**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q/A**


**(Amendment
      No.2)**





x
            **Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934**





For
      the
      quarterly period ended September 30, 2006




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), and (2) has been subject to such filing requirements for the past
      90
      days.





Yes x No o





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 o
            
            Accelerated
                filer o
            
            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 o    
      No x




As
      of
      September 30, 2006, there were 50,000,713 shares of Common Stock
      outstanding.










EXPLANATORY
      NOTE:




On
      August
      15, 2007, Synutra International, Inc. (“Synutra” or the “Company”) filed a
      timely Notification of Late Filing on Form 12b-25 with the U.S. Securities
      and
      Exchange Commission (the “SEC”) to report that it would be unable to file its
      Quarterly Report on Form 10-Q as and for the fiscal quarter ended June 30,
      2007
      by the prescribed due date of August 14, 2007. Further, the Company was unable
      to file its Form 10-Q within the five-day extension period provided in Rule
      12b-25 under the Exchange Act of 1934, as amended (the “Exchange Act”). On
      August 17, 2007, the Company filed a current report on Form 8-K stating that
      management had concluded that Synutra’s financial statements as of and for the
      fiscal year ended March 31, 2007 and for each fiscal quarter ended June 30,
      2006, September 30, 2006 and December 31, 2006 should not be relied upon. On
      August 20, 2007, the Company received a staff determination letter from The
      Nasdaq Stock Market stating that the Company’s common stock is subject to
      delisting from The Nasdaq Global Market for the Company’s failure to file its
      Form 10-Q. Finally, on October 2, 2007, the Company filed a current report
      on
      Form 8-K announcing that Lawrence Lee, a member of Synutra’s Board of Directors,
      resigned from his position on the Board to become Synutra’s Chief Financial
      Officer. On October 10, 2007, the Company received a letter from The
      Nasdaq Stock Market stating that its filing delinquency had been cured
      following the filing of the Quarterly Report on Form 10-Q for the three month
      period ended June 30, 2007.





The
      Company’s failure to file timely its Form 10-Q was due to management’s
      assessment of accounting errors and irregularities identified during the
      preparation of the Form 10-Q. As a result of such assessment, the Company is
      filing this amendment to its Quarterly Report on Form 10-Q with restated
      financial statements as and for the fiscal quarter ended September 30, 2006
      as
      filed on November 14, 2006 (the “Original Filing”), an amendment to its
      Quarterly Report on Form 10-Q with restated financial statements as and for
      the
      fiscal quarter ended December 31, 2006. On October 5, 2007, the Company filed
      an
      amendment to its Annual Report on Form 10-K with restated financial statements
      as and for the fiscal year ended March 31, 2007 (the “Form
      10-K/A”).





The
      Company’s dismissal of its independent registered public accounting firm,
      Rotenberg & Co. LLP, engagement of Deloitte Touche Tohmatsu CPA Ltd. as its
      new independent auditors effective July 27, 2007 and assessment of the
      accounting errors and irregularities identified during the preparation of the
      Form 10-Q are described in the Company’s previously-filed Exchange Act documents
      as follows:





·
            the
                Current Report on Form 8-K filed on July 27,
                2007;


·
            the
                Current Report on Form 8-K/A filed on August 9,
                2007;


·
            the
                Company’s Notification of Late Filing on Form 12b-25 filed on August 15,
                2007;


·
            the
                Current Report on Form 8-K filed on August 17, 2007;


2




·
            the
                Current Report on Form 8-K filed on August 24, 2007; and


·
            the
                Current Report on Form 8-K filed on October 2,
                2007.





In
      addition, aspects of the restatement are described in Note 15 to the Notes
      to
      the Condensed Consolidated Financial Statements to this Form 10-Q/A, Note 15
      to
      the Notes to Condensed Consolidated Financial Statements to the Company’s Form
      10-Q/A as and for the fiscal quarter ended December 31, 2006, Note 18 to the
      Notes to the Consolidated Financial Statements to the Form 10-K/A, Note 3 to
      the
      Notes to Condensed Consolidated Financial Statements to the Company’s Form 10-Q
      as and for the fiscal quarter ended June 30, 2007 and as described immediately
      below.





**Adjustments**





·
            Restricted
                cash, included as cash and cash equivalents in the Original Filing,
                represents cash deposited with the banks as guarantees for the issuance
                of
                promissory notes. Under US GAAP, restricted cash does not meet the
                definition of cash and cash equivalents, and separate disclosure
                on the
                face of balance sheet is required. In addition, the change in the
                restricted cash balance, given its use to secure promissory notes,
                should
                have been presented as an investing activity. Therefore, restricted
                cash
                of $19.6 million and $16.4 million is reclassified and is presented
                as an
                individual item on our consolidated balance sheets as of September
                30,
                2006 and March 31, 2006, respectively. In addition, the decrease
                in
                restricted cash of $3.2 million and $794,000 is reclassified from
                operating to investing activities in the consolidated statements
                of cash
                flows for six months ended September 30, 2006 and 2005, respectively.





·
            As
                at September 30, 2006 and March 31, 2006, the Company had provided
                bank
                loan guarantee of $1.1 million and $1.1 million in total extended
                to 104
                farmers in the Zhangbei area. This was incorrectly presented as gross
                other receivable and other payable in the Original filing. The Company
                has
                revised the balance sheet to eliminate both the other receivable
                and other
                payable.





·
            Land
                use rights, which represents a prepaid lease payment, is reclassified
                as
                an individual line item on our consolidated balance sheets as of
                September
                30, 2006 and March 31, 2006, respectively. It has been included as
                part of
                the property, plant and equipment, net in the Original Filing.





·
            In
                fiscal year 2007, we acquired certain fixed assets from Zheng Lan
                Qi
                County and subsequently established a new subsidiary with these assets.
                In
                conjunction with the acquisition, the local government provided an
                irrevocable subsidy of $4.1 million which we recognized as subsidy
                income
                for the fiscal year ended March 31, 2007. Subsequent to the Original
                Filing, we determined that the $4.1 million should be deferred and
                netted
                against the depreciation expenses of the assets acquired, as this
                method
                effectively matches the related depreciation of the cost of assets
                with
                the corresponding grant income. The effect of this adjustment is
                a
                decrease in subsidy income by $1.5 million and $2.8 million,and
                an increase in deferred subsidy by $1.5 million and $2.8 million
                for thethree
                and six months ended September 30, 2006 respectively.We
                did not recognize any of the subsidies during thethree
                and six months ended September 30, 2006as
                the asset had not yet been placed in
                service.




3




·
            Certain
                short term notes payable balances, in the amount of $24.3 million
                and
                $18.5 million, are reclassified as short-term loan as of September
                30 and
                March 31, 2006, respectively,as
                the ultimate lender of the note is an accredited financial
                institution.





·
            The
                cash consideration given to our retailers, who purchased our products
                directly from our distributors, is reclassified as a reduction of
                sales.
                It was recorded as advertising and promotion expenses in the Original
                Filing.The
                effects of this reclassification are a decrease in sales and an increase
                in advertising and promotion expenses of $297,000 and $527,000 for
                thethree
                and six months ended September 30, 2006,
                respectively.





·
            The
                amount of free products provided to our customers is reclassified
                as cost
                of salesfor
                the three and six months ended September 30, 2006 and 2005.It
                had been recorded as advertising and promotion expense in the Original
                Filing. The effects of this adjustment are an increase in cost of
                sales
                and a decrease in advertising and promotion expense of $283,000 and
                $508,000 for the three and six months ended September 30, 2006,
                respectively.





In
      addition to the above correcting adjustments, we also made reclassifications
      on
      our consolidated financial statements as disclosed in footnote 15 to the
      consolidated financial statements for the current period and have reclassified
      prior period amounts to conform to the current period presentation.
      W e
      have
      also added a disclosure in footnote 14 to the consolidated financial statements
      to reflect loan guarantees provided to farmers in the Zhangjiakou
      region.





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


4


**SYNUTRA
      INTERNATIONAL, INC.**





**FORM
      10-Q/A**


For
      the
      Quarter Ended September 30, 2006





**INDEX**





PART
                  I. FINANCIAL INFORMATIONItem
                1. Consolidated Financial Statements:Consolidated
                Balance Sheets as of September 30, 2006 (restated, unaudited) and
                March
                31, 2006 (restated, audited)
            
            
            6Consolidated
                Statements of Income for the three and six months ended September 30,
                2006 and 2005 (restated, unaudited)
            
            
            7Consolidated
                Statements of Changes in Shareholders’ Equity for the six months ended
                September 30, 2006 (restated, unaudited)
            
            
            8Consolidated
                Statements of Cash Flows for the six months ended September 30, 2006
                and
                2005 (restated, unaudited)
            
            
            9Notes
                to the Consolidated Financial Statements
            
            
            10Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            
            29PART
                  II. OTHER INFORMATIONItem
                6. Exhibits
            
            
            39Signatures
            
            
            40





5


**PART
      I**


**FINANCIAL
      INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**


**CONSOLIDATED
      BALANCE SHEETS**


**(restated,
      see note 15)**





**September
                30, 2006**
            
            **March
                31, 2006**(In
                thousands)
            
            **(unaudited)****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            15,828
            
            $
            5,677Restricted
                cash
            
            
            19,641
            
            
            16,457Accounts
                receivable
            
            
            8,491
            
            
            2,540Inventories
            
            
            12,841
            
            
            11,789Other
                receivable
            
            
            2,648
            
            
            2,230Due
                from the related parties
            
            
            6,769
            
            
            8,602Advances
                to suppliers
            
            
            3,720
            
            
            354Deferred
                expenses and other current assets
            
            
            428
            
            
            139**Total
                current assets**
            
            
            **70,366**
            
            
            **47,788****Property,
                plant and equipment, net**
            
            
            37,868
            
            
            33,318**Land
                use rights, net**
            
            
            1,807
            
            
            1,546**Other
                Assets**
            
            
            299
            
            
            357**TOTAL
                ASSETS**
            
            
            **110,340**
            
            
            **83,009****LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                Liabilities:**Bank
                loans
            
