepayment upon the
      occurrence of certain events, and contains customary covenants for financings
      of
      this type, including restrictions on the incurrence of liens, payment of
      dividends, and disposition of properties. The loan agreement for the New ABN
      Loan also contains certain financial covenants, including a requirement to
      maintain specified leverage and interest coverage ratio, tangible net worth,
      and
      indebtedness to tangible net worth ratio. We have performed an analysis of
      the
      relevant ratios and found that due to the net loss which resulted from the
      estimated costs of the product recall, including the write-down and write-off
      of
      affected inventory in this fiscal quarter, the Company was not able to meet
      the
      financial covenant requirements for leverage ratio and interest coverage ratio
      as of September 30, 2008. Further, we anticipate we may have difficulty meeting
      these financial covenant requirements for the next several fiscal quarters.
      We
      have requested the lenders to waive these financial covenants for the fiscal
      quarters ended September 30, 2008, December 31, 2008, March 31, 2009 and June
      30, 2009. As of the date of the filing of this 10-Q, the request for waiver
      has
      not been granted. Accordingly, we reclassified the outstanding balance of $34.3
      million under the loan to current liabilities since we consider this debt
      potentially callable by the bank. We may also incur additional expenses in
      connection with the change of loan arrangements, see Part II. Other Information
      - Item 1A. *Risk
      Factors - As a result of losses associated with the recent melamine
      contamination incident in China, we may not be able to meet certain financial
      covenants under our credit facility and may incur additional expenses in
      connection with the change of loan arrangements* .





In
      addition to the New ABN Loan, as of September 30, 2008 and March 31, 2008,
      the Company had short-term loans from banks in the amount of $43.9 million
      and
      $21.2 million, respectively (including new borrowings of $36.8 million with
      a
      weighted average interest rate of 6.21% during the three months ended September
      30, 2008). The weighted average interest rate on short-term loans outstanding
      at
      September 30, 2008 and March 31, 2008 was 6.41% and 7.08%, respectively.
      The loans were secured by the pledge of cash deposit and certain fixed assets
      held by the Company and its subsidiaries. The value of cash pledged was $33.6
      million and nil as of September 30, 2008 and March 31, 2008,
      respectively. The value of fixed assets pledged was $18.2 million and $18.1
      million as of September 30, 2008 and March 31, 2008, respectively.




We
        have a
        capital lease agreement in place related to office buildings. The capital
        lease
        obligations of $5.4 million are included in long-term debt.


***Contractual
        Obligations***
 
 For
        information on our contractual obligations, please refer to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations - Liquidity and Capital Resources - Contractual Obligations.” as
        presented in our Annual Report on Form 10-K for the fiscal year ended March
        31,
        2008.




***Capital
      Expenditures***




Our
      capital expenditures for the six months ended September 30, 2008 was $34.0
      million, primarily in connection with expansion of our production plants. In
      order to meet our immediate working capital needs in the aftermath of the
      melamine contamination incident, we have temporarily postponed all major capital
      expenditure projects that are not urgently needed for our operation. We will
      consider resuming these projects when our operations are back to normal.





***Off-Balance
      Sheet Arrangements***




We
      do not
      have off-balance sheet arrangements other than: (1) a guarantee issued to the
      Zhangbei Branch of the Agricultural Bank of China related to various bank loans
      of $1.1 million to 104 dairy farmers in the Zhangbei area of Hebei Province
      in
      China, which was discussed in our Annual Report on Form 10-K for the fiscal
      year
      ended March 31, 2008; and (2) a lease of certain land and building from Beijing
      Dongfang Xueyuan Property Management Co., Ltd. which we use as our office
      building. The lease period is from July 26, 2008 to July 25, 2028. The annual
      rental fee is $2.2 million. We have the option to renew the contract with the
      same term in the future.




21


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




There
      were no material changes in quantitative or qualitative disclosures about market
      risk during the three and six months ended September 30, 2008. For
      additional information, please refer to Item 7A "Quantitative and Qualitative
      Disclosures about Market Risk" as presented in our Annual Report on Form 10-K
      for the fiscal year ended March 31, 2008.




**ITEM
      4. CONTROLS AND PROCEDURES**




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      does not expect that our disclosure controls and procedures or our internal
      control over financial reporting will prevent all errors and all fraud. A
      control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. Further, the design of a control system must reflect the fact that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected.




