**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 December 31, 2007





or




o
            **Transition
                Report Pursuant to Section 13 of 15(d) of the Securities Exchange
                Act of
                1934**








For
      the
      Transition Period From  to





Commission
      File number: 000-50601





**SYNUTRA
      INTERNATIONAL, INC.**





DELAWARE
            
            13-4306188**(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(IRS
                Employer Identification No.)**





2275
      Research Blvd., Suite 500


Rockville,
      Maryland 20850





(301)
      840-3888





Check
      whether the Registrant (1) has filed all reports required to be filed by Section
      13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
      months (or for such shorter period that the Registrant was required to file
      such
      reports (pending legal opinion), and (2) has been subject to such filing
      requirements for the past 90 days.





Yes x No  ̈










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





Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated filer x





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





Yes  ̈ No x





As
      of
      January 26, 2008, there were 54,000,713 shares of Common Stock, par value
      $0.0001 per share, issued and outstanding




2


**SYNUTRA
      INTERNATIONAL, INC.**




**FORM
      10-Q**


For
      the
      Quarter Ended December 31, 2007





**INDEX**




PART
                I. FINANCIAL INFORMATIONItem
                1. Financial Statements (unaudited):Condensed
                Consolidated Statements of Income for the Three and Nine Months Ended
              December
                31, 2007 and 2006
            
            
            4Condensed
                Consolidated Balance Sheets as of December 31, 2007 and March 31,
                2007
            
            
            5Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended
              December
                31, 2007 and 2006
            
            
            6Notes
                to the Condensed Consolidated Financial Statements
            
            
            7Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
              of
                Operations
            
            
            21Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            
            37Item
                4T. Controls and Procedures
            
            
            38PART
                II. OTHER INFORMATIONItem
                1. Legal Proceedings
            
            
            40


Item
                1A. Risk Factors
            
            
            40Item
                2. Unregistered Sales of Equity Securities and Use of Proceeds
            
            
            43Item
                3. Defaults Upon Senior Securities
            
            
            43Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            43Item
                5. Other Information
            
            
            43Item
                6. Exhibits
            
            
            43Signatures
            
            
            45







3


**PART
      I**


**FINANCIAL
      INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**


**SYNUTRA
      INTERNATIONAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(unaudited)**





Three
                Months Ended
            
            Nine
                Months EndedDecember
                31,
            
            December
                31,2007
            
            2006
            
            2007
            
            2006(in
                thousands, except per share data)Net
                sales
            
            $
            100,205
            
            $
            56,314
            
            $
            253,899
            
            $
            151,039Cost
                of sales
            
            
            49,627
            
            
            28,183
            
            
            119,633
            
            
            78,039**Gross
                profit**
            
            
            **50,578**
            
            
            **28,131**
            
            
            **134,266**
            
            
            **73,000**Selling
                & distribution expenses
            
            
            10,301
            
            
            10,093
            
            
            26,191
            
            
            20,330Advertising
                & promotion expenses
            
            
            18,974
            
            
            12,419
            
            
            59,428
            
            
            29,953General
                & administrative expenses
            
            
            5,942
            
            
            2,036
            
            
            12,489
            
            
            4,440Total
                operating expenses
            
            
            35,217
            
            
            24,548
            
            
            98,108
            
            
            54,723**Income
                from operations**
            
            
            **15,361**
            
            
            **3,583**
            
            
            **36,158**
            
            
            **18,277**Interest
                expense
            
            
            (1,388
            )
            
            (548
            )
            
            (6,156
            )
            
            (1,319
            )Interest
                income
            
            
            339
            
            
            109
            
            
            1,539
            
            
            231Other
                income, net
            
            
            (545
            )
            
            62
            
            
            (587
            )
            
            356**Income
                before provision for income tax**
            
            
            **13,767**
            
            
            **3,206**
            
            
            **30,954**
            
            
            **17,545**Provision
                for income tax
            
            
            2,571
            
            
            287
            
            
            4,634
            
            
            1,733**Net
                income before minority interests**
            
            
            **11,196**
            
            
            **2,919**
            
            
            **26,320**
            
            
            **15,812**Minority
                interests
            
            
            (7
            )
            
            -
            
            
            5
            
            
            -**Net
                income attributable to shareholders**
            
            **$**
            **11,203**
            
            **$**
            **2,919**
            
            **$**
            **26,315**
            
            **$**
            **15,812**Other
                comprehensive income
            
            
            4,198
            
            
            849
            
            
            6,796
            
            
            1,478**Comprehensive
                income**
            
            **$**
            **15,401**
            
            **$**
            **3,768**
            
            **$**
            **33,111**
            
            **$**
            **17,290**Earning
                per share-basic
            
            $
            0.21
            
            $
            0.06
            
            $
            0.50
            
            $
            0.32Earning
                per share-diluted
            
            $
            0.21
            
            $
            0.06
            
            $
            0.49
            
            $
            0.32**Weighted
                average common share outstanding-basic**
            
            
            **54,001**
            
            
            **50,001**
            
            
            **52,890**
            
            
            **50,001****Weighted
                average common share outstanding-diluted**
            
            
            **54,304**
            
            
            **50,001**
            
            
            **53,206**
            
            
            **50,001**




4





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




**SYNUTRA
      INTERNATIONAL, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Unaudited)**





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands, except per share data)**ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            90,575
            
            $
            20,836Restricted
                cash
            
            
            10,818
            
            
            12,930Accounts
                receivable, net of allowance for doubtful accounts of $230 and $575,
                respectively
            
            
            10,857
            
            
            6,760Inventories
            
            
            50,742
            
            
            16,406Due
                from related parties
            
            
            42
            
            
            11,742Deferred
                tax assets-current
            
            
            868
            
            
            432Prepaid
                expenses and other current assets
            
            
            13,439
            
            
            3,477**Total
                current assets**
            
            
            177,341
            
            
            72,583Property,
                plant and equipment, net
            
            
            71,214
            
            
            51,472Land
                use rights, net
            
            
            3,462
            
            
            3,024Other
                assets
            
            
            2,465
            
            
            192**TOTAL
                ASSETS**
            
            **$**
            254,482
            
            $
            127,271**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                Liabilities:**Short-term
                loans
            
            $
            17,113
            
            $
            53,104Long-term
                loan-current portion
            
            
            1,848
            
            
            -Accounts
                payable
            
            
            31,082
            
            
            12,085Due
                to related parties
            
            
            1,104
            
            
            2,935Advances
                from customers
            
            
            6,286
            
            
            4,263Tax
                payables
            
            
            3,114
            
            
            1,329Other
                current liabilities
            
            
            9,871
            
            
            6,716**Total
                current liabilities**
            
            
            70,418
            
            
            80,432Long
                term bank loans
            
            
            35,000
            
            
            -Deferred
                revenue
            
            
            4,381
            
            
            4,138Other
                long term liabilities
            
            
            448
            
            
            -**Total
                liabilities**
            
            
            110,247
            
            
            84,570**Minority
                interest**
            
            
            368
            
            
            -**Shareholders'
                equity:**Common
                Stock, $.0001 par value: 250,000 authorized; 54,001 and 50,001
                 issued and outstanding at December 31, 2007 and March 31, 2007,
                respectively
            
            
            5
            
            
            5Additional
                paid-in capital
            
            
            76,607
            
            
            8,226Retained
                earnings
            
            
            57,527
            
            
            31,538Accumulated
                other comprehensive income
            
            
            9,728
            
            
            2,932**Total
                shareholders' equity**
            
            
            143,867
            
            
            42,701**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            254,482
            
            $
            127,271





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




5


**SYNUTRA
      INTERNATIONAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(unaudited)**





Nine
                Months Ended
              December
                312007
            
            2006(in
                thousands)Cash
                flow from operating activities:Net
                income
            
            $
            26,315
            
            $
            15,812Adjustments
                to reconcile net income to net cash provided by operating
                activities:Amortization
                of discount on bank loans
            
            
            2,586
            
            
            -Amortization
                of issuance costs on bank loans
            
            
            539
            
            
            -Depreciation
                and amortization
            
            
            3,352
            
            
            1,177Bad
                debt expense
            
            
            19
            
            
            (158
            )Gain
                on short-term investment
            
            
            -
            
            
            (44
            )Loss
                on disposal of property, plant and equipment
            
            
            239
            
            
            -Impairment
                of property, plant and equipment
            
            
            168
            
            
            -Deferred
                income tax
            
            
            (1,071
            )
            
            -Minority
                interest
            
            
            5
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (4,154
            )
            
            (3,095
            )Inventories
            
            
            (30,456
            )
            
            (3,160
            )Due
                from related parties
            
            
            11,990
            
            
            (13,976
            )Prepaid
                expenses and other current assets
            
            
            (9,396
            )
            
            (4,349
            )Accounts
                payable
            
            
            12,009
            
            
            39Due
                to related parties
            
            
            (3,237
            )
            
            (3,940
            )Advances
                from customers
            
            
            1,864
            
            
            473Tax
                payables
            
            
            1,673
            
            
            (1,089
            )Deferred
                revenue
            
            
            -
            
            
            4,098Other
                liabilities
            
            
            3,805
            
            
            3,501Net
                cash provided by (used in) operating activities
            
            
            16,250
            
            
            (4,711
            )Cash
                flow from investing activities:Acquisition
                of property, plant and equipment
            
            
            (14,134
            )
            
            (10,874
            )Disposal
                of investment in a subsidiary
            
            
            (1,046
            )
            
            -Sales
                on short term investment
            
            
            -
            
            
            87Purchases
                of intangible assets
            
            
            (220
            )
            
            (28
            )Change
                in restricted cash
            
            
            2,784
            
            
            (1,369
            )Advance
                to related companies
            
            
            (3,324
            )
            