            
            50,040
            
            
            36,680Accounts
                payable
            
            
            9,045
            
            
            13,079Due
                to related parties
            
            
            2,780
            
            
            4,301Advances
                from customers
            
            
            1,985
            
            
            933Tax
                payables
            
            
            2,676
            
            
            1,996Other
                payable and Other current liabilities
            
            
            6,560
            
            
            5,069**Total
                current liabilities**
            
            
            **73,086**
            
            
            **62,058**Deferred
                income
            
            
            2,782
            
            
            -**Total
                liabilities**
            
            
            **75,868**
            
            
            **62,058****Shareholders'
                equity:**Common
                Stock, $.0001 par value: 250,000 authorized;50,001  issued and
                outstanding at September 30 and March 31,2006,
                respectively
            
            
            5
            
            
            5Additional
                paid-in capital
            
            
            8,226
            
            
            8,226Retained
                earnings
            
            
            24,556
            
            
            11,664Accumulated
                other comprehensive income
            
            
            1,685
            
            
            1,056**Total
                shareholders' equity**
            
            
            **34,472**
            
            
            **20,951****TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            **110,340**
            
            **$**
            **83,009**





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


6


**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(restated,
      see note 15 , unaudited)**





**Three
                  Months Ended**
              **September
                30,**
            
            **Six
                  Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(in
                thousands, except for per share amounts)Net
                sales
            
            $
            45,617
            
            $
            30,172
            
            $
            94,724
            
            $
            51,336Including
                sales to related parties
            
            
            986
            
            
            3,800
            
            
            6,406
            
            
            5,661Cost
                of sales
            
            
            22,208
            
            
            15,624
            
            
            49,855
            
            
            27,280Including
                cost of sales to related parties
            
            
            1,032
            
            
            3,569
            
            
            6,549
            
            
            5,153**Gross
                profit**
            
            
            **23,409**
            
            
            **14,548**
            
            
            **44,869**
            
            
            **24,056**Selling
                & distribution expenses
            
            
            5,194
            
            
            3,910
            
            
            10,236
            
            
            5,725Advertising
                and promotion expenses
            
            
            11,060
            
            
            6,198
            
            
            17,534
            
            
            11,455General
                & administrative expenses
            
            
            1,372
            
            
            2,106
            
            
            2,404
            
            
            3,021Total
                operating expense
            
            
            17,626
            
            
            12,214
            
            
            30,174
            
            
            20,201**Income
                from operations**
            
            
            **5,783**
            
            
            **2,334**
            
            
            **14,695**
            
            
            **3,855**Interest
                expense
            
            
            (427
            )
            
            (830
            )
            
            (772
            )
            
            (1,191
            )Interest
                income
            
            
            60
            
            
            40
            
            
            121
            
            
            104Other
                income, net
            
            
            156
            
            
            72
            
            
            294
            
            
            598**Income
                before provision for income tax**
            
            **$**
            **5,572**
            
            **$**
            **1,616**
            
            **$**
            **14,338**
            
            **$**
            **3,366**Provision
                for income tax
            
            
            651
            
            
            279
            
            
            1,446
            
            
            305**Net
                income before minority interests**
            
            
            **4,921**
            
            
            **1,337**
            
            
            **12,892**
            
            
            **3,061**Minority
                interests
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                income attributable to shareholders**
            
            
            **4,921**
            
            
            **1,337**
            
            
            **12,892**
            
            
            **3,061**Other
                comprehensive income
            
            
            591
            
            
            617
            
            
            629
            
            
            644**Comprehensive
                income**
            
            
            **5,512**
            
            
            **1,954**
            
            
            **13,521**
            
            
            **3,705****Earning
                per share—basic and diluted**
            
            **$**
            0.10
            
            **$**
            0.03
            
            **$**
            0.26
            
            **$**
            0.06**Weighted
                average common share outstanding-basic and
                diluted**
            
            
            **50,001**
            
            
            **49,334**
            
            
            **50,001**
            
            
            **47,667**





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




7




**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**




**Common
                Stock outstanding**
            
            **Registered
                Capital**
            
            **Additional**
              **Paid-In**
                **Capital**
            
            **Retained
                Earnings**
            
            **Accumulated
                Comprehensive Income**
            
            **Total
                Shareholders’ Equity****(restated,
                see note 15, unaudited)(in thousands)****Balance
                at March 31, 2006**
            
            
            **50,001**
            
            $
            5
            
            $
            8,226
            
            $
            11,664
            
            $
            1,056
            
            $
            20,951Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            12,892
            
            
            -
            
            
            12,892Other
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            629
            
            
            629**Balance
                at September 30, 2006**
            
            
            **50,001**
            
            **$**
            **5**
            
            **$**
            **8,226**
            
            **$**
            **24,556**
            
            **$**
            **1,685**
            
            **$**
            **34,472**





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


8


**SYNUTRA
      INTERNATIONAL, INC. AND SUBSIDIARIES**


**(INCORPORATED
      IN THE STATE OF DELAWARE**


**WITH
      LIMITED LIABILITY)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(restated,
      see note 15, unaudited)**





**Six
                  Months Ended**
              **September
                30,****2006**
            
            **2005**(in
                thousands)**Cash
                flow from operating activities:**Net
                income
            
            $
            12,892
            
            $
            3,061Adjustments
                  to reconcile net income to net cash provided by operating activities
                  Depreciation and amortization
            
            
            804
            
            
            746Bad
                debt expense
            
            
            (45
            )
            
            4Gain
                on short term investment
            
            
            (6
            )
            
            7Minority
                interest
            
            
            -
            
            
            1Financial
                consultants and finders fee
            
            
            -
            
            
            567Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (5,907
            )
            
            (374
            )Inventories
            
            
            (1,051
            )
            
            (184
            )Advances
                to suppliers
            
            
            (3,366
            )
            
            268Due
                from related parties
            
            
            1,834
            
            
            (10
            )Other
                receivable
            
            
            (418
            )
            
            -Deferred
                expense
            
            
            (254
            )
            
            (2,392
            )Accounts
                payable
            
            
            (4,034
            )
            
            1,044Due
                to related parties
            
            
            (1,522
            )
            
            (496
            )Advances
                from customers
            
            
            1,052
            
            
            131Tax
                payable
            
            
            679
            
            
            -Other
                liabilities
            
            
            1,492
            
            
            1,510Deferred
                revenue
            
            
            2,782
            
            
            -**Net
                cash provided by operating activities**
            
            **$**
            **4,932**
            
            **$**
            **3,883****Cash
                flow from investing activities:**Acquisition
                of property, plant and equipment
            
            
            (658
            )
            
            (650
            )Cash
                used for construction in progress
            
            
            (4,905
            )
            
            (5,453
            )Cash
                receipt of disposal of fix assets
            
            
            -
            
            
            35Purchases
                of intangible assets
            
            
            (24
            )
            
            -Change
                of restricted cash
            
            
            (3,184
            )
            
            (794
            )**Net
                cash used in investing activities**
            
            $
            **(8,771**
            **)**
            $
            **(6,862**
            **)****Cash
                flow from financing activities:**Borrowing
                of bank loans
            
            
            40,366
            
            
            34,308Repayment
                of bank loans
            
            
            (27,005
            )
            
            (30,400
            )Issuance
                of Common stock
            
            
            -
            
            
            217**Net
                cash provided by financing activities**
            
            **$**
            **13,361**
            
            **$**
            **4,125****Net
                change in increase in cash and cash equivalents**
            
            
            **9,522**
            
            
            **1,146**Effect
                of exchange rate changes on cash and cash equivalents
            
            
            629
            
            
            644**Cash
                and cash equivalents, beginning of period**
            
            
            **5,677**
            
            
            **5,812****Cash
                and cash equivalents, end of period**
            
            **$**
            **15,828**
            
            **$**
            **7,602****Supplementary
                cash flows disclosure**Interest
                paid
            
            $
            772
            
            $
            720Income
                taxes paid
            
            $
            1,116
            
            $
            305





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


9


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.
      DESCRIPTION OF BUSINESS**





The
      Company is a Delaware corporation that at September 30, 2006 owned 100% of
      five
      subsidiary companies in the People’s Republic of China (“PRC” or “China”). These
      five subsidiaries are all principally engaged in different stages of the
      production, distribution, and sales of dairy based pediatric and adult nutrition
      products. The Company’s extensive sales network covers 24 provinces, 227 cities,
      and more than 800 counties throughout China. In 2004, the Company’s infant
      formula market share was rated number eight among international manufacturers
      and number three among domestic manufacturers in China. The Company’s fiscal
      year end is March 31.





**2.
      CRITICAL ACCOUNTING POLICIES AND ESTIMATES**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q. Accordingly,
      they
      do not include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements and related
      notes.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all adjustments necessary to present fairly the
      balance sheet of Synutra International, Inc. and subsidiaries as of September
      30, 2006, and the results of their operations and their cash flows for the
      three
      and six month periods ended September 30, 2006 and 2005. The results of
      operations for the three and six month periods ended September 30, 2006 and
      2005
      are not necessarily indicative of the results to be expected for the entire
      year. The condensed consolidated balance sheet information as of March 31,
      2006
      was derived from the audited Fiscal 2005 Annual Report. These financial
      statements should read in conjunction with that report.





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





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





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





10




**Accounting
      method**





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





**Principles
      of consolidation**





The
      consolidated financial statements as of September 30, 2006, the related
      consolidated statements of income for the three and six months ended September
      30, 2006 and 2005, and the related consolidated statements of cash flows and
      stockholders’ equity statements for the three and six months ended September 30,
      2006 and 2005 are unaudited. All significant inter-company balances and
      transactions have been eliminated in the consolidation.