*Conclusion
      Regarding Effectiveness of Disclosure Controls and Procedures*




The
      Company’s management, with the participation of the Company’s Chief Executive
      Officer and Chief Financial Officer, has evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as such term is defined in
      Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
      period covered by this report. Based on such evaluation, the Company’s Chief
      Executive Officer and Chief Financial Officer have concluded that, as of
      September 30, 2008, the Company’s disclosure controls and procedures were not
      effective to ensure that the information required to be disclosed by the Company
      in the reports that it files or submits under the Securities Exchange Act of
      1934 is (a) recorded, processed, summarized, and reported within the time
      periods specified in the SEC’s rules and forms and (b) accumulated and
      communicated to the Company’s management, including its Chief Executive Officer
      and Chief Financial Officer, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required disclosure. The Chief
      Executive Officer’s and Chief Financial Officer’s conclusion regarding the
      Company’s disclosure controls and procedures is based solely on management’s
      conclusion that the Company’s internal control over financial reporting as
      identified in our Management’s Report on Internal Control Over Financial
      Reporting included with our Annual Report on Form 10-K for the fiscal year
      ended
      March 31, 2008, continues not to be effective as of September 30, 2008.




In
      connection with our Annual Report on Form 10-K for the fiscal year ended March
      31, 2008, our management assessed the effectiveness of the Company’s internal
      control over financial reporting and concluded that the Company’s internal
      control over financial reporting was not effective based on management’s
      identification of one material weakness and four deficiencies in the Company’s
      internal control over financial reporting, as defined in Auditing Standard
      No. 5, “An Audit of Internal Control Over Financial Reporting That Is
      Integrated with An Audit of Financial Statements.”




Our
      material weakness related to:




·
            
            (i)
                an insufficient complement of personnel in our corporate accounting
                and
                financial reporting function 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 materiality
                thresholds; and (ii) an inadequacy of competent staff in our internal
                audit function to effectively monitor the Company’s operational, financial
                and compliance-oriented controls, including controls over the financial
                closing and reporting process.




Our
      deficiencies related to:




·
            
            inadequate
                training of employees, especially new hires, on our antifraud programs
                and
                code of ethics;




·
            
            inadequate
                segregation of duties related to our stock count process and lack
                of
                controls to regularly monitor, document and determine the value of
                certain
                inventories on a timely basis;




·
            
            Inadequate
                controls related to managing staff cash advances; and




·
            
            failure
                to maintain an appropriate level of security within our computer
                operating
                systems and applications.





*Remediation
      and Changes in Internal Control over Financial Reporting*




The
      Company has discussed the material weakness and deficiencies in its internal
      control over financial reporting with the Audit Committee of the Board of
      Directors. Specific remedial actions have been taken to reorganize and
      restructure the Company’s corporate accounting staff (“Corporate Accounting”)
      during the most recent fiscal quarter, which include (1) revising the
      reporting structure and establishing clear roles, responsibilities, and
      accountability, and (2) training accounting personnel at our subsidiaries
      to ensure the right complement of knowledge and skills. The Company has also
      strived to continuously improve its period-end closing procedures by
      (1) ensuring that account reconciliations and analyses for significant
      financial statement accounts are reviewed for completeness and accuracy by
      qualified accounting personnel, (2) 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
      (3) developing better monitoring controls at Corporate Accounting and at
      our subsidiaries. During the most recent fiscal quarter, the Company was also
      in
      the process of recruiting a qualified internal audit director and additional
      technical accounting personnel to address the Company’s complex accounting and
      financial reporting requirements. Due to the melamine contamination incident,
      these appointments have been delayed. The Company will resume the search for
      such personnel in the third fiscal quarter.





In
      addition, remediation actions have been implemented to address the deficiencies
      described above. These actions included: (1) implementing a formal training
      program and training of all key employees, especially new hires, on our
      antifraud programs, corporate governance guidance, and business ethics; (2)
      reorganizing the stock count process by including staff from different
      departments to ensure adequate segregation of duties; (3) introducing tighter
      controls which include regular checks and alerts to manage staff cash advances;
      and (4) increasing the level of security within our computer operating system
      and applications through keeping a record of audit logs and performing regular
      review of such audit logs and implementing adequate password
      controls.


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 Company’s most recent fiscal quarter, which have materially affected, or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.


22




**PART
      II**


**OTHER
      INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




We
      are
      not currently a party to any material legal proceedings. From time to time,
      we
      may be subject to various claims and legal actions arising in the ordinary
      course of business.




**ITEM
      1A. RISK FACTORS**





The
      discussion of our business and operations should be read together with the
      risk
      factors contained in our Annual Report on Form 10-K for the fiscal year ended
      March 31, 2008, which was filed with the SEC and describes the various risks
      and
      uncertainties to which we are or may become subject to. At September 30, 2008,
      there have been no material changes to the risk factors set forth in our Annual
      Report on Form 10-K for the year ended March 31, 2008, except as set forth
      below:




***We
      are highly dependent upon consumers’ perception of the safety and quality of our
      products as well as similar products distributed by other companies in our
      industry, particularly as they relate to the health and safety of infants and
      children. Any ill effects, product liability claims, recalls, adverse publicity
      or negative public perception regarding particular ingredients or products
      or
      our industry in general, or stemming from contamination of our products, or
      counterfeiting or other substandard imitations, could harm our reputation and
      damage our brand, result in costly and damaging recalls and government sanctions
      and possibly litigation and materially and adversely affect our results of
      operations.***