            -Advance
                repaid by related companies
            
            
            3,324
            
            
            -Capital
                injection into a subsidiary
            
            
            190
            
            
            -Net
                cash (used in) provided by investing activities
            
            
            (12,426
            )
            
            (12,184
            )Cash
                flow from financing activities :Proceeds
                from bank loans
            
            
            98,523
            
            
            55,952Repayment
                of bank loans
            
            
            (101,670
            )
            
            (39,546
            )Proceeds
                from issuance of common stock
            
            
            65,857
            
            
            -Net
                cash provided by financing activities
            
            
            62,710
            
            
            16,406Effect
                of exchange rate changes on cash and cash equivalents
            
            
            3,205
            
            
            1,478Net
                change in cash and cash equivalents
            
            
            66,534
            
            
            (489
            )Cash
                and cash equivalents, beginning of period
            
            
            20,836
            
            
            5,677Cash
                and cash equivalents, end of period
            
            $
            90,575
            
            $
            6,666Supplementary
                cash flows disclosure:Interest
                paid
            
            $
            3,475
            
            $
            1,591Income
                taxes paid
            
            $
            2,810
            
            $
            1,445





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




6


**SYNUTRA
      INTERNATIONAL, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**1.
      DESCRIPTION OF BUSINESS**





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





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




7




**2.
      BASIS OF PRESENTATION**





The
      Company is responsible for the unaudited condensed consolidated financial
      statements included in this document, which have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      (“GAAP”) and include all normal and recurring adjustments that management of the
      Company considers necessary for a fair presentation of its financial position
      and operating results.  The Company prepared these statements following the
      requirements of the U.S. Securities and Exchange Commission (the “SEC”) for
      interim reporting.  As permitted under those rules, the Company condensed
      or omitted certain footnotes or other financial information that are normally
      required by GAAP for annual financial statements.  These statements should
      be read in combination with the consolidated financial statements in the
      Company’s Annual Report on Form 10-K and its subsequent amendments for the
      fiscal year ended March 31, 2007.




These
      statements include the accounts of the Company 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.


**Segment
      Reporting**




Statement
      of Financial Accounting Standards (“SFAS”) No. 131, "Disclosures About Segments
      of an Enterprise and Related Information," establishes standards for reporting
      information about operating segments in annual financial statements and requires
      selected information of these segments be presented in interim financial
      statements. Operating segments are defined as components of an enterprise about
      which separate financial information is available that is evaluated regularly
      by
      the chief operating decision maker, or decision making group, in making
      decisions on how to allocate resources and assess performance. The Company
      has
      determined that it operates its business in one reportable segment based upon
      the manner in which internal information is produced and evaluated by its chief
      operating decision making group, as defined under SFAS No. 131, which consists
      of the Company’s chief executive officer and chief financial officer.




8





**Recently
      Issued Accounting Pronouncements**




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




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





In
      December 2007, the FASB issued SFAS No. 141R, "Business Combination", to improve
      reporting and to create greater consistency in the accounting and financial
      reporting of business combinations. The standard requires the acquiring entity
      in a business combination to recognize all (and only) the assets acquired and
      liabilities assumed in the transaction; establishes the acquisition-date fair
      value as the measurement objective for all assets acquired and liabilities
      assumed; and requires the acquirer to disclose to investors and other users
      all
      of the information they need to evaluate and understand the nature and financial
      effect of the business combination. SFAS No. 141R applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008. An entity may not apply it before that date. Given SFAS 141R relates
      to prospective business combinations, the Company has currently not determined
      the potential effects on the consolidated financial statements.





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 diversi t y
      that
      currently exists in accounting for transactions between an entity and
      noncontrolling interests by requiring they be treated as equity
      transaction s .
      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.




9





**3.
      BUSINESS COMBINATION**





In
      May
      2007, the Company acquired the 80% equity interest, held by Mr. Liang Zhang,
      the
      Company’s Chief Executive Officer, in Heilongjiang Baoquanling Shengyuan Diary
      Co., Ltd. ("BQL") for $1.41 million, which was settled in November 2007. This
      acquisition has been reflected as a transfer of assets between entities under
      common control. The acquisition resulted in a change in reporting entity in
      accordance with SFAS 154, “Accounting Changes and Error Corrections.” However,
      the Company has elected not to recast prior period financial statements and
      financial information for comparative purposes as BQL was not determined to
      be
      material.





Immediately
      after the acquisition, the Company invested $4.74 million into BQL to construct
      a new dairy processing facility to produce infant formula products. The minority
      interest holder in BQL (holding a 20% equity interest), Junchuan Ranch of
      Heilongjiang Province (“Junchuan Ranch”), elected not to contribute capital
      towards BQL’s new facility. In exchange for its capital contribution, the
      Company received additional shares in BQL, increasing the Company’s ownership
      interest in BQL to 94.62%. This transaction was not deemed to be an acquisition
      of minority interests as Junchuan Ranch did not participate in the capital
      transaction.





**4.
      INVENTORIES**





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




**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands )Raw
                materials
            
            $
            28,477
            
            $
            5,475Work-in-progress
            
            
            13,775
            
            
            7,714Finished
                goods
            
            
            8,490
            
            
            3,217**Total
                Inventories******
            
            **$**
            **50,742**
            
            **$**
            **16,406**




10




**5.
      DUE FROM/(TO) RELATED PARTIES**





**A.
      Classification of related party balances by name**





**a.
      Due from related parties**





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands)Beijing
                Honnete Dairy Corporation Ltd.
            
            $
            -
            
            $
            7,207Beijing
                Kelqin Dairy Co. Ltd.
            
            
            -
            
            
            3,015Beijing
                Luding Xueyuan Trading Co. Ltd.
            
            
            42
            
            
            80Heilongjiang
                Baoquanling Shengyuan Dairy Co. Ltd
            
            
            -
            
            
            978Beijing
                Ao Naier Feed Stuff LLC
            
            
            -
            
            
            462**Total
                Due from Related Companies**
            
            **$**
            **42**
            
            **$**
            **11,742******




**b.
      Due to related parties**




11





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands )Sheng
                Zhi Da Dairy Group Corporation
            
            $
            1,042
            
            $
            1,338Beijing
                Luding Xueyuan Trading Co. Ltd.
            
            
            39
            
            
            1St.
                Angel (Beijing Business Service)
            
            
            20
            
            
            5Beijing
                Kelqin Dairy Co. Ltd.
            
            
            -
            
            
            863Beijing
                Honnete Dairy Corporation Ltd.
            
            
            3
            
            
            -Heilongjiang
                Baoquanling Shengyuan Dairy Co., Ltd.
            
            
            -
            
            
            728**Total
                Due to Related Companies**
            
            **$**
            **1,104**
            
            **$**
            **2,935**





The
      above-mentioned entities are considered related parties to the Company because
      they are affiliates of the Company under the common control of the Company’s
      major shareholder.





**B.
      Classification of related party balances by nature**





**a. Due
      from related parties**





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands)Trade
                receivables
            
            $
            42
            
            $
            4,535Advance
                to suppliers
            
            
            -
            
            
            7,207**Total**
            
            **$**
            **42**
            
            **$**
            **11,742**





**b.
      Due to related parties**




12





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands)Trade
                payables
            
            $
            57
            
            $
            1,685Other
                payables
            
            
            1,047
            
            
            1,250**Total**
            
            **$**
            **1,104**
            
            **$**
            **2,935**




**6.
      PROPERTY, PLANT AND EQUIPMENT, NET**





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands)**Cost:**Buildings
                and leasehold improvements
            
            $
            26,849
            
            $
            16,638Plant
                and machinery
            
            
            34,656
            
            
            23,284Office
                equipment and furnishings
            
            
            2,948
            
            
            1,984Motor
                vehicles
            
            
            1,432
            
            
            1,04065,885
            
            
            42,946**Less:
                Accumulated depreciation:**Buildings
                and leasehold improvement
            
            
            2,808
            
            
            1,798Plant
                and machinery
            
            
            5,703
            
            
            3,450Office
                equipment and furnishings
            
            
            696
            
            
            472Motor
                vehicles
            
            
            584
            
            
            590Total
                of accumulated depreciation
            
            
            9,791
            
            
            6,310Construction
                in progress
            
            
            15,120
            
            
            14,836**Property,
                plant and equipment, net**
            
            **$**
            **71,214**
            
            **$**
            **51,472**




13





**7.
      LAND USE RIGHTS**





**December
                31,**
              **2007**
            
            **March 31,**
              **2007**(in
                thousands)Cost:
            
            $
            3,647
            
            $
            3,177Less:
                Accumulated amortization:
            
            
            185
            
            
            153Land
                use right, net
            
            **$**
            **3,642**
            
            **$**
            **3,024**





**8.
      BANK LOANS AND WARRANTS**




On
      April
      19, 2007, the Company entered into a bridge loan agreement with ABN AMRO Bank
      N.V., Hong Kong branch (“ABN”), in the amount of $35.0 million (the “Bridge Loan
      Agreement”). The principal amount and unpaid accrued interest under the Bridge
      Loan Agreement were repaid on October 18, 2007.




In
      addition, pursuant to a USD facility side letter and warrant agreement dated
      April 19, 2007 between the Company and ABN, the Company is obligated to issue
      warrants to ABN to purchase up to 400,000 shares of the Company’s common stock
      (the “Warrant Agreement”). On April 19, 2007 and October 11, 2007, respectively,
      the Company issued warrants to purchase 200,000 shares of its common stock
      at $8.84 per share and the remaining 200,000 shares at the same price. All
      of
      the warrants may be exercised up to the third anniversary of the completion
      of a
“Qualified Public Offering”, as defined in the warrant agreement.