The
      following companies are consolidated for financial statement presentation:





**Name
                of subsidiaries**
            
            **September
                30, 2006**
            
            **Incorporation
                date**Qingdao
                St. George Dairy Co. Ltd
            
            
            100
            %
            
            Sep-01Qingdao
                Sheng Yuan Dairy Co. Ltd
            
            
            100
            %
            
            Jan-98Heilongjiang
                Loubei Sheng Yuan Food Co. Ltd
            
            
            100
            %
            
            Apr-01Bei’an
                Yipin Dairy Co. Ltd
            
            
            100
            %
            
            Jun-04Qingdao
                Women and Children Nutrition Research Co. Ltd *
            
            
            100
            %
            
            Apr-04Zhangjiakou
                Shen Yuan Co. Ltd **
            
            
            100
            %
            
            Mar-04





*
            Qingdao
                Women and Children Nutrition Research Co, Ltd was dissolved and disposed
                of in July 2006.




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





**Restricted
      cash**




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





**Accounts
      receivable**





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





Trade
      receivables are recognized and carried at the original invoice amount less
      allowance for any uncollectible amounts. An estimate for doubtful accounts
      is
      made when collection of the full amount is no longer probable. Bad debts are
      written off as incurred. The allowance on the doubtful accounts was $372,000
      and
      $417,000 as at September 30, 2006 and March 31, 2006, respectively.




11




**Inventories**





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





**Property,
      plant and equipment**





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





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





The
      capitalized interest accrued up to the three months ended September 30, 2006
      was
      $74,460 associated with construction in progress.





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





Buildings
                and leasehold improvement
            
            
            20
                yearsPlant
                and machinery
            
            
            5
                - 10 yearsOffice
                equipment and furnishings
            
            
            5
                yearsMotor
                vehicles
            
            
            5
                years





**Land
      use right**





According
      to the law of China, the government owns all the land in China. Companies or
      individuals are authorized to possess and use the land only through land use
      rights granted by the Chinese government. Land use rights are being amortized
      using the straight-line method over the lease term of 20 to 50 years.





12




**Income
      taxes**





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





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





Qingdao
      St. George Dairy Co., Ltd. is under such preferential tax treatment until
      December 31, 2008. Accordingly, the applicable enterprise income tax rate is
      24%
      and the local tax rate is 0%, resulting in an aggregate tax rate of 24%. The
      subsidiary will not be subject to local income tax prior to 2003,The
      subsidiary’s first cumulative profit-making year was 2004.





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





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





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





Qingdao
      Women and Children Nutrition Research Co. Ltd was subject to 33% income tax.
      This entity was dissolved in July 2006.





13




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


**Period-Tax
                    rate (Calendar year)**
                
                **Incorporation****Name
                    of subsidiaries**
                
                **2006**
                
                **2007**
                
                **2008**
                
                **2009**
                
                **2010**
                
                **2011**
                
                **date**Qingdao
                    St. George Dairy Co., Ltd.
                
                
                12
                %
                
                12
                %
                
                12
                %
                
                24
                %
                
                24
                %
                
                24
                %
                
                Sep-01Qingdao
                    Sheng Yuan Dairy Co., Ltd.
                
                
                30
                %
                
                30
                %
                
                25
                %
                
                25
                %
                
                25
                %
                
                25
                %
                
                Jan-98Heilongjiang
                    Luobei Sheng Yuan Dairy Co., Ltd.
                
                
                0
                %
                
                0
                %
                
                16.5
                %
                
                16.5
                %
                
                16.5
                %
                
                25
                %
                
                Apr-01Bei’an
                    Yipin Dairy Co., Ltd.
                
                
                0
                %
                
                16.5
                %
                
                16.5
                %
                
                16.5
                %
                
                25
                %
                
                25
                %
                
                Jun-04Zhangjiakou
                    Shen Yuan Dairy Co., Ltd.
                
                
                0
                %
                
                0
                %
                
                16.5
                %
                
                16.5
                %
                
                16.5
                %
                
                25
                %
                
                Mar-04Qingdao
                    Women and Children Nutrition Research Co.,Ltd*.
                
                
                33
                %
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                Apr-04


*
            Qingdao
                Women and Children Nutrition Research Co, Ltd was dissolved and disposed
                of in July 2006.




On
      March
      16, 2007, the National People’s Congress approved and promulgated a new tax law,
      which will take effect beginning January 1, 2008. Under the new tax law, foreign
      invested enterprises 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.





**Revenue
      recognition**





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





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





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





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




14




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





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





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





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





**Government
      subsidies**





Government
      grants for revenue and/or expenses should be recognized in income when the
      related revenue and/or expense is recorded. Government grants related to
      property, plant, and equipment should be netted against the depreciation
      expenses of the related assets over the useful lives of these assets. Government
      subsidies were $193,000and $43,000 during the three months ended September
      30,
      2006 and 2005, respectively.





**Related
      parties**





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




15




**Foreign
      currency translation**





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





**September
                30, 2006**Balance
                sheet
            
            
            RMB
            
            
            7.91
            
            
            to
                US
            
            $
            1.00Operating
                statement
            
            
            RMB
            
            
            7.95
            
            
            to
                US
            
            $
            1.00**September
                30, 2005**Balance
                sheet
            
            
            RMB
            
            
            8.11
            
            
            to
                US
            
            $
            1.00Operating
                statement
            
            
            RMB
            
            
            8.19
            
            
            to
                US
            
            $
            1.00





In
      July
      2005, the PRC began to value the RMB against a basket of currencies of its
      major
      trading partners, including the U.S. This measure has allowed the RMB yuan
      to
      fluctuate within a narrow band vis á vis the U.S. dollars. Since the adoption of
      this managed flexible exchange rate policy, the RMB has been under pressure
      to
      appreciate against the U.S. dollar. This has affected changes in the foreign
      currency translation over the reporting period and is reflected in the
      other comprehensive income of $591,000 and $617,000 for the three months ended
      September 30, 2006 and 2005 respectively.





**Use
      of estimates**





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





**Fair
      value of financial instruments**





The
      carrying value of financial instruments including cash, receivables, accounts
      payable and accrued expenses and debt, approximates their fair value at
      September 30, 2006 and 2005 due to the relatively short-term nature of these
      instruments.





**Shipping
      and handing**





All
      shipping and handling are expensed as incurred and outbound freight is not
      billed to customers. Shipping and handling expenses are included in selling
      and
      distribution expenses. The expenses were $655,000 and $528,000 during the three
      months ended September 30, 2006 and 2005, respectively




15





**Advertising
      costs and promotion**





Advertising
      costs and promotion include salaries for all salesmen all over the Mainland
      China and are expensed as incurred. The advertising costs and promotion
      expenses were $11.1million and $6.2million during the three months ended
      September 30, 2006 and 2005, respectively.





**Employees’
      benefits**





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





**Comprehensive
      income/(loss)**





The
      Company has adopted the provisions of Statement of Financial Accounting
      Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
      No.
      130 establishes standards for the reporting and display of comprehensive income,
      its components and accumulated balances in a full set of general-purpose
      financial statements. SFAS No. 130 defines comprehensive income (loss) to
      include all changes in equity except those resulting from investments by owners
      and distributions to owners, including adjustments to minimum pension
      liabilities, accumulated foreign currency translation, and unrealized gains
      or
      losses on marketable securities. The other comprehensive income was $591,000
      and
      $617,000 for the three months ended September 30, 2006 and 2005, respectively.





**3.
      CONCENTRATION OF CREDIT RISK**





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





(i)
      Credit risks - The Company has policies in place to ensure that sales of
      products are made to customers with an appropriate credit history. The Company
      also has a concentration of credit risk as its export of protein product to
      North America is through a single importer in the US. Amount due from this
      importer accounts for a significant proportion of the Company’s total account
      receivables.





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




16




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





**4.
      RECENT PRONOUNCEMENTS**





**FIN
      48**





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





**SAB
      108**





In
      September, 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (SAB 108) which provides interpretive guidance
      on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 is effective
      for fiscal years ending after November 15, 2006 and early application is
      encouraged for any interim period of the first fiscal year ending after that
      date. The Company will adopt SAB 108 in the 4 th quarter
      of its fiscal 2007 and is currently evaluating the impact of adopting SAB 108
      on
      its financial statements.





**FAS
      157**





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





**FAS
      158**





In
      September 2006, the FASB also issued Statement of Financial Accounting Standards
      No. 158 “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans, an amendment of FAS Statements No. 87, 88, 106, and
      132(R)” (FAS 158). FAS 158 requires an employer to recognize the over-funded or
      under-funded status of a defined benefit postretirement plan as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity. This statement also requires an employer to measure
      the funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions. The Company will be required to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006, which for the Company will be the end of fiscal
      2007. The requirement to measure plan assets and benefit obligations as of
      the
      date of the employer's fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008, or fiscal 2009
      for the Company. The Company does not currently have a defined benefit pension
      plan but is currently evaluating the possible impact of adopting FAS 158 on
      its
      financial statements.




17




**SEC
      Staff’s letter regarding accounting for stock options under APB 25**





In
      September 2006, SEC issued a Staff letter regarding several common errors in
      the
      past practices related to the granting of stock options under APB 25. This
      letter provided guidance on what constitutes an error and how to correct them.
      The Company has not granted stock options and therefore this new pronouncement
      is not applicable.