We
      sell
      products for human consumption, which involves risks such as product
      contamination, spoilage and tampering. We may be subject to liability if the
      consumption of any of our products causes injury, illness or death. Adverse
      publicity or negative public perception regarding particular ingredients, our
      products, our actions relating to our products, or our industry in general
      could
      result in a substantial drop in demand for our products. This negative public
      perception may include publicity regarding the safety or quality of particular
      ingredients or products in general, of other companies or of our products or
      ingredients specifically. Negative public perception may also arise from
      regulatory investigations or product liability claims, regardless of whether
      those investigations involve us or whether any product liability claim is
      successful against us.




On
      September 16, 2008, China’s Administration of Quality Supervision, Inspection
      and Quarantine, or China AQSIQ, announced its finding that the formula products
      of 22 Chinese formula producers, including certain lots of our U-Smart products,
      were contaminated by melamine, a substance not approved for use in food and
      linked to the recent illness and deaths of infants and children in China. To
      date, there have been four reported deaths and tens of thousands of children
      have suffered kidney-related illness due to the contaminated infant formula
      of
      one of our competitors. This contamination incident has resulted in significant
      negative publicity for the entire domestic dairy and formula industries in
      China
      and demand for domestically-produced dairy and formula products, including
      our
      products, has declined significantly. We have recalled our affected U-Smart
      products as well as all other products produced at the same facilities in the
      Hebei and Inner Mongolia regions of China, where we believe the contaminated
      milk supplies originated. We also suspended production at our facilities in
      Qingdao, Hebei and Inner Mongolia for two weeks pending government and internal
      investigations. The estimated cost of the recall is $77.4 million, which has
      been recognized as a charge to cost of sales and selling and distribution
      expenses in our consolidated statement of income for the fiscal quarter ended
      September 30, 2008, of which $38.0 million was recorded as a product recall
      provision in our consolidated balance sheet as of September 30, 2008. These
      costs are still subject to finalization, and we cannot assure you that this
      will
      be the total cost for the recall or that the total cost will not significantly
      exceed our estimates.




Although
      we have not confirmed any cases of kidney-related or other illnesses caused
      by
      our products, we cannot assure you that such cases will not surface in the
      future. The Chinese government has provided free medical screening, treatment,
      and care for consumers affected by melamine contamination in infant formula
      products. We cannot assure you that the Chinese government will not seek
      reimbursement from dairy and formula product manufacturers, including us.




We
      believe the contamination incident has already negatively impacted our brand
      and
      reputation in China. It has also affected investor confidence in us as reflected
      by the sudden significant decrease in our stock price on Nasdaq to a 52-week
      low
      of $10.00 per share during the days shortly following the initial news reports
      about the incident. We cannot predict the long term effect this recall and
      the
      negative publicity associated with the contamination incident will have on
      our
      reputation among our customers, consumers and investors. Our results of
      operations and financial position would be severely impacted if we have failed
      to accurately estimate the costs of this product recall or if our customers
      and
      consumers cease to purchase our products as a result of the contamination
      incident.




In
      the
      past, there have also been occurrences of counterfeiting and imitation of
      products in China that have been widely publicized. We cannot guarantee that
      contamination or counterfeiting or imitation of our or similar products will
      not
      occur in the future or that we will be able to detect it and deal with it
      effectively. Any occurrence of contamination or counterfeiting or imitation
      could negatively impact our corporate and brand image or consumers’ perception
      of our products or similar nutritional products generally, particularly if
      the
      counterfeit or imitation products cause injury or death to consumers. For
      example, in April 2004, sales of counterfeit and substandard infant formula
      in
      Anhui, China caused the deaths of 13 infants as well as harming many others.
      Although this incident did not involve the counterfeiting of our products,
      it
      caused significant negative publicity for the entire infant formula industry
      in
      China. The mere publication of information asserting that infant formula
      ingredients or products may be harmful could have a material adverse effect
      on
      us, regardless of whether these reports are scientifically supported or concern
      our products or the raw materials used in our products.




In
      addition, we believe that the recent melamine incident and any other adverse
      news related to formula products in China will also result in increased
      regulatory scrutiny of our industry, which may result in increased costs and
      reduce our margins and profitability. The government has enhanced its
      regulations on the industry aimed to ensure the safety and quality of dairy
      products, including but not limited to compulsory batch by batch inspection.
      This is likely to increase our operating costs and capital expenditure.
      Moreover, our management may fail to respond effectively to such adverse events
      and any such failure could have a material adverse effect on our results of
      operations and financial condition.