The
      fair
      value of the warrants was $2.7 million at the grant date, estimated on the
      basis
      of the Black-Scholes-Merton option-pricing formula with the following
      assumptions:




14




**2007**Expected
                volatility
            
            
            43.86
            %Risk-free
                interest rate
            
            
            4.66
            %Expected
                dividend yield
            
            
            0.00
            %Contractual
                life of the warrant (years)
            
            
            4.2




The
      proceeds of the 2007 loan were allocated to the debt and the warrants based
      on
      their relative values, resulting in $32.4 million and $2.6 million being
      allocated to the debt and warrants, respectively. This amount has been recorded
      as an increase to additional paid in capital with a corresponding debt discount,
      which is being amortized over the term of the loan utilizing the effective
      interest method.





On
      October 11, 2007, ABN and certain other lenders provided a three year term
      loan
      to the Company in the aggregate amount of $35.0 million (the “Loan Agreement”).
      The principal amount, and any unpaid accrued interest, are due on October 11,
      2010 and may be prepaid without penalty. The proceeds of the loan were used
      to
      pay the outstanding principle and accrued interest of the ABN Bridge Loan
      described above. The loan bears interest at the three-month London interbank
      offered rate (“LIBOR”) for deposits in US dollars plus 3.5% with interest
      payable on the last day of each three month period. The Company is required
      to
      pay to ABN a commitment fee of 1% on the daily amount of the unused commitment
      amount. The loan is secured by a pledge of 10,000 shares of common stock of
      Synutra, Inc., an Illinois corporation wholly-owned by the Company.


The
        Loan
        Agreement 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 also contains certain financial covenants,
        including a requirement to maintain specified leverage and interest coverage
        ratios, tangible net worth, and indebtedness to tangible net worth ratio.
        Specifically these financial covenants do not permit (1) the Company’s
        consolidated interest coverage ratio as of the end of any fiscal quarter
        to be
        lower than 5.00; (2) the Company’s consolidated leverage ratio to be higher than
        2.00, 1.80 and 1.50, with respect to such fiscal quarter ending during the
        period beginning on October 1, 2007 and ending on September 30, 2008, beginning
        on October 1, 2008 and ending on September 30, 2009, and beginning on October
        1,
        2009 and ending on the Maturity Date, respectively; (3) the Company’s
        consolidated tangible net worth to be less than $132 million on any date
        during
        the period beginning on January 1, 2008 and ending on December 31, 2008,
        less
        than $200 million during the period beginning on January 1, 2009 and ending
        on
        December 31, 2009, and less than $265 million during the period beginning
        on
        January 1, 2010 and ending on the maturity date; (4) the ratio of consolidated
        indebtedness to consolidated net worth to be higher than 0.80 on any date
        during
        the period beginning on January 1, 2008 and ending on December 31, 2008,
        higher
        than 0.70 during the period beginning on January 1, 2009 and ending on December
        31, 2009, and higher than 0.60 during the period beginning on January 1,
        2010
        and ending on the maturity date. Upon the occurrence of certain events of
        default, the Company’s obligations under the Loan Agreement may be accelerated
        and the lending commitments terminated. Such events include (i) failure to
        pay
        principal or interest when due, (ii) the breach or failure to perform certain
        covenants, (iii) the attachment of assets, and (iv) the filing of a petition
        in
        bankruptcy. No such event has occurred and the Company was in compliance
        with
        the covenants as of December 31, 2007.




15




In
      addition to the above Loan Agreement with ABN, as at December 31, 2007 and
      March
      31, 2007, the Company had short-term loans from banks in the amount of $17.1
      million and $53.1 million, respectively, bearing interest ranging from 6.39%
      to
      7.29% per annum. Such loans are extendable for terms of no less than one year
      to
      December 2008. The loans were secured by the pledge of certain fixed assets
      held
      by the Company and its subsidiaries. The value of the fixed assets pledged
      was
      $5.7 million and $32.7 million as of December 31, 2007 and March 31, 2007,
      respectively.




As
      at
      December 31, 2007, BQL had a 3 year long-term loan from Junchuan Ranch of
      Heilongjiang Province in the amount of $1.8 million bearing interest at 3.24%
      per annum. The loan, maturing on August 16, 2008, is secured by the pledge
      of
      certain fixed assets held by BQL and by a personal guarantee from the Company’s
      Chief Executive Officer and his spouse.





**9.
      INCOME TAXES**





The
      Company’s income before income taxes was comprised of the following for the
      three and nine months ended December 31, 2007 and 2006, respectively.





**Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended****December
                31,**
            
            **December
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(in
                thousands)United
                States
            
            $
            (2,899
            )
            $
            (182
            )
            $
            (5,402
            )
            $
            (332
            )PRC
            
            
            16,666
            
            
            3,388
            
            
            36,356
            
            
            17,877**Total
                Income Before Tax**
            
            **$**
            **13,767**
            
            **$**
            **3,206**
            
            **$**
            **30,954**
            
            **$**
            **17,545**





In
      July 2006, the FASB issued Interpretation No. 48,
      Accounting for Uncertainty in Income Taxes—an
      interpretation of FASB Statement No. 109 (“FIN 48”), which
      clarifies the accounting and disclosure for
      uncertainty in tax positions. FIN 48 prescribes a
      more-likely-than-not threshold for financial statement
      recognition and measurement of a tax position taken or
      expected to be taken in a tax return. This interpretation
      also provides guidance on de-recognition of
      income tax assets and liabilities, classification of
      current and deferred income tax assets and
      liabilities, accounting for interest and
      penalties associated with tax positions,
      accounting for income taxes in interim periods and
      income tax disclosures.




The
      Company adopted the provisions of FIN 48 effective April 1, 2007. Based on
      its
      FIN 48 analysis and documentation, the Company has made its assessment of the
      level of tax authority for each tax position (including the potential
      application of interest and penalties) based on the technical merits, and has
      measured the unrecognized tax benefits associated with the tax positions. As
      of
      December 31, 2007, the Company has recorded FIN 48 liabilities of approximately
      $388,000 for its PRC subsidiaries. It also recognized interest and/or penalties
      associated to the uncertain tax positions of $ 60,000 in the FIN 48 tax
      provision.




16




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





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




As
      at
      December 31, 2007, undistributed earnings of the Company’s PRC subsidiaries of
      approximately $54.3 million, excluding statutory reserve and welfare funds
      under
      PRC law, are considered to be indefinitely reinvested and, accordingly, no
      provision for federal and state income taxes have been provided thereon. Upon
      distribution of those earnings in the form of dividends or otherwise, the
      Company would be subject to both U.S. income taxes (subject to an adjustment
      for
      foreign tax credits) and withholding taxes payable in the PRC.




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





Income
      taxes are calculated on a separate entity basis. Each of the Company’s
      subsidiaries files stand-alone tax returns and the Company does not file a
      consolidated tax return. The provisions for income taxes for the three and
      nine
      months ended December 31, 2007 and 2006, respectively, are summarized as
      follows:




**Three
                Months**
            
            **Nine
                Months****Ended**
            
            **Ended****December
                31,**
            
            **December
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(in
                thousands)
            
            ****
            
            ****
            
            ****
            
            ****Current-PRC
            
            $
            3,513
            
            $
            287
            
            $
            5,705
            
            $
            1,733Deferred
                tax benefit-PRC
            
            
            (942
            )
            
            -
            
            
            (569
            )
            
            -Deferred
                tax benefit-US
            
            
            -
            
            
            -
            
            
            (502
            )
            
            -**Total**
            
            **$**
            **2,571**
            
            **$**
            **287**
            
            **$**
            **4,634**
            
            **$**
            **1,733**




17




**10.
      COMMON STOCK**





On
      May
      24, 2007, the Company entered into a Common Stock Purchase Agreement (the
“Purchase Agreement”) with Warburg Pincus Private Equity IX, L.P. (the
“Investor”), pursuant to which the Investor agreed to acquire 4 million shares
      of the Company’s common stock for an aggregate purchase price of $66 million,
      net of issuance costs of $ 145,000. The closing of the transaction took place
      on
      June 15, 2007. The Company intends to use the net proceeds from this financing
      for general corporate purposes. Pursuant to the terms of the Purchase Agreement
      so long as the Investor owns at least 50% of the common stock acquired by the
      Investor pursuant to the Purchase Agreement, the Investor has the right to
      designate a person to serve on the Board of Directors of the Company (the
“Investor Designee”), and the Company has agreed to use its best efforts to
      nominate and cause the Investor Designee to be elected to the
      Company’s Board of Directors.




**11.
      COMPREHENSIVE INCOME**




Comprehensive
      income includes charges and credits to equity from non-owner sources and
      comprises two subsets: net earnings and other comprehensive income which relates
      to foreign exchange translation adjustments. Total comprehensive income
      comprises the following:








**Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended****December
                31,**
            
            **December
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(in
                thousands)Net
                income
            
            $
            11,203
            
            $
            2,919
            
            $
            26,315
            
            $
            15,812Other
                comprehensive income
            
            
            4,198
            
            
            849
            
            
            6,796
            
            
            1,478**Total
                comprehensive income**
            
            **$**
            **15,401**
            
            **$**
            **3,768**
            
            **$**
            **33,111**
            
            **$**
            **17,290**





**12.
      NET INCOME PER SHARE (EPS)**





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




18





**Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended****December
                31,**
            
            **December
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(in
                thousands)Net
                income
            
            $
            11,203
            
            $
            2,919
            
            $
            26,315
            
            $
            15,812Basic
                weighted average common shares outstanding
            
            
            54,001
            
            
            50,001
            
            
            52,890
            
            
            50,001Dilutive
                potential common shares from warrants****
            
            
            303
            
            
            -
            
            
            316
            
            
            -Diluted
                weighted average shares outstanding
            
            
            54,304
            
            
            50,001
            
            
            53,206
            
            
            50,001**Net
                income per share - basic**
            
            **$**
            **0.21**
            
            **$**
            **0.06**
            
            **$**
            **0.50**
            
            **$**
            **0.32****Net
                income per share - diluted**
            
            **$**
            **0.21**
            
            **$**
            **0.06**
            
            **$**
            **0.49**
            
            **$**
            **0.32**





**13.
      COMMITMENTS AND CONTINGENCIES**





**A.
      Purchase Commitments**





As
      of
      December 31, 2007, the Company had outstanding commitments in the amount of
      $27.8 million for advertising and purchase of raw materials within the next
      12
      months.