**5.
      ACCOUNTS RECEIVABLES**





The
      Company's accounts receivables as at September 30, 2006 and March 31, 2006
      are
      summarized as follows:





(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**Trade
                receivables
            
            $
            8,768
            
            $
            2,957Less:
                Allowance for doubtful accounts
            
            
            372
            
            
            417Trade
                receivables, net
            
            
            8,396
            
            
            2,540Notes
                receivable
            
            
            95
            
            
            -Accounts
                receivables
            
            $
            8,491
            
            $
            2,540





**6.
      PROPERTY, PLANT AND EQUIPMENT**




(in
                thousands)
            
            
            **September
                30,**
              **2006**
            
            
            **March
                31,**
              **2006****Cost:**Buildings
                and leasehold improvement
            
            $
            7,453
            
            $
            7,252Plant
                and machinery
            
            
            6,927
            
            
            7,206Office
                equipment and furnishings
            
            
            1,636
            
            
            988Motor
                vehicles
            
            
            1,272
            
            
            1,212**17,288**
            
            
            **16,658****Less:
                Accumulated depreciation:**Buildings
                and leasehold improvement
            
            
            1,484
            
            
            1,265Plant
                and machinery
            
            
            2,533
            
            
            2,306Office
                equipment and furnishings
            
            
            523
            
            
            336Motor
                vehicles
            
            
            731
            
            
            6315,271
            
            
            4,538Construction
                in progress
            
            
            25,851
            
            
            21,198Property,
                plant and equipment, net
            
            **$**
            **37,868**
            
            **$**
            **33,318**





Depreciation
      expenses relating to property, plant and equipment were $391,000 and $400,000
      for the three months ended September 30, 2006 and 2005, respectively.




18




**7.
      LAND USE RIGHT**





(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**Cost:
            
            $
            1,939
            
            $
            1,660Accumulated
                amortization
            
            
            132
            
            
            114Land
                use right, net
            
            **$**
            **1,807**
            
            **$**
            **1,546**





Amortization
      expenses relating to land use right were $10,000 and $8,000 for the three months
      ended September 30, 2006 and 2005, respectively.





**8.
      INVENTORIES**





The
      Company's inventories at September 30, 2006 and March 31, 2006 are summarized
      as
      follows:





(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**Raw
                Materials
            
            $
            2,098
            
            $
            1,985Work
                in Process
            
            
            8,467
            
            
            7,586Finished
                Goods
            
            
            1,478
            
            
            2,132Packing
                Materials & Other Consumables
            
            
            798
            
            
            86Total
            
            **$**
            **12,841**
            
            **$**
            **11,789**





**9.
      DUE FROM/(TO) RELATED PARTIES**





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





**A.
      Classification by name of related parties**





**a.
      Due from related parties**





(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**St.
                Angel (Beijing Business Service)
            
            $
            -
            
            $
            1,761Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            30
            
            
            692Beijing
                Ao Naier Feed Stuff LLC
            
            
            307
            
            
            298Beijing
                Kelqin Dairy Co. Ltd
            
            
            556
            
            
            1,708Sheng
                Zhi Da Dairy Group Corporation
            
            
            808
            
            
            (268
            )Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            
            858
            
            
            226Beijing
                Honnete Dairy Corporation Ltd
            
            
            4,210
            
            
            4,185Total
                Due from Related Companies
            
            **$**
            **6,769**
            
            **$**
            **8,602**





19




**b.
      Due to related parties**





(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**Beijing
                Kelqin Dairy Co. Ltd
            
            $
            92
            
            $
            63Beijing
                Honnete Dairy Corporation Ltd
            
            
            445
            
            
            1,339Heilongjiang
                Baoquanling Shen Yuan Dairy Co. Ltd
            
            
            920
            
            
            706Sheng
                Zhi Da Dairy Group Corporation
            
            
            1,323
            
            
            2,193Total
                Due to Related Companies
            
            **$**
            **2,780**
            
            **$**
            **4,301**





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





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




(in
                thousands)
            
            **September
                30,**
              **2006**
            
            **March
                31,**
              **2006**Trade
                receivables
            
            $
            1,318
            
            $
            2,018Prepayments
            
            
            5,357
            
            
            4,526Other
                receivables
            
            
            94
            
            
            2,058**Total**
            
            **$**
            **6,769**
            
            $
            8,602





**b.
      Due to related parties**




(in
                thousands)
            
            
            **September
                30,**
              **2006**
            
            
            **March
                31,**
              **2006**Trade
                payables
            
            $
            2,285
            
            $
            4,301Advance
                from customers
            
            
            445
            
            
            -Other
                payables
            
            
            50
            
            
            -**Total**
            
            $
            2,780
            
            $
            4,301





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.




20




**10.
      RELATED PARTY TRANSACTIONS**





The
      following related party transactions occurred during the three months ended
      September 30, 2006 and 2005:





In
      the
      three months ended September 30, 2006 and 2005, the Company’s sales to the
      related parties included anhydrous milk fat and non-fat dry milk to Beijing
      Kelgin Dairy Co., Ltd. and Heilongjiang Baoquanling Sheng Yuan Dairy Co., Ltd.;
      and Luding Xueyuan for direct sales, catalogue sales, and regional retail
      outlets distribution. Terms of all the sales are at market price.





**Sales
      to related parties**





(in
                thousands)
            
            **Three
                Months Ended**
              **September,
                30****2006**
            
            **2005**St.
                Angel (Beijing Business Service)
            
            $
            -
            
            $
            376Beijing
                Ludin Xueyuan Trading Co. Ltd
            
            
            13
            
            
            153Total
            
            **$**
            **13**
            
            **$**
            **529**





**Other
      income to related parties**





(in
                thousands)
            
            **Three
                Months ended**
              **September
                30,****2006**
            
            **2005**Beijing
                Kelqin Dairy Co. Ltd
            
            $
            49
            
            $
            1,603Sheng
                Zhi Da Dairy Group Corporation
            
            
            -
            
            
            104Heilongjiang
                Baoquanling Shengyuan Dairy Co
            
            
            924
            
            
            1,388Beijing
                Honnete Dairy Corporation Ltd
            
            
            -
            
            
            176Total
            
            **$**
            **973**
            
            **$**
            **3,271**





In
      the
      three months ended September 30, 2006 and 2005, the Company’s purchases from
      related parties included whey protein powders from Beijing Kelqin Dairy Co.
      Ltd., Beijing Honnete Dairy Corporation Ltd; and spray-dried milk powder from
      Heilongjiang Baoquanling Sheng Yuan Dairy Co. Ltd.. Terms of these transactions
      are all done at market prices.




21




**Purchases
      from related parties**





(in
                thousands)
            
            **Three
                Months Ended**
              **September
                30****2006**
            
            **2005**Sheng
                Zhi Da Dairy Group Corporation
            
            $
            -
            
            $
            1,131Beijing
                Kelqin Dairy Co. Ltd
            
            
            914
            
            
            125Beijing
                Honnete Dairy Corporation Ltd
            
            
            2,184
            
            
            490Heilongjiang
                Baoquanling Shengyuan Dairy Co
            
            
            3,420
            
            
            1,583Total
            
            **$**
            **6,518**
            
            **$**
            **3,329**





**11.
      BANK LOANS**





As
      at
      September 30, 2006 and March 31, 2006, the Company had short-term loans from
      banks in the amount of $50.0 million and $36.7 million bearing interest ranging
      from 5.576% to 7.488% per annum. Such loans are extendable for terms of no
      less
      than one year to June 2007. 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 $11.56 million and $11.56 million as of September 30, 2006
      and March 31, 2006, respectively.





**12.
      INCOME TAXES**





The
      Company’s income/(loss) before income taxes was comprised of the following for
      the three months ended September 30, 2006 and 2005,respectively





(in
                thousands)
            
            **Three
                Months Ended September 30****2006**
            
            **2005**United
                States
            
            $
            (176
            )
            $
            (53
            )PRC
            
            
            5,748
            
            
            1,669**Total**
            
            **$**
            **5,572**
            
            **$**
            **1,616**





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





The
      provisions for income taxes for the three months ended September 30, 2006 and
      2005, respectively, are summarized as follows:





(in
                thousands)
            
            **Three
                months ended September 30****2006**
            
            **2005**Current
            
            $
            651
            
            $
            279**Total**
            
            **$**
            **651**
            
            **$**
            **279**




22




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





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





(in
                thousands, except for per share amounts)
            
            **For
                the Three Months Ended**
              **September
                30, 2006**
            
            **For
                the Six Months Ended**
              **September
                30, 2006****Income**
            
            **Shares**
            
            **Per-Share**
            
            **Income**
            
            **Shares**
            
            **Per-Share**(Numerator)
            
            (Denominator)
            
            **Amount**
            
            (Numerator)
            
            (Denominator)
            
            **Amount****Basic
                EPS**Income
                available to common stockholders
            
            **$**
            **4,921**
            
            
            **50,001**
            
            **$**
            **0.10**
            
            **$**
            **12,892**
            
            
            **50,001**
            
            **$**
            **0.26****Effect
                of Dilutive Securities**Warrants
                and options
            
            
            -
            
            
            -
            
            
            -
            
            
            **-**
            
            
            **-**
            
            
            **-**Convertible
                preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            **-**
            
            
            **-**
            
            
            **-****Diluted
                EPS**Income
                available to common stockholders + assumed conversions
            
            **$**
            **4,921**
            
            
            **50,001**
            
            **$**
            **0.10**
            
            **$**
            **12,892**
            
            
            **50,001**
            
            **$**
            **0.26**





**14.
      COMMITMENTS AND CONTINGENCIES**





**A.
      CAPITAL COMMITMENTS**





As
      of
      September 30, 2006, the Company had no significant capital commitments required
      for disclosure. **





23




**B.
      LEASE COMMITMENTS**





The
      lease
      commitments of the Company as of September 30, 2006 were as follows:





(in
                thousands)
            
            **Expiration
                date**
            
            **Monthly**
              **payment**
            
            **Mar-07**
            
            **Mar-08**Office
                facilities in Beijing (SOHO 2903)
            
            
            20-Apr-05
            
            to
            
            14-Dec-07
            
            $
            7
            
            $
            43
            
            $
            62Office
                facilities in Beijing (SOHO 2903-2905)
            
            
            15-Dec-04
            
            to
            
            14-Dec-07
            
            
            11
            
            
            66
            
            
            92Office
                facilities in Beijing
            
            
            1-Jan-06
            
            to
            
            31-Dec-07
            
            
            4
            
            
            24
            
            
            36**Total
                rent expenses:**
            **$**
            **133**
            
            **$**
            **190**





**C.
      LEGAL PROCEEDINGS**





None.