23




***If
      we fail to obtain raw materials in the quantity and the quality we need, and
      at
      commercially acceptable prices, our results of operations, financial condition
      and business prospects would be materially and adversely affected.***




Our
      business requires certain key raw materials, such as raw milk and whey protein
      powder. We may experience a shortage in the supply of certain raw materials
      in
      the future, which could materially and adversely affect our production and
      results of operations. We do not have guaranteed supply contracts with any
      of
      our raw material suppliers, and some of our suppliers may, without notice or
      penalty, terminate their relationship with us at any time. We also rely on
      a
      small number of suppliers for some of our raw materials, such as whey protein
      powder and imported milk powder. After the melamine contamination incident,
      we
      have started to import milk powder from Europe and New Zealand for our U-Smart
      and Super products as consumers have less confidence in domestically-produced
      milk powder. If any supplier is unwilling or unable to provide us with high
      quality raw materials in required quantities and at acceptable prices, we may
      be
      unable to find alternative sources or at commercially acceptable prices, on
      satisfactory terms, in a timely manner, or at all. Our inability to find or
      develop alternative sources could result in delays or reductions in production,
      product shipments or a reduction in our profit margins. Moreover, these
      suppliers may delay material shipments or supply us with inferior quality raw
      materials that may adversely impact the timely delivery or the quality of our
      products. If any of these events were to occur, our product quality, competitive
      position, reputation and business could suffer.




In
      addition, some of the raw materials used in our business are imported, such
      as
      whey protein powder and milk powder. Our imported raw materials are subject
      to
      various PRC governmental permit requirements, approval procedures and import
      duties, and may also, from time to time, be subject to export controls and
      other
      legal restrictions imposed by foreign countries. Should the PRC government
      refuse to issue the necessary permits or approvals to us or our suppliers,
      or
      take any administrative actions to limit imports of certain raw materials,
      or if
      we or our suppliers fail to pay any required import duties, or if governmental
      agencies or laws of foreign countries prevent the timely export of certain
      raw
      materials we require to China, our ability to produce and sell our products
      in
      China could be materially and adversely affected. In addition, import duties
      increase the cost of our products and may make them less
      competitive.




Finally,
      certain suppliers of raw materials within our supply chain may intentionally
      or
      inadvertently contaminate our raw material supplies or provide us with
      substandard raw material supplies that adversely impact the quality of our
      products exposing our customers to health risks and damaging our reputation,
      brand and financial condition. For a more detailed description of this risk,
      and
      in particular the impact of the recent melamine contamination incident in China,
      see “Risk Factors — We are highly dependent upon consumers’ perception of
      the safety and quality of our products as well as similar products distributed
      by other companies in our industry, particularly as they relate to the health
      and safety of infants and children. Any ill effects, product liability claims,
      recalls, adverse publicity or negative public perception regarding particular
      ingredients or products or our industry in general, or stemming from
      contamination of our products, or counterfeiting or other substandard
      imitations, could harm our reputation and damage our brand, result in costly
      and
      damaging recalls and government sanctions and possibly litigation and materially
      and adversely affect our results of operations.”




***Our
      results of operations may be affected by fluctuations in availability and price
      of raw materials.***




The
      raw
      materials we use are subject to price fluctuations due to various factors beyond
      our control, including increasing market demand, inflation, severe climatic
      and
      environmental conditions, commodity price fluctuations, currency fluctuations,
      changes in governmental and agricultural regulations and programs and other
      factors. For instance, the price of raw milk in China rose by approximately
      55.0% in 2007 due to various factors, including rising production costs. We
      also
      expect that our raw material prices will continue to fluctuate and be affected
      by inflation in the future. Changes to our raw materials prices may result
      in
      increases in production and packaging costs, and we may be unable to raise
      the
      prices of our products to offset these increased costs in the short-term or
      at
      all. As a result, our results of operations may be materially and adversely
      affected.




24




***We
      may experience problems with product quality or product performance, or the
      perception of such problems, which could adversely affect our reputation or
      result in a decrease in customers and revenue, unexpected expenses and loss
      of
      market share.***




Our
      operating results depend, in part, on our ability to deliver high quality
      products on a timely and cost-effective manner. Our quality control and food
      safety management systems are complex. For example, there are over 1,100 quality
      control points throughout the whole production process. If the quality of any
      of
      our products deteriorated, it could result in delays in shipments, cancellations
      of orders or customer returns and complaints, loss of goodwill, and harm to
      our
      brand and reputation. In addition, we purchase a portion of our milk powder
      from
      third-party producers. We may be unable to exercise the same degree of quality
      control over these third-party production facilities as we can over our own
      facilities. Any quality problems associated with the milk powder produced by
      these third-party producers would also affect our products’ quality and lead to
      negative publicity against us, adversely affecting our reputation and brand,
      and
      causing a decrease in sales of our products and a loss of market share. For
      example, the recent melamine contamination incident in China has resulted in
      certain of our products being contaminated, impacting our brand and reputation.