**B.
      Capital commitments**





As
      of
      December 31, 2007, the Company’s capital commitments amounted to $14.5 million
      in relation to asset improvement and plant expansion within the next 12 months. **





**C.
      Lease commitments**




19





The
      lease
      commitments of the Company as at December 31, 2007 and 2006 were $20,000 and
      $257,000, respectively.





**D.
      Legal proceedings**





The
      Company is subject to various legal proceedings and claims that arise in the
      ordinary course of business. The Company does not believe that the amount,
      and
      ultimate liability, if any with respect to these actions will materially affect
      our business, financial position, results of operations or cash flows. The
      Company cannot assure, however, that such actions will not be material and
      will
      not adversely affect our business, financial position, results of operations
      or
      cash flows.





**E.
      Guarantees**





As
      at
      December 31, 2007, the Company had an outstanding guarantee issued to the
      Zhangbei Branch of the Agriculture Bank of China related to various bank loans
      totaling $1.1 million to 104 diary farmers in the Zhangbei Area (the
“Guarantee”). Such loans matured on December 25, 2007, but as of December 31,
      2007, none of the loans had been repaid and the total outstanding loan amount
      remained $1.1 million.





On
      December 27, 2007, the People’s Bank of China ("PBOC"), and China Banking
      Regulatory Commission ("CBRC"), issued a joint decree requesting all banks
      in
      China to extend the maturity of their loans to the diary farmers with maturity
      dates between January 1, 2006 to June 30, 2008. The PBOC and CBRC did not
      specify the extension periods for such loans but rather directed the lending
      banks to determine the length of such extension.





This
      decree represents the PRC government’s efforts to boost the country’s fresh milk
      production which has been challenged by rising animal feed costs. In order
      to
      encourage diary cow farmers to increase their production without substantially
      increasing milk prices, the government is taking initiatives to subsidize diary
      farmers.





To
      the
      best knowledge of the Company, the Agriculture Bank of China has not determined
      the extension period for the above loans. Although the Company is in discussions
      with the lending bank to determine the extension periods for such loans, no
      agreement has been reached and the Company is still obligated under the
      Guarantee. The Company has prepared its best estimate of possibly losses related
      to these loans based on a weighed average range of likely probabilities and
      potential payments that would be required under the Guarantee, and estimated
      a
      potential loss of $352,000 related to the Guarantee. This amount has been
      recorded as current liability on the balance sheet.




20


**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 above, contain forward-looking
      statements.  These forward-looking statements are not guarantees of future
      performance and are subject to certain risks, uncertainties and assumptions
      that
      are difficult to predict; therefore, actual results may differ materially from
      those expressed, implied or forecasted in any such forward-looking
      statements.




Expressions
      of future goals and expectations or similar expressions including, without
      limitation, “may,” “should,” “could,” “expects,” “does not currently expect,”
“plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,”
“potential,” “targets,” or “continue,” reflecting something other than
      historical fact are intended to identify forward-looking statements.  The
      factors described below in PART II. OTHER INFORMATION -- Item 1A. Risk Factors
      could cause 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 available on the SEC website. The public may read and copy any
      materials filed by the Company with the SEC at the SEC’s Public Reference Room
      at 100 F Street, NE, Room 1580, Washington, DC 20549.  The public may
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-202-551-8090.  The SEC maintains an Internet site that contains
      reports, proxy and information statements and other information regarding
      issuers that file electronically with the SEC at http://www.sec.gov.  The
      contents of these websites are not incorporated into this filing.  Further,
      the Company’s references to the URLs for these websites are intended to be
      inactive textual references only.




21





**EXECUTIVE
      OVERVIEW**





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





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





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





The
      Company's net sales for the nine months ended December 31, 2007 increased by
      68.1% to $253.9 million from $151.0 million for the same period in the previous
      year. The Company's gross profit for the nine months ended December 31, 2007
      increased by 83.9% to $134.3 million from $73.0 million for the same period
      in
      the previous year. The Company's net income for the nine months ended December
      31, 2007 increased by 66.4 % to $26.3 million from $15.8 million for the same
      period in the previous year.





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




22





·
            Rapid
                growth of the infant formula market in China, which increased in
                terms of
                sales revenue by 96.5% from RMB11.4 billion in 2006 to RMB22.4 billion
                in
                2007, according to Euromonitor, an international market research
                company;





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





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





**RESULTS
      OF OPERATIONS**





**Three
      Months Ended December 31, 2007 Compared to Three Months Ended December 31,
      2006**





***Net
      Sales***




Net
      sales
      for the three
      months ended December 31, 2007 increased by 77.9% to $100.2 million from $56.3
      million for the same period in the previous year. This increase in net sales
      was
      a result of an increase in volume o f product s sol d an d a n increas e i n averag e sellin g price . Th e increas e i n th e volum e o f product s sol d wa s partl y drive n by
      th e growt h o f th e
      infant
      formula market
      in
      China an d increase d marke t awarenes s fo r the
      Company’s  product s a s
      a resul t o f the
      Company’s intensive marketing  initiatives.
      These marketing initiatives were built around a TV advertising campaign that
      began in September  2006,
      which was enhanced by continued targeted sales and promotional activities at
      the
      store level.




Net
      sales
      of the Company’s nutritional products, such as the infant formula for infants
      and children and adults under the brand names of Super, U-Smart, U-Strong,
      and
      National Standards accounted for over 91.1% of the Company’s total sales. Net
      sales of the Company’s nutritional products for the three months ended December
      31, 2007 increased by 111.9% to $91.3 million from $43.1 million for the same
      period in the previous year, principally as a result of the following
      factors:





·
            Volume
                of nutritional products sold increased by 67.2% to 12,259 tons for
                the
                three months ended December 31, 2007 from 7,331 tons for the same
                period
                in the previous year, resulting in an increase of $29.0 million in
                net
                sales.




23





·
            
            The
                average selling price of the Company’s nutritional products for the three
                months ended December 31, 2007 increased by 26.7% to $7,448 per ton
                from
                $5,878 per ton for the same period in the previous year, resulting
                in an
                increase of $19.3 million in net sales. This increase in average
                selling
                price was primarily a result of substantial price increases for the
                U-Smart series, and the change in product mix toward products with
                higher
                prices.




Net
      sales
      from the Company’s other activities, such as the sales of chondroitin sulfate
      and industrial materials and the provision of certain services, such as toll
      drying, blending and packaging services, for the three months ended December
      31,
      2007 decreased by 32.7% to $8.9 million from $13.2 million for the same period
      in the previous year due to fluctuations in the Company’s capacity and customer
      orders.




***Cost
      of Sales***




Cost
      of
      sales for the three months ended December 31, 2007 increased by 76.1% to $49.6
      million from $28.2 million for the same period in the previous year. This
      increase in cost of sales was a result of increases in both the price and volume
      of raw materials purchased.







The
      cost
      of sales for the Company’s nutritional products for the three months ended
      December 31, 2007 increased by169.7% to $41.8 million from $15.5 million for
      the
      same period in the previous year. The increase in the volume of nutritional
      products sold for the three months ended December 31, 2007 as compared to the
      same period in the previous year resulted in a $10.4 million increase in the
      Company’s cost of sales. The increase in the price of raw materials costs for
      the three months ended December 31, 2007 as compared to the same period in
      the
      previous year resulted in an aggregate $15.9 million increase in the Company’s
      cost of sales. Prices of raw milk and whey protein powder, which are major
      components of the cost of sales of the Company’s nutritional products, have
      increased as compared to the same period in the previous year. The Company
      expects that the prices of these materials may continue to rise due to a
      shortage of milk supply and a general increase in commodities prices, especially
      for agriculture products. This would in turn affect the unit cost of sales
      for
      the Company’s nutritional products.





The
      cost
      of sales from the Company’s other products and services for the three months
      ended December 31, 2007 decreased by 38.6% to $7.8 million from $12.7 million
      for same period in the previous year in line with the decrease of net sales
      from
      such products and services.




***Gross
      Profit and Gross Margin***




Gross
      profit for the three months ended December 31, 2007 increased by 79.8% to $50.6
      million from $28.1 million for the same period in the previous year. The
      Company’s gross margin increased to 50.5% for the three months ended December
      31, 2007 from 50.0% for the same period in the previous year.




24





The
      increase in gross profits was primarily a result of increased volume of
      nutritional products sold and increased average selling prices of nutritional
      products recorded during the period. The increase in gross margin was primarily
      due to the implementation of the Company’s targeted sales incentive programs
      that resulted in a significant increase in the sales of the Company’s higher
      margin product lines, which recorded significant increases. For the three months
      ended December 31, 2007, the sales of the Company’s premium infant formula brand
      with higher gross margin, the Super Baby series, accounted for 41.3% of the
      Company’s total sales of infant formula products, representing an increase of
      approximately 16.7 percentage points as compared to the same period in the
      previous year.