**D.
      GUARANTEES**





As
      at
      September 30, 2006 and March 31, 2006, the Company had a guarantee given to
      the
      Zhangbei Branch of the Agriculture Bank of China in respect of bank loans of
      $
      1.1 million and $1.1 million respectively in total extended to 104 farmers
      in
      the Zhangjiakou Region. These
      bank loans mature on December 25, 2007. The potential loss from this guarantee
      could not be estimated as the Company was unable to assess the financial
      position of individual farmers. However, based on general economic information
      available for this area, the Company believes that these loans will be repaid
      by
      the farmers upon maturity. Therefore, no liability was recorded on the balance
      sheet in relation to these guarantees.





**15.
      RESTATEMENT**





The
      Company is filing this amendment to its Quarterly Report on Form 10-Q
      for the fiscal quarter ended September 30, 2006 to include or revise information
      necessary to improve the disclosures as follows:





**Adjustments**





·
            Restricted
                cash, included as cash and cash equivalents in the Original Filing,
                represents cash deposited with the banks as guarantees for the issuance
                of
                promissory notes. Under US GAAP, restricted cash does not meet the
                definition of cash and cash equivalents, and separate disclosure
                on the
                face of balance sheet is required. In addition, the change in the
                restricted cash balance, given its use to secure promissory notes,
                should
                have been presented as an investing activity. Therefore, restricted
                cash
                of $19.6 million and $16.4 million is reclassified and is presented
                as an
                individual item on our consolidated balance sheets as of September
                30,
                2006 and March 31, 2006, respectively. In addition, the decrease
                in
                restricted cash of $3.2 million and $794,000 is reclassified from
                operating to investing activities in the consolidated statements
                of cash
                flows for six months ended September 30, 2006 and 2005, respectively.




24




·
            As
                at September 30, 2006 and March 31, 2006, the Company had provided
                bank
                loan guarantee of $1.1 million and $1.1 million in total extended
                to 104
                farmers in the Zhangbei area. This was incorrectly presented as gross
                other receivable and other payable in the Original filing. The Company
                has
                revised the balance sheet to eliminate both the other receivable
                and other
                payable.





·
            Land
                use rights, which represents a prepaid lease payment, is reclassified
                as
                an individual line item on our consolidated balance sheets as of
                September
                30, 2006 and March 31, 2006, respectively. It has been included as
                part of
                the property, plant and equipment, net in the Original Filing.





·
            In
                fiscal year 2007, we acquired certain fixed assets from Zheng Lan
                Qi
                County and subsequently established a new subsidiary with these assets.
                In
                conjunction with the acquisition, the local government provided an
                irrevocable subsidy of $4.1 million which we recognized as subsidy
                income
                for the fiscal year ended March 31, 2007. Subsequent to the Original
                Filing, we determined that the $4.1 million should be deferred and
                netted
                against the depreciation expenses of the assets acquired, as this
                method
                effectively matches the related depreciation of the cost of assets
                with
                the corresponding grant income. The effect of this adjustment is
                a
                decrease in subsidy income by $1.5 million and $2.8 million,and
                an increase in deferred subsidy by $1.5 million and $2.8 million
                for thethree
                and six months ended September 30, 2006 respectively.We
                did not recognize any of the subsidies during thethree
                and six months ended September 30, 2006as
                the asset had not yet been placed in
                service.





·
            Certain
                short term notes payable balances, in the amount of $24.3 million
                and
                $18.5 million, are reclassified as short-term loan as of September
                30 and
                March 31, 2006, respectively,as
                the ultimate lender of the note is an accredited financial
                institution.





·
            The
                cash consideration given to our retailers, who purchased our products
                directly from our distributors, is reclassified as a reduction of
                sales.
                It was recorded as advertising and promotion expenses in the Original
                Filing.The
                effects of this reclassification are a decrease in sales and an increase
                in advertising and promotion expenses of $297,000 and $527,000,
                respectively.





·
            The
                amount of free products provided to our customers is reclassified
                as cost
                of salesfor
                the three and six months ended September 30, 2006 and 2005.It
                had been recorded as advertising and promotion expense in the Original
                Filing. The effects of this adjustment are an increase in cost of
                sales
                and a decrease in advertising and promotion expense of $283,000 and
                $508,000 for the three and six months ended September 30, 2006,
                respectively.





**Reclassifications**





Based
      on
      the above adjustments, we also made reclassifications on our consolidated
      financial statements as follows for the current period and the prior period
      presentation has been conformed:




·
            Accounts
                receivable and notes receivable have been combined as accounts receivable.
                They used to be reported separately.The
                combined amounts of accounts receivable were $8.5 million and $2.5
                million
                as of September 30 and March 31, 2006,
                respectively.




25




·
            Construction
                in progress has been included under property, plant and equipment,
                net. It
                used to be reported separately. The amounts of construction in progress
                were $25.8 million and $21.2 million as of September 30 and March
                31,
                2006, respectively.





·
            Accounts
                payable and notes payable have been combined as accounts payable.
                They
                used to be reported separately.The
                combined amounts of accounts payable were $9.0 million and $13.1
                million
                as of September 30 and March 31, 2006,
                respectively.





·
            Accrued
                expense, otherpayable
                and otheraccrued
                liabilities have been combined as othercurrent
                liabilities. They used to be reported separately.The
                combined amounts of other current liabilities were $6.6 million and
                $5.1
                million as of September 30 and March 31, 2006,
                respectively.





·
            Retained
                earnings and reserves have been combined as retained earnings. They
                used
                to be reported separately. The combined amounts of retained earnings
                and
                reserves were $24.6 million and $11.7 million as of September 30
                and March
                31, 2006, respectively.





·
            Government
                grants other than those related to assets, which used to be reported
                as a
                separate line item, have been reported as other income, net. The
                effect of
                the reclassification is an increase of $193,000 and $332,000 on other
                income, net for the three and six months ended September 30, 2006,
                respectively. For the three and six months ended September 30, 2005,
                other
                income increased by $43,000 and $647,000, respectively. These subsidies
                are not related to fixed asset government explained
                above.




The
      Consolidated Balance Sheets, as of September 30 and March 31, 2006, have been
      adjusted as follows:




**September
                30, 2006**
            
            **March
                31, 2006****(As**
            
            **Adjustments
                &**
            
            **(As**
            
            **(As**
            
            **Adjustments
                &**
            
            **(As**(In
                thousands)
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)**
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            35,469
            
            $
            (19,641
            )
            $
            15,828
            
            $
            22,134
            
            $
            (16,457
            )
            
            
            
            $
            5,677Restricted
                cash
            
            
            -
            
            
            19,641
            
            
            19,641
            
            
            -
            
            
            16,457
            
            
            
            
            
            16,457Short-term
                investments
            
            
            48
            
            
            (48
            )
            
            -
            
            
            43
            
            
            (43
            )
            
            
            
            
            -Notes
                receivable
            
            
            95
            
            
            (95
            )
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -Accounts
                receivable
            
            
            8,396
            
            
            95
            
            
            8,491
            
            
            2,540
            
            
            -
            
            
            
            
            
            2,540Other
                receivable, net
            
            
            3,751
            
            
            (1,103
            )
            
            2,648
            
            
            2,230
            
            
            -
            
            
            
            
            
            2,230Deferred
                expenses and other current assets
            
            
            380
            
            
            48
            
            
            428
            
            
            126
            
            
            13
            
            
            
            
            
            139**Total
                current assets**
            
            
            71,469
            
            
            (1,103
            )
            
            70,366
            
            
            47,818
            
            
            (30
            )
            
            
            
            
            47,788**Property,
                plant and equipment, net**
            
            
            13,887
            
            
            23,981
            
            
            37,868
            
            
            13,728
            
            
            19,590
            
            
            
            
            
            33,318**Construction
                in progress**
            
            
            25,851
            
            
            (25,851
            )
            
            -
            
            
            21,198
            
            
            (21,198
            )
            
            
            
            
            -**Land
                use rights, net**
            
            
            -
            
            
            1,807
            
            
            1,807
            
            
            -
            
            
            1,546
            
            
            
            
            
            1,546**Other
                Assets**
            
            
            236
            
            
            63
            
            
            299
            
            
            265
            
            
            92
            
            
            
            
            
            357**TOTAL
                ASSETS**
            
            **$**
            **111,442**
            
            **$**
            **(1,102**
            **)**
            **$**
            **110,340**
            
            **$**
            **83,009**
            
            **$**
            **-**
            
            
            
            
            **$**
            **83,009****Current
                Liabilities:**Bank
                loans
            
            
            25,710
            
            
            24,330
            
            
            50,040
            
            
            13,134
            
            
            23,546
            
            
            
            
            
            36,680Notes
                payable
            
            
            24,330
            
            
            (24,330
            )
            
            -
            
            
            19,113
            
            
            (19,113
            )
            
            
            
            
            -Accounts
                payable
            
            
            9,045
            
            
            -
            
            
            9,045
            
            
            12,580
            
            
            499
            
            
            
            
            
            13,079Other
                payables
            
            
            5,271
            
            
            (1,103
            )
            
            4,168
            
            
            4,570
            
            
            -
            
            
            
            
            
            4,570**Total
                current liabilities**
            
            
            74,189
            
            
            (1,103
            )
            
            73,086
            
            
            57,127
            
            
            4,932
            
            
            
            
            
            62,058**Long
                term debts**
            
            
            -
            
            
            -
            
            
            -
            
            
            4,932
            
            
            (4,932
            )
            
            
            
            
            -**Deferred
                income**
            
            
            -
            
            
            2,782
            
            
            2,782
            
            
            -
            
            
            -
            
            
            
            
            