***Product
      liability claims against us could result in adverse publicity and potentially
      significant monetary damages.***




As
      with
      other infant formula producers, we are also exposed to risks associated with
      product liability claims if the consumption of infant formula products we sell
      results in injury or death. We cannot predict what impact such product liability
      claims or resulting negative publicity would have on our business or on our
      brand image. The successful assertion of product liability claims against us
      could result in potentially significant monetary damages, diversion of
      management resources and require us to make significant payments and incur
      substantial legal expenses. We do not have product liability insurance and
      have
      not made provisions for potential product liability claims. Therefore, we may
      not have adequate resources to satisfy a judgment if a successful claim is
      brought against us. Even if a product liability claim is not successfully
      pursued to judgment by a claimant, we may still incur substantial legal expenses
      defending against such a claim and our brand image and reputation would suffer.
      Finally, serious product quality concerns could result in governmental action
      against us, which, among other things, could result in the suspension of
      production or distribution of our products, loss of certain licenses, or other
      governmental penalties.




For
      example, the recent melamine contamination incident in China has resulted in
      certain of our products being contaminated. While we have not, to date, become
      subject to any product liability claims in connection with the melamine
      contamination incident, we cannot assure you that such claims will not occur
      in
      the future. See “Risk Factors — We are highly dependent upon consumers’
perception of the safety and quality of our products as well as similar products
      distributed by other companies in our industry, particularly as they relate
      to
      the health and safety of infants and children. Any ill effects, product
      liability claims, recalls, adverse publicity or negative public perception
      regarding particular ingredients or products or our industry in general, or
      stemming from contamination of our products, or counterfeiting or other
      substandard imitations, could harm our reputation and damage our brand, result
      in costly and damaging recalls and government sanctions and possibly litigation
      and materially and adversely affect our results of operations.”




***More
      mothers may breastfeed their babies rather than use our products, resulting
      in
      reduced demand for our products and adversely affecting our
      revenues.***




Our
      results of operations are affected by the number of mothers who choose to use
      our products rather than breastfeeding their babies. Much publicly available
      data suggests that breastfeeding has many health benefits for the baby that
      cannot be replicated by dairy-based infant formula products. Additionally,
      popular literature, cultural pressure, government policies and medical advice
      in
      China generally promote the benefits of breastfeeding. For example, on
      August 1, 2007, China’s Ministry of Health issued an Infant Feeding
      Strategy which promoted breastfeeding and requested all local relevant
      departments to publicize the benefits of breastfeeding through radio
      broadcasting, television and newspapers during World Breastfeeding Week, which
      took place in early August 2007. Thus, to the extent that private, public and
      government sources increasingly promote the benefits of breastfeeding, there
      could be a reduced demand for our products and our revenues could be adversely
      affected.




In
      addition, we believe the recent melamine contamination incident has deteriorated
      customer confidence in the safety and quality of infant formula products and
      the
      number of mothers (and future mothers) who choose to breastfeed their babies
      may
      significantly increase. The overall market demand for infant formula products
      may slow or decline and any reduced demand for our products will negatively
      impact our revenues and growth prospects.




25




***We
      operate in a competitive environment, which may lead to declining revenue growth
      or other circumstances that would negatively affect our results of
      operations.***




The
      market for pediatric nutritional products is competitive, and we believe that
      competition in this market will continue to intensify. We believe that the
      principal competitive factors in our markets are brand recognition, perceived
      quality, advertising, formulation, packaging, and price. We face significant
      competition from a number of competitors, including multinational companies,
      such as Abbot Laboratories’ Ross Products Division, Mead Johnson, Nestle, Numico
      and Wyeth, and domestic companies, such as Yashili and Yili. See “Item 1.
      Business—Competition” in our Annual Report on Form 10-K for the fiscal year
      ended March 31, 2008, which was filed with the SEC. Many of our competitors
      have
      longer operating histories, greater name recognition, significantly larger
      market shares, access to larger customer bases and significantly greater
      economies of scale in financial, sales and marketing, production, distribution,
      technical and other resources than we do. Some of these competitors have used,
      and we expect will continue to use, more aggressive pricing strategies, greater
      amounts of incentives and subsidies for distributors, retailers and customers
      and more advanced processes and technologies. Furthermore, consolidation among
      industry participants in China may potentially result in stronger domestic
      competitors that are better able to compete as end-to-end suppliers as well
      as
      competitors who are more specialized in particular areas and geographic markets.
      This could have a material adverse effect on our business, financial condition,
      results of operations and prospects. In addition, as a result of the recent
      melamine contamination incident, customers have lost confidence in infant
      formula produced by domestic companies for the time being, which gives
      multinational infant formula companies an advantage over us.




In
      order
      to compete successfully in our markets, we will need to restore customer
      confidence in our brand and products, develop new products and enhance our
      product offerings while maintaining price competitiveness. Even if we
      successfully restore customer confidence, if and to the extent we fail to
      develop new products that differentiate us from our competitors, we may need
      to
      compete largely on price, which may cause our operating margins to decline.
      Our
      inability to compete successfully against competitors and pricing pressures
      could result in lost customers, loss of market share and reduced operating
      margins, which would adversely impact our results of operations.