***Selling
      and Distribution Expenses***




Selling
      and distribution expenses for the three months ended December 31, 2007 increased
      by 2.1% to $10.3 million from $10.1 million for the same period in the previous
      year. Total compensation for the Company’s sales staff for the three months
      ended December 31, 2007 increased by 108.0% to $5.2 million from $2.5 million
      for the same period in the previous year. This increase was primarily due to
      the
      implementation of a performance-related incentive program. In addition, the
      increase in the number of sales staff to 2,198 as of December 31, 2007 from
      1,902 as of the same date in the previous year also contributed to the increase
      in sales staff compensation., As a result of the increases in sales and business
      activities, transportation expenses for the three months ended December 31,
      2007
      increased by 53.8% to $2.0 million from $1.3 million for the same period in
      the
      previous year, in proportion to the increase in sales. Travel expenses for
      the
      three months ended December 31, 2007 increased by 45.8% to $782,000 from
      $536,000 for the same period in the previous year. Entertainment, event,
      communication and marketing expenses for the three months ended December 31,
      2007 decreased by 60.0% to $2.3 million from $5.8 million for the same period
      in
      the previous year, due mainly to a reduction in market consulting
      expenses and a reclassification of certain marketing expenses (primarily
      end-cap placement costs, admission fees, and other expenses paid to the shopping
      mall/supermarket operators) to reduction of revenue.




***Advertising
      and Promotion Expenses***




Advertising
      and promotion expenses for the three months ended December 31, 2007 increased
      by
      52.8% to $19.0 million from $12.4 million for the same period in the previous
      year, due to increased nationwide TV advertising campaign and intensive
      promotional activities at store level. Advertising expenses for the three months
      ended December 31, 2007 accounted for 28.1% of total advertising and promotion
      expenses, representing an increase of 76.7% to $5.3 million from $3.0 million
      for the same period in the previous year. Promotion expenses for the three
      months ended December 31, 2007 accounted for 71.9% of total advertising and
      promotion expenses, representing an increase of 43.2% to $13.6 million from
      $9.5
      million for the same period in the previous year.




***General
      and Administrative Expenses***





General
      and administrative expenses for the three months ended December 31, 2007
      increased by 195.0% to $5.9 million from $2.0 million for the same period in
      the
      previous year. Most of the increases were for corporate staff salaries,
      management expenses, and legal, accounting, and consulting costs related to
      corporate transactions, increased auditing and other professional costs.





***Interest
      Income***




Interest
      income for the three months ended December 31, 2007 increased to $339,000 from
      $109,000 for the same period in the previous year due to significant increases
      in the Company’s cash and cash equivalent balances.




25





***Interest
      Expense***




Interest
      expense for the three months ended December 31, 2007 increased to $1.4 million
      from $548,000 for the same period in the previous year, due primarily to
      borrowings from ABN and the amortization of debt discount associated with the
      issuance of warrants to ABN.




***Provision
      for Income Taxes***




The
      provision for income taxes, which is computed on an individual legal entity
      basis, was $2.6 million and $287,000 for the three months ended December 31,
      2007 and 2006, respectively. The Company’s effective tax rate increased to 18.7%
      for the three months ended December 31, 2007 from 9.0% for the same period
      in
      the previous year. This increase in the Company’s effective income tax rate was
      due to the expiration of a tax holiday enjoyed by Shengyuan Nutritional Food
      Co., Ltd.




***Net
      Income Attributable to Stockholders***




As
      a
      result of the foregoing, net income attributable to stockholders for the three
      months ended December 31, 2007 increased by 283.8% to $11.2 million from $3.0
      million for the same period in the previous year.




**Nine
      Months Ended December 31, 2007 Compared to Nine Months Ended December 31,
      2006**





***Net
      Sales***




Net
      sales
      for the nine
      months ended December 31, 2007 increased by 68.1% to $253.9 million from $151.0
      million for the same period in the previous year. This increase in net sales
      was
      a result of an increase in volume o f product s sol d an d a n increas e i n averag e sellin g price . Th e increas e i n th e volum e o f product s sol d wa s partl y drive n by
      th e growt h o f th e
      infant
      formula market
      in
      China an d increase d marke t awarenes s fo r the
      Company’s  product s a s
      a resul t o f the
      Company’s  marketing  initiatives.
      These marketing initiatives were built around a TV advertising campaign that
      started in September  2006,
      which was enhanced by continued targeted sales and promotional activities at
      the
      store level.




Net
      sales
      of the Company’s nutritional products, such as the infant formula for infants
      and children and adults under the brand names of Super, U-Smart, U-Strong,
      and
      National Standards accounted for over 88.4% of the Company’s total sales. Net
      sales of the Company’s nutritional products for the nine months ended December
      31, 2007 increased by 93.9% to $224.5 million from $115.8 million for the same
      period in the previous year, principally as a result of the following
      factors:





·
            Volume
                of nutritional products sold increased by 51.9% to 30,035 tons for
                the
                nine months ended December 31, 2007 from 19,767 tons for the same
                period
                in the previous year, resulting in an increase of $60.1 million in
                net
                sales.




26





·
            
            The
                average selling price of the Company’s nutritional products for the nine
                months ended December 31, 2007 increased by 27.6% to $7,475 per ton
                from
                $5,856 per ton for the same period in the previous year, resulting
                in an
                increase of $48.6 million in net sales. This increase in average
                selling
                price was primarily a result of substantial price increases for the
                U-Smart series, and the change in product mix toward products with
                higher
                prices.




Net
      sales
      from the Company’s other activities, such as the sales of chondroitin sulfate
      and industrial materials and the provision of certain services, such as toll
      drying, blending and packaging services, for the nine months ended December
      31,
      2007 decreased by 16.7% to $29.4 million from $35.3 million for the same period
      in the previous year due to fluctuations in the Company’s capacity and customer
      orders.




***Cost
      of Sales***




Cost
      of
      sales for the nine months ended December 31, 2007 increased by 53.3% to $119.6
      million from $78.0 million for the same period in the previous year. This
      increase in cost of sales was a result of increases in both the price and volume
      of raw materials purchased.




The
      cost
      of sales for the Company’s nutritional products for the nine months ended
      December 31, 2007 increased by 111.8% to $95.1 million from $44.9 million for
      the same period in the previous year. The increase in the volume of nutritional
      products sold for the nine months ended December 31, 2007 as compared to the
      same period in the previous year resulted in a $23.3 million increase in the
      Company’s cost of sales. The increase in the price of raw materials costs for
      the nine months ended December 31, 2007 as compared to the same period in the
      previous year resulted in an aggregate $26.9 million increase in the Company’s
      cost of sales. Prices of raw milk and whey protein powder, which are major
      components of the cost of sales of the Company’s nutritional products, have
      increased as compared to the same period in the previous year. The Company
      expects that the prices of these materials may continue to rise due to a
      shortage of milk supply and a general increase in commodities prices, especially
      for agriculture products. This would in turn affect the unit cost of sales
      for
      the Company’s nutritional products.





The
      cost
      of sales from the Company’s other products and services for the nine months
      ended December 31, 2007 decreased by 26.0% to $24.5 million from $33.1 million
      for same period in the previous year in line with the decrease of net sales
      from
      such products and services.




***Gross
      Profit and Gross Margin***




Gross
      profit for the nine months ended December 31, 2007 increased by 83.9% to $134.3
      million from $73.0 million for the same period in the previous year. The
      Company’s gross margin increased to 52.9% for the nine months ended December 31,
      2007 from 48.3% for the same period in the previous year.




27





The
      increase in gross profits was primarily a result of increased volume of
      nutritional products sold and increased average selling prices of nutritional
      products recorded during the period. The increase in gross margin was primarily
      due to the implementation of the Company’s targeted sales incentive programs
      that resulted in a significant increase in the sales of the Company’s higher
      margin product lines, which recorded significant increases. For the nine months
      ended December 31, 2007, the sales of the Company’s premium infant formula brand
      with higher gross margin, the Super Baby series, accounted for 39.0% of the
      Company’s total sales of infant formula products, representing an increase of
      approximately 16.3 percentage points as compared to the same period in the
      previous year.





***Selling
      and Distribution Expenses***




Selling
      and distribution expenses for the nine months ended December 31, 2007 increased
      by 28.8% to $26.2 million from $20.3 million for the same period in the previous
      year. Total compensation for the Company’s sales staff for the nine months ended
      December 31, 2007 increased by 72.9% to $10.8 million from $6.2 million for
      the
      same period in the previous year. This increase was due primarily to the
      implementation of a performance-related incentive program. In addition, the
      increase in the number of sales staff to 2,198 as of December 31, 2007 from
      1,902 as of the same date in the previous year also contributed to the increase
      in sales staff compensation. As a result of the increases in sales and business
      activities, transportation expenses for the nine months ended December 31,
      2007
      increased by 60.3% to $4.6 million from $2.9 million for the same period in
      the
      previous year, in proportion to the increase in sales. Travel expenses for
      the
      nine months ended December 31, 2007 increased by 43.8% to $2.1 million from
      $1.5
      million for the same period in the previous year. Entertainment, event,
      communication and marketing expenses for the nine months ended December 31,
      2007
      decreased by 11.0% to $8.7 million from $9.7 million for the same period in
      the
      previous year mainly
      due to a reclassification of certain marketing expenses (primarily end-cap
      placement costs, admission fees, and other expenses paid to the shopping
      mall/supermarket operators) to reduction of revenue .




***Advertising
      and Promotion Expenses***





Advertising
      and promotion expenses for the nine months ended December 31, 2007 increased
      by
      98.4% to $59.4 million from $30.0 million for the same period in the previous
      year, due to increased nationwide TV advertising campaign and intensive
      promotional activities at store level. Advertising expenses for the nine months
      ended December 31, 2007 accounted for 35.7% of total advertising and promotion
      expenses, representing an increase of 253.3% to $21.2 million from $ 6.0 million
      for the same period in the previous year. Promotion expenses for the nine months
      ended December 31, 2007 accounted for 64.3% of total advertising and promotion
      expenses, representing an increase of 59.8% to $38.2 million from $23.9 million
      for the same period in the previous year.