            -**Total
                liabilities**
            
            
            **74,189**
            
            
            **1,679**
            
            
            **75,868**
            
            
            **62,058**
            
            
            **-**
            
            
            
            
            
            **62,058****Shareholders'
                equity:**Retained
                earnings
            
            
            27,314
            
            
            (2,758
            )
            
            24,556
            
            
            11,664
            
            
            -
            
            
            
            
            
            11,664Accumulated
                other comprehensive income
            
            
            1,708
            
            
            (23
            )
            
            1,685
            
            
            1,056
            
            
            -
            
            
            
            
            
            1,056**Total
                shareholders' equity**
            
            
            **37,253**
            
            
            **(2,781**
            **)**
            
            **34,472**
            
            
            **20,951**
            
            
            **-**
            
            
            
            
            
            **20,951****TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            **$**
            **111,442**
            
            **$**
            **(1,102**
            **)**
            **$**
            **110,340**
            
            **$**
            **83,009**
            
            **$**
            **-**
            
            
            
            
            **$**
            **83,009**




26


Consolidated
        Statements of Income for the three and six months ended September 30, 2006
        and
        2005, have been adjusted as follows:


**Three
                Months Ended**
            
            **Six
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006****(As**
            
            **Adjustments
                &**
            
            **(As**
            
            **(As**
            
            **Adjustments
                &**
            
            **(As**(In
                thousands, except for per share amounts)
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)**
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)**Net
                sales
            
            $
            45,915
            
            $
            (298
            )
            $
            45,617
            
            $
            95,251
            
            $
            (527
            )
            $
            94,724Cost
                of sales
            
            
            21,925
            
            
            283
            
            
            22,208
            
            
            49,348
            
            
            507
            
            
            49,855**Gross
                profit**
            
            
            **23,990**
            
            
            **(581**
            **)**
            
            **23,409**
            
            
            **45,903**
            
            
            **(1,034**
            **)**
            
            **44,869**Advertising
                and promotion expenses
            
            
            11,641
            
            
            (581
            )
            
            11,060
            
            
            18,569
            
            
            (1,035
            )
            
            17,534General
                and administrative expenses
            
            
            1,323
            
            
            49
            
            
            1,372
            
            
            2,317
            
            
            87
            
            
            2,404Total
                operating expense
            
            
            18,158
            
            
            (532
            )
            
            17,626
            
            
            31,122
            
            
            (948
            )
            
            30,174**Income
                from operations**
            
            **$**
            **5,832**
            
            
            **(49**
            **)**
            **$**
            **5,783**
            
            **$**
            **14,781**
            
            
            **(86**
            **)**
            **$**
            **14,695**Subsidy
                income
            
            
            1,702
            
            
            (1,702
            )
            
            
            
            
            3,090
            
            
            (3,090
            )
            
            -Interest
                expense
            
            
            (478
            )
            
            51
            
            
            (427
            )
            
            (886
            )
            
            114
            
            
            (772
            )Other
                income, net
            
            
            (35
            )
            
            191
            
            
            156
            
            
            (10
            )
            
            304
            
            
            294**Income
                before provision for income tax**
            
            **$**
            **7,081**
            
            **$**
            **(1,509**
            **)**
            **$**
            **5,572**
            
            **$**
            **17,096**
            
            **$**
            **(2,758**
            **)**
            **$**
            **14,338****Net
                income before minority interests**
            
            **$**
            **6,430**
            
            **$**
            **(1,509**
            **)**
            **$**
            **4,921**
            
            **$**
            **15,650**
            
            **$**
            **(2,758**
            **)**
            **$**
            **12,892**Effect
                of Exchange Rate Changes on Cash and Cash Equivalents
            
            
            613
            
            
            (22
            )
            
            591
            
            
            653
            
            
            (24
            )
            
            629**Comprehensive
                income**
            
            
            **7,043**
            
            
            **(1,531**
            **)**
            
            **5,512**
            
            
            **16,303**
            
            
            **(2,782**
            **)**
            
            **13,521****Earning
                per share—basic and diluted**
            
            **$**
            **0.13**
            
            **$**
            **(0.03**
            **)**
            **$**
            **0.10**
            
            **$**
            **0.31**
            
            **$**
            **(0.05**
            **)**
            **$**
            **0.26****Weighted
                average common share outstanding-basic and
                diluted**
            
            
            **50,001**
            
            
            **-**
            
            
            **50,001**
            
            
            **50,001**
            
            
            **-**
            
            
            **50,001**




27





**Three
                Months Ended**
            
            **Six
                Months Ended****September
                30, 2005**
            
            **September
                30, 2005****(As**
            
            **Adjustments
                &**
            
            **(As**
            
            **(As**
            
            **Adjustments
                &**
            
            **(As**(In
                thousands)
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)**
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)**General
                and administrative expenses
            
            $
            2,065
            
            $
            41
            
            $
            2,106
            
            $
            2,925
            
            $
            96
            
            $
            3,021Subsidy
                income
            
            
            43
            
            
            (43
            )
            
            -
            
            
            647
            
            
            (647
            )
            
            -Interest
                expense
            
            
            (871
            )
            
            41
            
            
            (830
            )
            
            (1,287
            )
            
            96
            
            
            (1,191
            )Other
                income, net
            
            $
            29
            
            $
            43
            
            $
            72
            
            $
            (49
            )
            $
            647
            
            $
            598





Consolidated
      Statements of Cash Flow for the six months ended September 30, 2006 and 2005,
      have been adjusted as follows:




**Six
                Months Ended****September
                30, 2006****(As**
            
            **Adjustments
                &**
            
            **(As**(in
                thousands)
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)****Cash
                flow from operating activities:**Net
                income
            
            $
            15,650
            
            $
            (2,758
            )
            $
            12,892Changes
                in operating assets and liabilities:Other
                receivable, net
            
            
            (1,521
            )
            
            1,103
            
            
            (418
            )Notes
                payable
            
            
            5,218
            
            
            (5,218
            )
            
            -Accounts
                payable
            
            
            (3,535
            )
            
            (499
            )
            
            (4,034
            )Other
                payables and accrued liabilities
            
            
            2,595
            
            
            (1,103
            )
            
            1,492Deferred
                revenue
            
            
            -
            
            
            2,782
            
            
            2,782**Net
                cash provided by operating activities**
            
            
            **10,625**
            
            
            **(5,693**
            **)**
            
            **4,932****Cash
                flow from investing activities:**Restricted
                cash
            
            
            -
            
            
            (3,184
            )
            
            (3,184
            )**Net
                cash provided by (used in)investing activities**
            
            
            **(5,587**
            **)**
            
            **(3,184**
            **)**
            
            **(8,771**
            **)****Cash
                flow from financing activities:**Borrowing
                of bank loans
            
            
            7,644
            
            
            32,722
            
            
            40,366Repayment
                of bank loans
            
            
            -
            
            
            (27,005
            )
            
            (27,005
            )**Net
                cash provided by financing activities**
            
            
            **7,644**
            
            
            **5,717**
            
            
            **13,361****Net
                change in increase in cash and cash equivalents**
            
            
            **12,682**
            
            
            **(3,160**
            **)**
            
            **9,522**Effect
                of exchange rate changes on cash and cash equivalents
            
            
            653
            
            
            (24
            )
            
            629**Cash
                and cash equivalents, beginning of period**
            
            
            **22,134**
            
            
            **(16,457**
            **)**
            
            **5,677****Cash
                and cash equivalents, end of period**
            
            $
            **35,469**
            
            **$**
            **(19,641**
            **)**
            **$**
            **15,828**




28




**Six
                Months Ended****September
                30, 2005****(As**
            
            **Adjustments&**
            
            **(As**(in
                thousands)
            
            **Reported)**
            
            **Reclassifications**
            
            **Restated)****Cash
                flow from operating activities:**Changes
                in operating assets and liabilities:Notes
                payable
            
            $
            1,572
            
            $
            (2,323
            )
            $
            (751
            )**Net
                cash provided by operating activities**
            
            
            **6,206**
            
            
            (2,323
            )
            
            **3,883****Cash
                flow from investing activities:**Restricted
                cash
            
            
            -
            
            
            (794
            )
            
            (794
            )**Net
                cash provided by (used in)investing activities**
            
            
            (6,069
            )
            
            (793
            )
            
            (6,862
            )**Cash
                flow from financing activities:**Borrowing
                of bank loans
            
            
            1,585
            
            
            32,723
            
            
            34,308Repayment
                of bank loans
            
            
            -
            
            
            (30,401
            )
            
            (30,401
            )**Net
                cash provided by financing activities**
            
            
            **1,802**
            
            
            **2,323**
            
            
            **4,125****Net
                change in increase in cash and cash equivalents**
            
            
            **1,939**
            
            
            (793
            )
            
            **1,146**Effect
                of exchange rate changes on cash and cash equivalents
            
            
            644
            
            
            -
            
            
            644**Cash
                and cash equivalents, beginning of period**
            
            
            **16,085**
            
            
            (10,273
            )
            
            **5,812****Cash
                and cash equivalents, end of period**
            
            $
            **18,668**
            
            **$**
            (11,066
            )
            **$**
            **7,602**





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





**Organizational
      structure**





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





29




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





Qingdao
      ST George Dairy Co., Ltd. is engaged in the production, packaging, shipping
      and
      distribution of all of Synutra’s products. Qingdao ST George Dairy Co., Ltd. was
      formed in September 2001 by Synutra Illinois. In March 2004 Synutra Illinois
      transferred 75% of Qingdao St George Dairy Co., Ltd ownership to Sheng Zhi
      Da
      Dairy Corporation and Synutra Illinois retained 25% of the company. In February
      2005 Sheng Zhi Da Dairy Corporation transferred all of its ownership in Qingdao
      St. George Dairy Co., Ltd. (75%) to Synutra Illinois, resulting in a 100%
      ownership of Qingdao St. George Dairy Co., Ltd by Synutra Illinois. In
      September, 2006 Qingdao St. George Dairy Co., Ltd. incorporated into its
      existing operations the research and development functions of the then dissolved
      Qingdao Mother and Infant Nutrition Research and Development Company, Ltd.