***The
      recent disruptions in the overall economy and the financial markets may
      adversely impact our business and results of operations and may limit our access
      to additional financing.***




As
      widely
      reported, financial markets in the United States, Europe and Asia have been
      experiencing extreme disruptions in recent months, including, among other
      things, extreme volatility in security prices, the failure and near failure
      of a
      number of large financial services companies, severely diminished liquidity
      and
      credit availability, rating downgrades of certain investments and declining
      valuations of others.




The
      infant formula industry can be affected by macro economic factors, including
      changes in national, regional, and local economic conditions, employment levels
      and consumer spending patterns.  Though the recent disruptions in the
      overall economy and financial markets is less severe in China than in the U.S.,
      it could reduce consumer confidence in the economy and negatively affect
      consumers’ spending, which could be harmful to our financial position and
      results of operations.




In
      addition, if the capital and credit markets continue to experience volatility
      and the availability of funds remains limited, we will incur increased costs
      associated with equity and/or debt financing. It is possible that our ability
      to
      access the capital and credit markets may be limited by these or other factors
      at a time when we would like, or need, to do so, which could have an impact
      on
      our ability to refinance maturing debt and/or react to changing economic and
      business conditions.




26




***As
      a result of losses associated with the recent melamine contamination*** ***incident
      in China, we may not be able to meet certain financial covenants under our
      credit facility and may incur additional expenses in connection with the change
      of loan arrangements.***




As
      a
      result of the recent melamine contamination incident, we have incurred
      substantial losses for the quarter ended September 30, 2008 from product recall
      and inventory write-off. Though we expect this to be a short-term financial
      challenge for us, we may experience difficulty in meeting financial covenants
      set forth in our credit facility for the quarter ended September 30, 2008,
      and
      possibly for the next several quarters. We are requesting the lenders to grant
      us a waiver of financial covenants and amend loan agreements with us. There
      can
      be no assurance that we will be able to obtain such waiver on terms and
      conditions acceptable to us. We expect that in consideration for the waiver,
      we
      will be subject to increased interest rates and additional fees as a result
      of
      downgrading of our credit rating by the lenders due to the melamine
      contamination incident as well as the current market disruption. If we are
      unable to obtain the waiver, we will be in default and may be required to prepay
      the outstanding loans as a result of the default. We may not be able to
      refinance our debt on terms acceptable to us, or at all, and there can be no
      assurance that additional lines-of-credit or financing instruments will be
      available in amounts or on terms acceptable to us, if at all, under the current
      market condition.




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




We
      have,
      in the past, obtained loans and sold our common stock to raise additional
      capital. Our business requires significant capital and although we believe
      that
      our current cash, and cash flow from operations will be sufficient to meet
      our
      present and reasonably anticipated cash needs, we may, in the future, require
      additional cash resources due to changed business conditions, implementation
      of
      our strategy to expand our production 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. For example,
      the recent melamine contamination incident has significantly impacted our
      liquidity due to our product recall and may require us to obtain additional
      funding for working capital purposes after the incident. Accordingly, we may
      need to obtain additional private or public financing including debt or equity
      financing and there can be no assurance that such financing will be available
      as
      needed or, if available, on terms favorable to us. Due to the current stock
      market conditions, we have terminated our proposed public offering of
      common stock. Any additional equity financing may be dilutive to stockholders
      and such additional equity securities may have rights, preferences or privileges
      that are senior to those of our existing common stock. 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. If we are unable to generate sufficient cash flow from operating
      activities or obtain funds for required payments of interest and principal
      on
      such additional indebtedness, or if we fail to comply with our debt covenants,
      we will be in default. In addition, changes in our debt rating due to the recent
      melamine contamination incident could have a material adverse effect on our
      interest costs and financing sources. 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.




***We
      also purchase milk powder from third-party producers and any disruption in
      this
      source of milk powder could materially and adversely affect our business and
      results of operations.***




We
      also
      purchase milk powder from third-party producers. Approximately 15% of our milk
      powder was produced by third-party producers for the fiscal year ended
      March 31, 2008. All of this third-party production is currently performed
      by only three third-party producers in three different locations. While these
      arrangements help us manage operating costs and address production capacity
      constraints, they also reduce our direct control over a portion of our
      production. As our third-party producers are not legally obligated to supply
      us
      with milk powder, we cannot assure you that they will always meet our demand.
      They may encounter capacity constraints or may be unable or unwilling to provide
      us milk powder in required quantities or at acceptable costs. Our inability
      to
      find or develop alternate third-party producers, if required, could result
      in
      delays or reductions in production and product shipments. Moreover, these
      third-party suppliers may delay milk powder shipments or supply us with inferior
      quality milk powder that may adversely impact the timely delivery or the quality
      of our products. For a more detailed description of risks associated with
      product quality, see “Risk Factors — We may experience problems with
      product quality or product performance, or the perception of such problems,
      which could adversely affect our reputation or result in a decrease in customers
      and revenue, unexpected expenses and loss of market share.”