***General
      and Administrative Expenses***





General
      and administrative expenses for the nine months ended December 31, 2007
      increased by 181.3% to $12.5 million from $4.4 million for the same period
      in
      the previous year. Most of the increases were for staff salaries, management
      expenses, and legal, accounting, and consulting costs related to corporate
      transactions, increased auditing and other professional costs.





***Interest
      Income***




Interest
      income for the nine months ended December 31, 2007 increased to $1.5 million
      from $231,000 for the same period in the previous year due to significant
      increases in the Company’s cash and cash equivalent balances.




28





***Interest
      Expense***




Interest
      expense for the nine months ended December 31, 2007 increased to $6.2 million
      from $1.3 million for the same period in the previous year, due primarily to
      borrowings from ABN and the amortization of debt discount associated with the
      issuance of warrants to ABN.




***Provision
      for Income Taxes***




The
      provision for income taxes, which is computed on an individual legal entity
      basis, was $4.6 million and $1.7 million for the nine months ended December
      31,
      2007 and 2006, respectively. The Company’s effective tax rate increased to 15.0%
      for the nine months ended December 31, 2007 from 9.9% for the same period in
      the
      previous year. This increase in the Company’s effective income tax rate was due
      to the expiration of a tax holiday enjoyed by Shengyuan Nutritional Food Co.,
      Ltd.




***Net
      Income Attributable to Stockholders***




As
      a
      result of the foregoing, net income attributable to stockholders for the nine
      months ended December 31, 2007 increased by 66.4% to $26.3 million from $15.8
      million for the same period in the previous year.




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





The
      Company’s financial condition has improved during the nine months ended December
      31, 2007. The cash and cash equivalent balance increased by $69.8 million to
      $90.6 million at December 31, 2007, as compared to $20.8 million at March 31,
      2007.





***Cash
      flows from operating activities***





Net
      cash
      provided by operating activities was $16.3 million for the nine months ended
      December 31, 2007, as compared to net cash used in operating activities of
      $4.7
      million for the nine months ended December 31, 2006. Net cash provided by
      operating activities in the nine months ended December 31, 2007 was mainly
      due
      to net income of $26.3 million, a $12.0 million increase in accounts payable,
      and a $12.0 million decrease in due from related parties, offset by a $30.5
      million increase in inventory. The increase in inventory was, in general,
      resulted from the increase in the Company’s sales activities. In addition, the
      Company also increased its inventory level in preparation for the forthcoming
      Chinese New Year holiday.




***Cash
      flows from investing activities***




Net
      cash
      used in investing activities was $12.4 million for the nine months ended
      December 31, 2007, as compared to $12.2 million for the nine months ended
      December 31, 2006. This was due primarily to the Company’s plant expansion to
      increase its production capacities. Cash invested in purchases of property
      and
      equipment was $14.1 million and $10.9 million for the nine months ended December
      31, 2007 and 2006, respectively. Restricted cash decreased by $2.8 million
      in
      the nine months ended December 31, 2007, as compared to an increase of $1.4
      million in the nine months ended December 31, 2006. Restricted cash represents
      cash deposited with banks as security against notes payable.




29





***Cash
      flows from financing activities***




Net
      cash
      provided by financing activities was $62.7 million for the nine months ended
      December 31, 2007, as compared to $16.4 million for the nine months ended
      December 31, 2006. The cash provided by financing activities during the nine
      months ended December 31, 2007 was primarily related to the proceeds from the
      issuance of common stock to Warburg
      Pincus and from
      the borrowings with ABN, partially offset by the repayment of short term
      borrowings from domestic banks. Net cash provided by financing activities for
      the nine months ended December 31, 2006 was primarily related to the proceeds
      from short term bank loans of $56.0 million, partially offset by the repayment
      of short term borrowings of $39.5 million.




***Outstanding
      indebtedness***


On
        October 11, 2007, ABN and certain other lenders provided a three year term
        loan
        to the Company in the aggregate amount of US$35.0 million. The principal
        amount,
        and any unpaid accrued interest, is due on October 11, 2010 and may be prepaid
        without penalty. The proceeds of the loan were used to pay the outstanding
        principle and accrued interest of the ABN bridge loan described above.  The
        loan
        bears interest at LIBOR for deposits in US dollars plus 3.5% with interest
        payable on the last day of each three month period. The Company is required
        to
        pay to ABN a commitment fee of 1% on the daily amount of the unused Commitment
        Amount. The loans are secured by a pledge of 10,000 shares of common stock
        of
        Synutra, Inc., an Illinois corporation wholly-owned by the Company.
 
 The
        Loan
        Agreement 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 contains financial covenants that do not
        permit (1) the Company’s consolidated interest coverage ratio as of the end of
        any fiscal quarter to be lower than 5.00; (2) the Company’s consolidated
        leverage ratio to be higher than 2.00, 1.80 and 1.50, with respect to such
        fiscal quarter ending during the period beginning on October 1, 2007 and
        ending
        on September 30, 2008, beginning on October 1, 2008 and ending on September
        30,
        2009, and beginning on October 1, 2009 and ending on the Maturity Date,
        respectively; (3) the Company’s consolidated tangible net worth to be less than
        $132 million on any date during the period beginning on January 1, 2008 and
        ending on December 31, 2008, less than $200 million during the period beginning
        on January 1, 2009 and ending on December 31, 2009, and less than $265 million
        during the period beginning on January 1, 2010 and ending on the maturity
        date;
        (4) the ratio of consolidated indebtedness to consolidated net worth to be
        higher than 0.80 on any date during the period beginning on January 1, 2008
        and
        ending on December 31, 2008, higher than 0.70 during the period beginning
        on
        January 1, 2009 and ending on December 31, 2009, and higher than 0.60 during
        the
        period beginning on January 1, 2010 and ending on the maturity date. The
        Company
        has performed an analysis of the above ratios and confirmed that these financial
        covenants were satisfied as of December 31, 2007.


In
      addition to the Loan Agreement with ABN, as of December 31, 2007, the Company
      had short-term loans from banks in the amount of $17.1million bearing interest
      ranging from 6.39% to 7.29% per annum. Such loans are extendable for terms
      of no
      less than one year to December 2008.




30




As
      at
      December 31, 2007, BQL had a 3 year long-term loan from Junchuan Ranch of
      Heilongjiang Province in the amount of $1.8 million bearing interest at 3.24%
      per annum. The loan, maturing on August 16, 2008, is secured by the pledge
      of
      certain fixed assets held by BQL and by a personal guarantee from the Company’s
      Chief Executive Officer and his spouse.




**OFF-BALANCE
      SHEET ARRANGEMENTS**





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





As
      of
      December 31, 2007, the Company had an outstanding guarantee issued to the
      Zhangbei Branch of the Agriculture Bank of China related to various bank loans
      of $1.1 million to 104 diary farmers in the Zhangbei Area. Such loans matured
      on
      December 25, 2007, but as of December 31, 2007, none of the loans had been
      repaid and the total outstanding loan amount remained $1.1 million.





On
      December 27, 2007, the People’s Bank of China, and China Banking Regulatory
      Commission, issued a joint decree requesting all banks in China to extend their
      loans to the diary farmers with maturity dates between January 1, 2006 to June
      30, 2008. The PBOC and CBRC did not specify the extension periods for such
      loans
      but rather directed the lending banks to determine the length of such extension.





This
      decree represents the PRC government’s efforts to boost the country’s fresh milk
      production which has been challenged by rising animal feed costs. In order
      to
      encourage diary cow farmers to increase their production without substantially
      increasing milk prices, the government is taking initiatives to subsidize the
      diary farmers.





To
      the
      best knowledge of the Company, the Agriculture Bank of China has not determined
      the extension period for the above loans. Although the Company is in discussions
      with the lending bank to determine the extension periods for such loans, no
      agreement has been reached and the Company is still obligated under the
      Guarantee. The Company has prepared its best estimate of possibly losses related
      to these loans based on a weighed average range of likely probabilities and
      potential payments that would be required under the guarantee, and estimated
      a
      potential loss of $352,000 related to the Guarantee. This amount has been
      recorded as current liability on the balance sheet.




**COMMITMENTS
      AND CONTINGENCIES**





**A.
      Purchase Commitments**





As
      of
      December 31, 2007, the Company had outstanding commitments in the amount of
      $27.8 million for advertising and purchase of raw materials within the next
      12
      months




31





**B.
      Capital commitments**





As
      of
      December 31, 2007, the Company’s capital commitments amounted to $14.5 million
      in relation to asset improvement and plant expansion within the next 12 months. **





**C.
      Lease commitments**





The
      lease
      commitments of the Company as at December 31, 2007 and 2006 were $20,000 and
      $257,000, respectively.





**D.
      Legal proceedings**





The
      Company is subject to various legal proceedings and claims that arise in the
      ordinary course of business. The Company does not believe that the amount,
      and
      ultimate liability, if any with respect to these actions will materially affect
      our business, financial position, results of operations or cash flows. The
      Company cannot assure, however, that such actions will not be material and
      will
      not adversely affect our business, financial position, results of operations
      or
      cash flows.




**CRITICAL
      ACCOUNTING ESTIMATES AND JUDGEMENTS**





The
      Company follows certain significant accounting policies when preparing its
      consolidated financial statements. A summary of these policies is included
      in
      the most recent amendments to the Company’s Annual Report on Form 10-K. The
      preparation of these financial statements in conformity with accounting
      principles generally accepted in the United States requires the Company 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. The Company evaluates
      these
      estimates and judgments on an ongoing basis and bases its 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. The Company’s actual
      results may differ from these estimates.