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





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




30





Qingdao
      Mother and Infant Nutrition Research Company Limited is engaged in the research
      and development of various nutritional products for both infants and children
      as
      well as pregnant and lactating women. Qingdao Mother and Infant Nutrition
      Research Company Limited was formed in April 2004 by Sheng Zhi Da Dairy
      Corporation (80%) and Ms. Xiu Qing Meng (20%). In May 2005, Sheng Zhi Da Dairy
      Corporation transferred 80% of its ownership to Synutra Illinois and Ms. Xiu
      Qing Meng transferred 20% of her ownership to Synutra Illinois, resulting in
      a
      100% ownership of Qingdao Mother and Infant Nutrition Research Company Limited
      by Synutra Illinois. In July 2006 Qingdao Mother and Infant Nutrition Research
      Company Limited was dissolved.





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





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





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





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




31





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





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





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





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





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





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





**RESULTS
      OF OPERATIONS**





**Three
      Months Ended September 30, 2006 Compared to Three Months Ended September 30,
      2005**





**Sales**





Sales
      for
      the three months ended September 30, 2006 increased by $15.5 million or 51.2%
      to
      $45.6 million from $30.2 million for the three months ended September 30, 2005.





Increase
      in volume of products sold was due in part to greater market penetration as
      a
      result of various measures including changes made by management to incentive
      programs and policies affecting the Synutra sales system. Such change enhanced
      sales force productivity through targeted resource allocation down to the store
      level, and strengthened promotional efforts in the medium sized city markets
      and
      rural markets of China by aligning bonuses with sales performance.





The
      bulk
      of sales was generated from the Company’s mainline dairy-based pediatric and
      adult nutrition products, under the brand names of Super, U-Smart, U-Strong,
      and
      National Standards, which were also mostly responsible for the increases in
      revenue growth.




32




a.
            The
                tonnage of such products sold increased by 2,100 for the three months
                ended September 30, 2006, resulting in a $10.6 million increase of
                gross
                sales.





b.
            The
                average selling price for the period ended September 30, 2006 increased
                by
                $791 per ton, resulting in an increase of $5.3 million in gross sales.





c.
            New
                product launches contributed $1.6 million in gross sales growth.




d.
            Further
                contributing to the sales growth is a decrease of $2.1 million from
                processing and packaging of nutritional supplement ingredients, anhydrous
                mild-fat, non-fat dry milk, and toll packaging and blending services.
                .





For
      the
      three months ended September 30, 2006, the Company realized and earned close
      to
      99.3% of the $38.8 million of traditional main products through its wholesale
      distributor networks and about 0.7% through the supermarket retailers. Of the
      total $22.9 million of main products sales earned in the 3 months period ended
      September 30, 2005, about 98.3% was from distributors and about 1.7% from
      supermarket retailers.





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





**Cost
      of Sales**





Cost
      of
      sales for the three months ended September 30, 2006 increased to $22.2 million
      from $15.6 million for the three months ended September 30, 2005. The 42.1%
      increase in cost of sales of $6.6 million was a result of increases in purchases
      of raw materials and other ingredients, as well as increases in processing
      expenses, all in proportion to the production volume increases.





The
      increase of 2,100 tons sold of the traditional main products resulted in $4.2
      million increase of cost. The average cost per unit increased by $398 per metric
      ton, resulting in $2.7million cost increase for the three months ended September
      30, 2006. The launch of new products accounted for $1.4 million in the total
      cost of sales for the three months ended September 30, 2006. Further
      contributing to the cost of sales growth is an decrease of $1.7 million from
      processing and packaging of nutritional supplement ingredients, anhydrous
      mild-fat, non-fat dry milk, and toll packaging and blending services.




33




**Gross
      Profit**





Gross
      profit was $23.4 million or 51.3% of sales for the three months ended September
      30, 2006, compared to $14.5 million or 48.2% of sales for the three months
      ended
      September 30, 2005. It was an increase of $8.9 million or 60.9%.





The
      sales
      of traditional main products contributed $22.8 million or 97.3% of gross profits
      for the three months ended September 30, 2006. Such main products contributed
      $13.8 million or 94.7% of gross profits for the three months ended September
      30,
      2005.





With
      sales increasing in the three months ended September 30, 2006 compared to 2005,
      the Company experienced a significant increase in gross profit. This increase
      was primarily a result of increased volume of products sold and the average
      sales price during the year. Due to implementation of targeted sales incentive
      programs, sales of the higher margin lines of products increased more,
      contributing to the increase in gross margin.





**Selling
      and Distribution Expenses**





Selling
      and distribution expenses increased by $1.3 million or 32.8% to $5.2 million
      for
      the three months ended September 30, 2006, as compared to $3.9 million for
      the
      three months ended September 30, 2005. The increase in selling and distribution
      expenses in the three months ended September 30, 2006 as compared to 2005 was
      a
      result of increased transportation expenses due to the increase in sales volume,
      in addition to increases in other components of expenses such as wages,
      supermarket expenses and service expenses. ** The
      increase in total compensation to the sales force constitutes most of the
      increase in selling and distribution expenses. The total compensation to the
      sales force increased by $1.2 million from $975,000 in the three months ended
      September 30, 2005 to $2.2 million in the three months ended September 30,
      2006.
      In the meantime shipping and handling expenses increased by $127,000 from
      $528,000 in the three months ended September 30, 2005 to $656,000 in the three
      months ended September 30, 2006; and travel expenses increased by $187,000
      from
      $340,000 in the three months ended September 30, 2005 to $528,000 in the three
      months ended September 30, 2006.





**Advertising
      and Sales Promotion**





Advertising
      and sales promotion increased by $4.9 million or 78.5% to $11.1 million for
      the
      three months ended September 30, 2006, as compared to $6.2 million for the
      three
      months ended September 30, 2005 as a result of increased advertising and
      promotional activity expenses. The major components of advertising and sales
      promotion are placement of advertisements with major media outlets and points
      of
      sale and community promotional activities.




(in
                thousands)
            
            **Three
                Months Ended September 30****2006**
            
            
            **2005**
            
            
            **Change
                in $**
            
            
            **Change
                in %**Advertising
            
            $
            2,364
            
            $
            2,696
            
            $
            (332
            )
            
            (12.3)
            %Sales
                promotion
            
            
            8,696
            
            
            3,502
            
            
            5,194
            
            
            148.3
            %**Totals**
            
            **$**
            **11,060**
            
            **$**
            **6,198**
            
            **$**
            **4,862**
            
            
            78.5
            %





**General
      and Administrative Expenses**





General
      and administrative expenses decreased by $734,000 or34.9% to $1.4million for
      the
      three months ended September 30, 2006, as compared to $2.1 million for the
      three
      months ended September 30, 2005. The decrease in general and administrative
      expenses was due to the consolation of certain business functions and
      development of shared services.





**Income
      from Operations**





Based
      on
      the sales increase of $15.5 million or 51.2% and the cost of sales increase
      of
      $6.6 million or 42.1% for the three months ended September 30, 2006, gross
      profit increased by $8.9million or 60.9% compared to the three months ended
      September 30, 2005. In the meantime, operational expenses also increased by
      approximately $5.4 million from $12.2 million to $17.6 million for the three
      months ended September 30, 2006 and 2005. As a result, income from operations
      was $5.8million for the three months ended September 30, 2006, as compared
      to
      $2.3 million for the three months ended September 30, 2005, an increase of
      $3.4
      million or 147.8%.





**Interest
      expense**





Interest
      expense decreased by $403,000 or 48.6% to $427,000for the three months ended
      September 30, 2006, as compared to $830,000 for the three months ended September
      30, 2005. The decrease in finance costs was due to reduction of borrowing size
      upon maturity of certain loans.





**Other
      Income/(Loss)**





Other
      income, net was $156,000 for the three months ended September 30, 2006 as
      compared to other income, net of $72,000for the same period of 2005. These
      other
      income was incurred as a result of Subsidy income from local governments
      increased by $150,000 to $193,000 for the three months ended September 30,
      2006
      as compared to $43,000 for the three months ended September 30,
      2005.





**Provision
      for Income Taxes**





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $651,000 and $279,000for the three months ended September 30, 2006 and 2005,
      respectively. The difference in income tax provisions was due to changes in
      the
      status of tax holidays and abatement treatment for the year 2006 for some of
      the
      operating subsidiaries.





**Net
      Income Attributed to Shareholders**





Net
      income attributable to shareholders for the three months ended September 30,
      2006 increased by $3.6 million or 268.1% to $4.9 million from $1.3 million
      for
      the three months ended September 30, 2005 due to the factors discussed above.




34




**Earnings
      Per Share**





Basic
      and
      diluted Earnings Per Share were $0.10 for three months ended September 30,
      2006
      and $0.03 for three months ended September 30, 2005.





**Six
      Months Ended September 30, 2006 Compared to Six Months Ended September 30,
      2005**





**Sales**





Sales
      for
      the six months ended September 30, 2006 increased by $43.4 million or 84.5%
      to
      $94.7 million from $51.3 million for the six months ended September 30, 2005.





Increase
      in volume of products sold was due in part to greater market penetration as
      a
      result of various measures including changes made by management to incentive
      programs and policies affecting the Synutra sales system. Such change enhanced
      sales force productivity through targeted resource allocation down to the store
      level, and strengthened promotional efforts in the medium sized city markets
      and
      rural markets of China by aligning bonuses with sales performance.