27




***We
      have limited insurance coverage and do not carry any business interruption
      insurance, third-party liability insurance for our production facilities or
      insurance that covers the risk of loss of our products in shipment.***




Operation
      of our facilities involves many risks, including equipment failures, natural
      disasters, industrial accidents, power outages, labor disturbances and other
      business interruptions. Furthermore, if any of our products are faulty or
      contaminated, then we may become subject to product liability claims or we
      may
      have to engage in a product recall. For details about our recent recall of
      contaminated products in connection with the melamine contamination incident,
      please see “Item 2. Management’s Discussion and Analysis of Financial Condition
      and Results of Operations — Overview.”




We
      do not
      carry any business interruption insurance, product recall or third-party
      liability insurance for our production facilities or with respect to our
      products to cover claims pertaining to personal injury or property or
      environmental damage arising from defects in our products, product recalls,
      accidents on our property or damage relating to our operations. Therefore,
      our
      existing insurance coverage may not be sufficient to cover all risks associated
      with our business. As a result, we may be required to pay for financial and
      other losses, damages and liabilities, including those caused by natural
      disasters and other events beyond our control, out of our own funds, which
      could
      have a material adverse effect on our business, financial condition and results
      of operations. For examples, all of the costs we have incurred to date and
      may
      incur in the future that are related to our recent product recall in connection
      with the melamine contamination incident, may not be covered by our existing
      insurance policies.




28




**RISKS
      ASSOCIATED WITH DOING BUS** **INESS
      IN CHINA**




***PRC
      food hygiene and safety laws may become more onerous, which may adversely affect
      our operations and financial performance and lead to an increase in our costs
      which we may be unable to pass on to our customers.***




Operators
      within the PRC dairy industry and infant formula sector are subject to
      compliance with PRC food hygiene and safety laws and regulations. Such laws
      and
      regulations require all enterprises engaged in the production of dairy and
      infant formula products to obtain a hygiene license. They also set out hygiene
      standards with respect to food and food additives, packaging and containers,
      and
      labeling on packaging as well as hygiene requirements for food production and
      sites, facilities and equipment used for the transportation and the sale of
      food. Failure to comply with PRC food hygiene and safety laws may result in
      fines, suspension of operations, loss of hygiene license and, in certain cases,
      criminal proceedings against an enterprise and its management. Although we
      are
      in compliance with current PRC food hygiene and safety laws and regulations,
      in
      the event that such laws and regulations become more stringent or widen in
      scope, we may fail to comply with such laws, or if we comply, our production
      and
      distribution costs may increase, and we may be unable to pass these additional
      costs on to our customers. For example, in response to the recent melamine
      contamination incident, the PRC State Council abolished the regulations on
      inspection exemptions for food on September 18, 2008 so that our products were
      to be subject to batch by batch inspection going forward. In addition, the
      PRC
      State Council promulgated with immediate effect the Regulation on Supervision
      and Administration of Quality and Safety of Dairy Products on October 9, 2008
      which, among other things, imposes more stringent requirements for inspection,
      production, packaging, labeling and product recall on dairy product producers.
      All these new measures are likely to increase our costs which we may be unable
      to pass on to our customers.




***Changes
      in the regulatory environment for dairy and infant nutrition products in China
      could negatively impact our business.***




The
      dairy
      and infant nutrition product industries in China are regulated and regulatory
      changes may affect both our customers and us. Any changes in regulations that
      impose additional requirements for construction of new production lines and
      facilities or expansion of existing facilities will require us to secure
      additional government approvals for our current production expansion projects.
      Similarly, additional safety and quality control regulations could impact our
      costs of production. For example, on March 18, 2008, the PRC National
      Development and Reform Commission, or NDRC, promulgated the Access Conditions
      for Dairy Products Processing Industry, or the Access Conditions, which became
      effective on April 1, 2008. The Access Conditions impose new conditions
      that an entity must satisfy in order to engage, or continue to engage, in the
      dairy products processing business. For a more detailed description of these
      requirements, see “Item 1. Business—Regulation” in our Annual Report on Form
      10-K for the fiscal year ended March 31, 2008, which was filed with the SEC.
      Although we believe our existing entities and facilities meet the Access
      Condition requirements, it is possible that our future expansion plans or the
      establishment of new entities may fail to meet one or more of the requirements
      under the Access Conditions in the future. In addition, in response to the
      recent melamine contamination incident, the relevant PRC government authorities
      may impose more stringent conditions on entering or remaining in the dairy
      products industry. Failure to comply with these or any other changes in
      regulations affecting our business could have a material adverse effect on
      our
      business and our results of operations. In addition, the indirect impact of
      any
      such changes could adversely affect our business even if the specific
      regulations do not directly apply to our products or us.