The
      Company believes 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 the most recent
      amendments to the Company’s Annual Report on Form 10-K have the greatest
      potential impact on our financial statements, so the Company considers these
      estimates, assumptions and judgments to be its critical accounting
      policies.




32





Additionally,
      due to the adoption of FIN48, the Company has revised its policy on income
      taxes
      with respect to accounting for uncertain tax positions. The Company considers
      its policy on income taxes to be a critical accounting policy due to the
      significant level of estimates, assumptions, and judgments and its potential
      impact on the Company’s consolidated financial statements.





Finally
      the Company has included a new critical accounting policy on contingencies
      in
      this fiscal third quarter reporting due to the significant management judgments
      applied in the determination of the contingency loss with respect to loan
      guarantees.





**Income
      Taxes**




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




The
      Company’s 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
      Company’s 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 Company’s
      effective tax rate and in evaluating its tax positions.





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




33




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





The
      Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48)
      effective April 1, 2007. In accordance with FIN 48, the Company recognized
      a tax
      benefit associated with an uncertain tax position when, in the Company’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 the Company
      judges to have a greater than 50% likelihood of being realized upon ultimate
      settlement with a taxing authority. The Company’s 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 Company’s effective tax rate includes the net
      impact of changes in the liability for unrecognized tax benefits and subsequent
      adjustments as considered appropriate by management.





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




The
      Company classifies interest and penalties recognized on the liability for
      unrecognized tax benefits as income tax expense. For the quarter ended
      December 31, 2007, the unrecognized tax benefit did not change significantly
      and
      the amount of interest and penalties related to uncertain tax position is
      immaterial.




34





**Contingencies**





As
      at
      December 31, 2007, the Company had an outstanding guarantee granted to the
      Zhangbei Branch of the Agriculture Bank of China in respect of bank loans of
      $1.1 million in total extended to 104 diary farmers in the Zhangbei Area.
      Periodically, the Company reviews the status of the guarantee and assesses
      its
      potential financial exposure. If the potential loss from the guarantee is
      considered probable and the amount can be estimated, the Company accrues a
      liability for the estimated loss. Significant judgment is required in both
      the
      determination of probability and the determination as to whether an exposure
      can
      be reasonably estimated.





Because
      of uncertainties related to the guarantee, the estimate of contingent loss
      is
      based on the best information available at the time. As additional information
      becomes available, the Company will reassess the potential liability related
      to
      its guarantee and may revise its estimates. Such revision in the estimates
      of
      the potential liabilities could have a material impact on its consolidated
      results of operations and financial condition.





In
      the
      fiscal quarter ended December 31, 2007, the Company recorded an estimated loss
      of $352,000 related to the guarantee, which was estimated based on the judgment
      as described in Note 13 to the financial statements. ******





**CONCENTRATION
      OF CREDIT RISK**





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





(i)
      Credit risks - The Company has policies in place to ensure that sales of
      products are made to customers with an appropriate credit history. The Company
      also has a concentration of credit risk due to (1) geographic sales as a
      majority of its products are marketed and sold in the PRC (2) export of
      chondroitin sulfate through a single importer in North America.





(ii)
      Liquidity risks - Prudent liquidity risk management implies maintaining
      sufficient cash, the availability of funding through an adequate amount of
      committed credit facilities and ability to close out market positions. The
      Company’s financial condition has improved substantially during the nine months
      ended December 31, 2007, as its cash and cash equivalent balance increased
      by
      $69.8 million to $90.6 million at December 31, 2007, as compared to $20.8
      million at March 31, 2007.




35





(iii)
      Interest rate risk - The interest rate and terms of repayments of short-term
      and
      long-term bank borrowings are approximately between 3-10% per annum. The
      Company’s interest rate risk arises from long term borrowings. Borrowings issued
      at variable rates expose the Company to cash flow interest rate risk. Other
      than
      the long term loan, the Company has no significant interest-bearing assets
      and
      the Company's income and operating cash flows are substantially independent
      of
      changes in market interest rates.





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





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




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





In
      December 2007, the FASB issued SFAS No. 141R, "Business Combination", to improve
      reporting and to create greater consistency in the accounting and financial
      reporting of business combinations. The standard requires the acquiring entity
      in a business combination to recognize all (and only) the assets acquired and
      liabilities assumed in the transaction; establishes the acquisition-date fair
      value as the measurement objective for all assets acquired and liabilities
      assumed; and requires the acquirer to disclose to investors and other users
      all
      of the information they need to evaluate and understand the nature and financial
      effect of the business combination. SFAS No. 141R applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008. An entity may not apply it before that date. Given SFAS 141R relates
      to prospective business combinations, the Company has currently not determined
      the potential effect on the consolidated financial statements.




36





In
      December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
      Consolidated Financial Statements" to improve the relevance, comparability,
      and
      transparency of financial information provided to investors by requiring all
      entities to report non-controlling (minority) interests in subsidiaries in
      the
      same way as required in the consolidated financial statements. Moreover, SFAS
      No. 160 eliminates the diversi t y
      that
      currently exists in accounting for transactions between an entity and
      non-controlling interests by requiring they be treated as equity
      transaction s .
      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.




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





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




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




**Interest
      Rate Risk**





The
      Company did not experience any material changes in interest rate exposures
      during the three and nine months ended December 31, 2007.  Based upon
      economic conditions and leading market indicators at December 31, 2007, the
      Company does not foresee a significant adverse change in interest rates in
      the
      near future and does not use interest rate derivatives to manage exposure to
      interest rate changes.




Currently,
      the Company is exposed to interest rate risk primarily associated with the
      ABN
      three-year term loan, a variable-rate debt obligation based on LIBOR. As of
      December 31, 2007, the carrying value of the Company’s long term debt with ABN
      is $35.0 million.





**Foreign
      Exchange Risk**




37





The
      Company conducts essentially all of its business outside the United States
      through subsidiaries with Renminbi ("RMB") as their functional currency. 
As a result, the Company faces exposure to adverse movements in currency
      exchange rates as the financial results of its international operations are
      translated from local currency into U.S. dollars upon consolidation.  If
      the U.S. dollar weakens against the local currency, the translation of
      these foreign-currency-denominated balances will result in increased net assets,
      net revenues, operating expenses, and net income or loss.  Similarly, the
      Company’s net assets, net revenues, operating expenses, and net income or loss
      will decrease if the U.S. dollar strengthens against local currency.
      Additionally, foreign exchange rate fluctuations on transactions denominated
      in
      currencies other than the functional currency result in gains and losses that
      are reflected in the Company’s unaudited condensed consolidated statement of
      income.  The Company’s international operations are subject to risks
      typical of international business, including, but not limited to, differing
      economic conditions, changes in political climate, differing tax structures,
      other regulations and restrictions, and foreign exchange rate
      volatility.




**ITEM
      4T. CONTROLS AND PROCEDURES**





**Disclosure
      Controls and Procedures**





As
      of
      December 31, 2007, the end of the period covered by this report, the Company’s
      Chief Executive Officer and Chief Financial Officer reviewed and evaluated
      the
      effectiveness of the Company’s disclosure controls and procedures (as defined in
      Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that
      material information the Company is required to disclose in its reports filed
      or
      submitted under the Exchange Act is recorded, processed, summarized, and
      reported within required time periods. Disclosure controls and procedures
      include, without limitation, controls and procedures designed to ensure that
      information required to be disclosed is accumulated and communicated to the
      Company’s management including its Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosures. The Company has concluded, based on that evaluation, that as of
      the
      end of the period covered by this report, its disclosure controls and procedures
      were not effective at the reasonable assurance level because of the
      identification of material weaknesses in its internal control over financial
      reporting, which the Company views as an integral part of its disclosure
      controls and procedures.





Management’s
      assessment identified the following material weaknesses:





1.
      The
      Company did not maintain a sufficient complement of personnel with an
      appropriate level of technical accounting knowledge, experience, and training
      in
      the application of generally accepted accounting principles commensurate with
      the Company’s complex financial accounting and reporting requirements and low
      materiality thresholds.




2.
      The
      Company did not have effective controls to ensure that significant non-routine
      transactions, accounting estimates, and other adjustments were appropriately
      reviewed, analyzed, and monitored on a timely basis.




38





3.
      The
      Company’s internal audit function is not adequately staffed, and did not have a
      robust risk assessment process in place to regularly monitor and document the
      procedures, programs and controls related to the Company’s financial
      reporting.





Due
      to
      these material weaknesses in internal control over financial reporting -- as
      evidenced by the significant number and magnitude of out-of-period adjustments
      identified during the year-end and period-end closing process and the resulting
      restatements -- management has concluded that the Company’s disclosure controls
      and procedures were not effective at the reasonable assurance level. Further,
      management understands that these material weaknesses, if not remediated, could
      result in the Company not being able to meet its regulatory filing deadlines
      or
      cause a material misstatement in the future.




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





The
      Company is in the process of developing and implementing remediation plans
      to
      address its material weaknesses in its internal control over financial reporting
      by adopting and implementing the Sarbanes-Oxley Act for the Company's fiscal
      year ending March 31, 2008. During the fiscal quarter ended December 31, 2007,
      management conducted a program to plan the remediation of all identified
      material weaknesses and significant deficiencies using a risk-based approach
      based on the “Internal Control — Integrated Framework” issued by the
      Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
      These
      plans contemplate various changes in process, procedures, policy, training
      and
      organizational design, and are currently being implemented. In addition, the
      Company will hire and/or appoint new managers in the accounting area and engage
      accounting professionals from external resources to address internal control
      weaknesses related to technical accounting.





The
      following specific remedial actions are in process to address the material
      weaknesses in the Company’s internal control over financial reporting described
      above:





1.
      Reorganize and restructure the Company’s corporate accounting staff (“Corporate
      Accounting”) by (1) revising the reporting structure and establishing clear
      roles, responsibilities, and accountability, (2) hiring additional technical
      accounting personnel to address the Company's complex accounting and financial
      reporting requirements, and (3) assessing the technical accounting capabilities
      at the Company’s subsidiaries to ensure the right complement of knowledge,
      skills, and training.