The
      bulk
      of sales were generated from the Company’s mainline dairy-based pediatric and
      adult nutrition products, under the brand names of Super, U-Smart, U-Strong,
      and
      National Standards, which were also mostly responsible for the increases in
      revenue growth.





a.
            The
                tonnage of such products sold increased by 4,330 tons for the six
                months
                ended September 30, 2006, resulting in $21.5million increase of gross
                sales.





b.
            The
                average selling price for the six months ended September 30, 2006
                increased by $869 per ton, resulting in an increase of $10.8 million
                in
                gross sales.





c.
            New
                product launches contributed $10.6 million in gross sales growth.




d.
            Further
                contributing to the sales growth is an increase of $791,000 from
                processing and packaging of nutritional supplement ingredients, anhydrous
                mild-fat, non-fat dry milk, and toll packaging and blending services.





For
      the
      six months ended September 30, 2006, the Company realized and earned close
      to
      99.3% of the $72.7 million of traditional main products through its wholesale
      distributor networks and about 0.7% through the supermarket retailers. Of the
      total $40.3 million of main products sales earned in the six months ended
      September30, 2005, about 98.4% was from distributors and about 1.6% from
      supermarket retailers.





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




35




**Cost
      of Sales**





Cost
      of
      sales for the six months ended September 30, 2006 increased to $49.9 million
      from $27.3million for the six months ended September 30, 2005. The82.8% increase
      in cost of sales of $22.6 million was a result of increases in purchases of
      raw
      materials and other ingredients, as well as increases in processing expenses,
      all in proportion to the production volume increases.





The
      increase of 4,330 tons sold of the traditional main products resulted in $9.4
      million increase of cost. The average cost per unit increased by $195 per metric
      ton, resulting in $2.4 million cost increase for the six months ended September
      30, 2006. The launch of new products accounted for $8.9 million in the total
      cost of sales for the six months ended September 30, 2006. Further contributing
      to the cost of sales growth is an increase of $1.9 million from processing
      and
      packaging of nutritional supplement ingredients, anhydrous mild-fat, non-fat
      dry
      milk, and toll packaging and blending services.





**Gross
      Profit**





Gross
      profit was $44.9 million or 47.4% of sales for the six months ended September
      30, 2006, compared to $24.1 million or 46.9% of sales for the six months ended
      September 30, 2005. It was an increase of $20.8 million or 86.5%.





The
      sales
      of traditional main products contributed $43.2 million or 96.4% of gross profits
      for the six months ended September 30, 2006. Such main products contributed
      $22.7 million or94.4% of gross profits for the six months ended September 30,
      2005.





With
      sales increasing in the six months ended September 30, 2006 compared to 2005,
      the Company experienced an increase in both gross profit and gross margin.
      This
      increase was primarily a result of increased volume of products sold and the
      average sales price during the year. Due to implementation of targeted sales
      incentive programs, sales of the higher margin lines of products increased
      more,
      contributing to the increase in gross margin.





**Selling
      and Distribution Expenses**





Selling
      and distribution expenses increased by $4.5 million or 78.8% to $10.2 million
      for the six months ended September 30, 2006, as compared to $5.7 million for
      the
      six months ended September 30, 2005. The increase in selling and distribution
      expenses in the six months ended September 30, 2006 as compared to 2005 was
      a
      result of increased transportation expenses due to the increase in sales volume,
      in addition to increases in other components of expenses such as wages,
      supermarket expenses and service expenses. ** The
      increase in total compensation to the sales force constitutes most of the
      increase in selling and distribution expenses. The total compensation to the
      sales force increased by $2.1 million from $1.7 million in the six months ended
      September 30, 2005 to $3.8 million in the six months ended September 30, 2006.
      In the meantime shipping and handling expenses increased by $151,000 from $1.4
      million in the six months ended September 30, 2005 to $1.5 million in the six
      months ended September 30, 2006; and travel expenses increased by $310,000
      from
      $627,000 in the six months ended September 30, 2005 to $938,000 in the six
      months ended September 30, 2006.




36




**Advertising
      and Sales Promotion**





Advertising
      and sales promotion increased by $6.1 million or 53.1% to $17.5 million for
      the
      six months ended September 30, 2006, as compared to $11.5 million for the six
      months ended September 30, 2005 as a result of increased advertising and
      promotional activity expenses. The major components of advertising and sales
      promotion are placement of advertisements with major media outlets and points
      of
      sale and community promotional activities.




(in
                thousands)
            
            **Six
                Months Ended September 30****2006**
            
            
            **2005**
            
            
            **Change
                in $**
            
            
            **Change
                in %**Advertising
            
            $
            3,080
            
            $
            3,388
            
            $
            (308
            )
            
            ø9.1÷
            %Sales
                promotion
            
            
            14,454
            
            
            8,067
            
            
            6,387
            
            
            79.1
            %**Totals**
            
            **$**
            **17,534**
            
            **$**
            **11,455**
            
            **$**
            **6,079**
            
            
            53.1
            %





**General
      and Administrative Expenses**





General
      and administrative expenses decreased by $616,000or 20.4% to $2.4 million for
      the six months ended September 30, 2006, as compared to $3.0 million for the
      six
      months ended September 30, 2005. The decrease in general and administrative
      expenses was due to the consolation of certain business functions and
      development of shared services.





**Income
      from Operations**





Based
      on
      the sales increase of $43.4 million or 84.5% and the cost of sales increase
      of
      $22.6 million or82.8% for the six months ended September 30, 2006, gross profit
      increased by $20.8 million or 86.5% compared to the six months ended September
      30, 2005. In the meantime, operational expenses also increased by approximately
      $10.0 million for the six months. As a result, income from operations was $14.7
      million for the six months ended September 30, 2006, as compared to $3.9 million
      for the six months ended September 30, 2005, an increase of $10.8 million or
      281.2%.





**Interest
      expense**





Interest
      expense decreased by $419,000 or 35.2% to $772,000 for the six months ended
      September 30, 2006, as compared to $1.2 million for the six months ended
      September 30, 2005. The decrease in finance costs was due to reduction of
      borrowing size upon maturity of certain loans.




37




**Other
      Income/(Loss)**





Other
      income was $294,000 for the six months ended September 30, 2006 as compared
      to
      $598,000 for the same period of 2005. These other income were incurred as a
      result of Subsidy income from local governments decreased by $315,000 to
      $332,000 for the six months ended September 30, 2006 as compared to $647,000
      for
      the six months ended September 30, 2005.





**Provision
      for Income Taxes**





The
      provision for income taxes, which is computed on a per subsidiary basis, was
      $1.4million and $305,000 for the six months ended September 30, 2006 and 2005,
      respectively. The difference in income tax provisions was due to changes in
      the
      status of tax holidays and abatement treatment for the year 2006 for some of
      the
      operating subsidiaries.





**Net
      Income Attributed to Shareholders**





Net
      income attributable to shareholders for the six months ended September 30,
      2006
      increased by $9.8 million or 321.1% to $12.9 million from $3.1 million for
      the
      six months ended September 30, 2005 due to the factors discussed above.





**Earnings
      Per Share**





Basic
      and
      diluted Earnings Per Share were $0.26 for six months ended September 30, 2006
      and $0.06 for six months ended September 30, 2005.





**FINANCIAL
      CONDITION**





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Cash**





The
      cash
      balance increased by $10.1 million to $15.8 million at September 30, 2006,
      as
      compared to $5.7 million at March 31, 2006. The increase was mainly attributable
      to cash flow from operations in 2006 which amounted to $4.9 million, being
      offset by cash spent in construction projects on plant and acquisition of fixed
      assets which amounted to $5.6 million and new bank loans which
      amounted to $13.4 million. The remaining $629,000 was the effect of exchange
      rate changes on cash items.





Cash
      flow
      generated from operations was $4.9 million for the six months ended September
      30, 2006. Trade receivables increased by $5.9 million and advances to suppliers
      increased by $3.4 million. Expanded scale of operations from the increase in
      sales revenues in the six months ended September 30, 2006 resulted in additional
      demand on working capital. Therefore, we experienced increased account
      receivables and inventories to support our increased sales revenues and
      production activities.




38




Cash
      flows used in investing activities amounted to $8.8 million. During the six
      months, we used $4.9 million for the construction of a new factory plant and
      facilities. The facilities are expected to be completed in the year ended
      2006. ** We
      also
      spent around $658,000 for new machinery and equipment.





**Working
      Capital**





Working
      capital increased by $11.5 million to negative $2.7 million at September 30,
      2006, as compared to negative $14.3 million at March 31, 2006. The increase
      in
      working capital reflects an improvement in the ratio of current assets over
      current liabilities to 96.3% from 77.0% over the period in discussion.





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





**Subsequent
      Events**





On
      November 6th, 2006, the Company consummated a transaction with the Department
      of
      Finance of Zheng Lan Qi (County) of Inner Mongolia in which the Company acquired
      certain assets owned by them including approximately $ 253,000 in land use
      rights and $3.2million in plant and buildings. The transaction was consummated
      in order to establish a wholly foreign-owned company to produce milk fat and
      other diary-based food ingredients.





The
      agreement, provided that the effective date of the transaction was when the
      Company received 60% of the non refundable subsidy of RMB 30,000,000
      (approximately $3,800,000). This occurred during the September quarter and
      thus
      the assets were recorded during that period, notwithstanding that the official
      ownership certificates have not yet been obtained. The non refundable subsidy
      was received in 2 installments and was recorded in the periods received.





**PART
      II**


**OTHER
      INFORMATION**





**ITEM
      6. EXHIBITS**





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





(1)
            Incorporated
                herein by reference from the Registrant’s Form 10SB126 filed with the
                Securities and Exchange Commission on June 15, 2005.(2)
            Incorporated
                herein by reference from the Registrant’s Form 8-K filed with Securities
                and Exchange Commission on July 21, 2005.(3)
            Incorporated
                herein by reference from the Registrant’s Form 10-KSB filed with the
                Securities and Exchange Commission on June 29, 2006.




39




**SIGNATURES**





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


SYNUTRA
                INTERNATIONAL, INC.Date:
                October 13, 2007
            By:
            /s/ Liang
                ZhangName:
                Liang ZhangTitle: Chief
                Executive Officer




40