29




**RISKS
      RELATED TO THE MARKET FOR OUR STOCK GENERALLY**




***The
      market price of our common stock is volatile, and its value may be depressed
      at
      a time when you want to sell your holdings.***




The
      market price of our common stock is volatile, and this volatility may continue.
      For instance, between July 1, 2008 and September 30, 2008, the price of our
      common stock, as reported on Nasdaq on which our common stock has traded, ranged
      between $11.83 and $52.24. Though we believe the recent fluctuation resulted
      mainly from the melamine contamination incident and the current worldwide market
      disruption, numerous factors, many of which are beyond our control, may cause
      the market price of our common stock to fluctuate significantly.




In
      addition to market and industry factors, the price and trading volume for our
      common stock may be highly volatile for specific business reasons. Factors
      such
      as variations in our revenues, earnings and cash flow, announcements of new
      investments, cooperation arrangements or acquisitions, and fluctuations in
      market prices for our products could cause the market price for our shares
      to
      change substantially.




Securities
      class action litigation is often instituted against companies following periods
      of volatility in their stock price. This type of litigation could result in
      substantial costs to us and divert our management’s attention and
      resources.




Moreover,
      the trading market for our common stock will be influenced by research or
      reports that industry or securities analysts publish about us or our business.
      If one or more analysts who cover us downgrade our common stock, the market
      price for our common stock would likely decline. If one or more of these
      analysts cease coverage of us or fail to regularly publish reports on us, we
      could lose visibility in the financial markets, which, in turn, could cause
      the
      market price for our common stock or trading volume to decline.




Furthermore,
      securities markets may from time to time experience significant price and volume
      fluctuations for reasons unrelated to operating performance of particular
      companies. These market fluctuations may adversely affect the price of our
      common stock and other interests in our company at a time when you want to
      sell
      your interest in us.




30




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




None.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None.





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




By
      written consent of our majority stockholder, dated June 11, 2008, in lieu of
      a
      special meeting of stockholders pursuant to Section 228 of the Delaware General
      Corporation Law, the following actions were approved:




·
            Amendment
                and restatement of our Certificate of Incorporation to: (i) implement
                a
                staggered Board of Directors with three classes; (ii) clarify the
                rights
                of holders of our common stock, par value $0.0001; (iii) clarify
                the
                Board’s authority with respect to our preferred stock, $0.0001; (iv)
                increase the minimum size of the Board to four (4); and (v) make
                any such
                other changes to the Certificate of Incorporation as are necessary
                and/or
                incidental to the foregoing; and




·
            The
                adoption of the Synutra International, Inc. 2008 Stock Incentive
                Plan.





The
      actions above were approved at a meeting of our Board on June 11, 2008 and
      the
      stockholder consent was executed by the holder of at least a majority of the
      issued and outstanding shares of Common Stock entitled to vote on the matters
      above. We filed a Definitive Information Statement on Schedule 14C with the
      SEC
      on September 4, 2008, and a discussion of these actions is contained in such
      Definitive Information Statement. The action to adopt the 2008 Stock Incentive
      Plan became effective on September 29, 2008 (twenty (20) calendar days after
      the
      date the Definitive Information Statement was first sent or given to our
      stockholders). The action to amend and restate our Certificate of Incorporation
      became effective on October 17, 2008 upon the filing of our Amended and Restated
      Certificate of Incorporation with the Delaware Secretary of State.




**ITEM
      5. OTHER INFORMATION**




None




31




**ITEM
      6. EXHIBITS**





**EXHIBIT**
              **NO.**
            
            **DOCUMENT
                DESCRIPTION**3.1
            
            Amended
                and Restated Certificate of Incorporation of Synutra International,
                Inc.3.2
            
            Amended
                and Restated Bylaws of Synutra International, Inc.10.1
            
            Synutra
                International, Inc. 2008 Stock Incentive Plan (incorporated by reference
                to Exhibit 10.1 from the registrant’s Form 8-K filed with the SEC on June
                17, 2008)





10.2
            
            Asset
                Purchase Agreement, dated July 14, 2008, between Sheng Yuan Nutritional
                Food Co.. Ltd. and Beijing Huilian Food Co., Ltd.(incorporated by
                reference to Exhibit 2.1 from the registrant's Form 8-K filed with
                the SEC
                on July 18, 2008 ).31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
                15d-14(a), promulgated under the Securities Exchange Act of 1934,
                as
                amended.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
                15d-14(a), promulgated under the Securities 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).




32





**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:
                November 10,
                2008
            By:
            /s/ Liang
                ZhangName: 
                Liang ZhangTitle: 
                Chief Executive Officer




33