39





2.
      Improve period-end closing procedures by (1) requiring all significant
      non-routine transactions to be reviewed by Corporate Accounting, (2) ensuring
      that account reconciliations and analyses for significant financial statement
      accounts are reviewed for completeness and accuracy by qualified accounting
      personnel, (3) implementing a process that ensures the timely review and
      approval of complex accounting estimates by qualified accounting personnel
      and
      subject matter experts, where appropriate, and (4) developing better monitoring
      controls at Corporate Accounting and at the Company’s subsidiaries.





3.
      Reorganize the Company’s internal audit function by (1) hiring additional
      personnel with an appropriate internal auditing knowledge and experience, (2)
      ensuring the independence of the internal audit function in corporate structure,
      and (3) developing and implementing systematic risk assessment procedures,
      programs and controls.





As
      previously noted, management has augmented the resources in Corporate Accounting
      by utilizing external resources in technical accounting areas and will implement
      additional closing procedures during the remainder of fiscal 2008. As a result,
      management believes that there are no material inaccuracies or omissions of
      material fact and, to the best of its knowledge, believes that the condensed
      consolidated financial statements as and for the fiscal quarter and nine months
      ended December 31, 2007 in this Form 10-Q, fairly present in all material
      respects the financial condition and results of operations of the Company in
      conformity with accounting principles generally accepted in the United States
      of
      America.




**PART
      II**


**OTHER
      INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





The
      Company is subject to various legal proceedings and claims that arise in the
      ordinary course of business. The Company does not believe that the amount,
      and
      ultimate liability, if any with respect to these actions will materially affect
      our business, financial position, results of operations or cash flows. The
      Company cannot assure, however, that such actions will not be material and
      will
      not adversely affect our business, financial position, results of operations
      or
      cash flows.





**ITEM
      1A. RISK FACTORS**





For
      information regarding the risks and uncertainties affecting the Company’s
      business, please refer to “Part II, Item 1A Risk Factors” of the Company’s
      Quarterly Report on Form 10-Q for the three months ended June 30, 2007. There
      have been no material changes to these risks and uncertainties, except as
      follows:




40





***The
      PRC government’s recent measures to curb inflation rates in China could be
      viewed by investors as adversely affecting future results of operations.***





Recently,
      the PRC government undertook various measures to alleviate the effects of
      inflation, especially with respect to key commodities. On January 16, 2008,
      the
      PRC National Development and Reform Commission announced national price controls
      on various products, including milk. The PRC government also has encouraged
      local governments to institute price controls on similar products. Such price
      controls could be viewed by investors as adversely affecting the Company’s
      future results of operations and, accordingly, the price of the Company’s common
      stock.





***The
      PRC government’s recent aid package for dairy farmers in China includes the
      extension of loan repayment periods for dairy farmer loans, which will extend
      the Company’s exposure under its loan guarantees issued to the Zhangbei Branch
      of the Agriculture Bank of China.***





The
      People’s Bank of China and the China Banking Regulatory Commission recently
      implemented new favorable policies to aid dairy farmers, including policies
      mandating the extension of loan repayment dates for bank loans to dairy farmers.
      These PRC loan repayment extension measures have extended the December 25,
      2007
      maturity date on various bank loans guaranteed by the Company totaling $1.1
      million to 104 dairy farmers in the Zhangbei Area. Although the Company is
      in
      discussions with the lending bank to determine the extension period for such
      loans, no agreement regarding the extension has been reached and the Company
      continues to be obligated under its loan guarantee.





***The
      Company’s sales, results of operations, brand image and reputation could be
      materially and adversely affected if the Company fails to efficiently manage
      the
      Company’s production operations without interruption, or fails to ensure that
      the Company’s products are delivered on time.***





The
      operation of the Company’s business requires successful coordination of several
      sequential and complex production processes, the disruption of any of which
      could interrupt the Company’s production and have a material and adverse effect
      on the Company’s relationships with its distributors and end-user customers, the
      Company’s brand name and reputation, and the Company’s financial performance.
      The Company’s production operations involve the coordination of raw material
      sourcing from third parties, internal production processes and external
      distribution processes. The Company may face difficulties in coordinating the
      various aspects of its production processes, resulting in downtime and delays.
      In addition, the Company may encounter interruptions in its production processes
      due to catastrophic events beyond the Company’s control, such as fires,
      explosions, labor disturbances or severe weather conditions, such as the current
      severe snowstorms and winter weather affecting travel in certain parts of China.
      If there is a stoppage in production at any of the Company’s facilities, even if
      only temporarily, or delays in deliveries to its customers, the Company’s
      business and reputation could be negatively affected. The Company currently
      does
      not have business interruption insurance to offset these potential losses,
      delays and risks, so a material interruption of the Company’s business
      operations could severely damage its business.




41





In
      addition, along with other dairy and consumer product producers in China, the
      Company generally relies on transport operators and distributors for the
      delivery of its products. Transportation conditions are often difficult in
      some
      of the regions where the Company sells its products. Delivery disruptions for
      various reasons beyond the Company’s control, including weather conditions,
      political turmoil, social unrest and strikes could lead to delayed or lost
      deliveries. For example, in the past the Company has experienced problems with
      deliveries due to disruptions in transportation.





***Under
      China’s New EIT Law, the Company may be classified as a “resident enterprise” of
      China. Such classification could result in unfavorable tax consequences to
      the
      Company and its non-PRC shareholders.***




China
      passed a new Enterprise Income Tax Law, or the New EIT Law, and it
      is implementing rules, both of which became effective on January 1, 2008.
      Under the New EIT Law, an enterprise established outside of China with “de facto
      management bodies” within China is considered a “resident enterprise,” meaning
      that it can be treated in a manner similar to a Chinese enterprise for
      enterprise income tax purposes. The implementing rules of the New EIT Law define
      de facto management as “substantial and overall management and control over the
      production and operations, personnel, accounting, and properties” of the
      enterprise. Currently no official interpretation or application of this new
      “resident enterprise” classification is available; therefore, it is unclear how
      tax authorities will determine tax residency based on the facts of each case.




If
      the
      PRC tax authorities determine that Synutra, Inc. or Synutra International,
      Inc.
      is a “resident enterprise” for PRC enterprise income tax purposes, a number of
      unfavorable PRC tax consequences could follow. First, the Company may be subject
      to enterprise income tax at a rate of 25% on its worldwide
      taxable income as well as PRC enterprise income tax reporting
      obligations. Second,
      although under the New EIT Law and its implementing rules dividends paid to
      the
      Company from its PRC subsidiaries would qualify as “tax-exempt income,” the
      Company cannot guarantee that such dividends will not be subject to a 10%
      withholding tax, as the
      PRC
      foreign exchange control authorities, which enforce the withholding tax, have
      not yet issued guidance with respect to the processing of outbound remittances
      to entities that are treated as resident enterprises for PRC enterprise income
      tax purposes. Finally, it is possible that future guidance issued with respect
      to the new “resident enterprise” classification could result in a situation in
      which a 10%
      withholding tax is imposed on dividends the Company pays to its non-PRC
      shareholders and with
      respect to gains derived by our non-PRC shareholders from transferring our
      shares.




In
      addition to the uncertainty in how the new “resident enterprise” classification
      could apply, it is also possible that the rules may change in the future,
      possibly with retroactive effect. The Company is actively monitoring the
      possibility of “resident enterprise” treatment for the 2008 tax year and
      evaluating appropriate organizational changes to avoid this treatment, to the
      extent possible.




42





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




On
      May
      24, 2007, the Company entered into a Common Stock Purchase Agreement with
      Warburg Pincus Private Equity IX, L.P. (the “Investor”), pursuant to which the
      Investor agreed to acquire 4 million shares of the Company’s common stock for an
      aggregate purchase price of $66,000,000. The Company claims an exemption from
      the registration requirements of the Securities Act of 1933 (the “Securities
      Act”) for the private placement of these securities pursuant to Section 4(2) of
      the Securities Act and/or Regulation D promulgated thereunder. The transaction
      did not involve a public offering, the Investor is an accredited investor and/or
      qualified institutional buyer, the Investor had access to information about
      the
      Company and their investment, the Investor took the securities for investment
      and not resale, and the Company took appropriate measures to restrict the
      transfer of the securities.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





**None.**





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





**None.**





**ITEM
      5. OTHER INFORMATION**





**None.**




**ITEM
      6. EXHIBITS**





**EXHIBIT**
              **NO.**
            
            **DOCUMENT
                DESCRIPTION**3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws
                (1)10.1
            
            Share
                Exchange Agreement dated as of June 14, 2005 (2)




43




10.2
            
            License
                and Supply Agreement dated as of September 1st,
                2003 (3)10.3
            
            Agreement
                between the Company and the Department of Finance of Zheng Lan Qi
                (County)
                of Inner Mongolia, with Amendment and Schedule (4)31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as amended.32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
                Officer).32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
                Officer).





(1)
            Incorporated
                herein by reference from the Registrant’s Form 10-SB filed with the SEC on
                June 15, 2005.(2)
            Incorporated
                herein by reference from the Registrant’s Form 8-K filed with the SEC on
                July 21, 2005.(3)
            Incorporated
                herein by reference from the Registrant’s Form 10-KSB filed with the SEC
                on June 29, 2006.(4)
            Incorporated
                herein by reference from the Registrant’s Form 8-K filed with the SEC on
                November 9, 2006.






44


**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:
                February 12, 2008
            By:
            /s/ Liang
                ZhangName: 
                Liang ZhangTitle: 
                Chief Executive Officer




45