Synutra International (SYUT) 10-Q/A 2006 Q3 Quarterly report (amended)

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;

 

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· 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 the three and six months ended September 30, 2006 respectively. We did not recognize any of the subsidies during the three and six months ended September 30, 2006 as the asset had not yet been placed in service.

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· 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 the three and six months ended September 30, 2006, respectively.

· The amount of free products provided to our customers is reclassified as cost of sales for 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. We 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.  

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SYNUTRA INTERNATIONAL, INC.

FORM 10-Q/A

For the Quarter Ended September 30, 2006

INDEX

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

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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	$	5,677
Restricted cash		19,641		16,457
Accounts receivable		8,491		2,540
Inventories		12,841		11,789
Other receivable		2,648		2,230
Due from the related parties		6,769		8,602
Advances to suppliers		3,720		354
Deferred 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		36,680
Accounts payable		9,045		13,079
Due to related parties		2,780		4,301
Advances from customers		1,985		933
Tax payables		2,676		1,996
Other 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		5
Additional paid-in capital		8,226		8,226
Retained earnings		24,556		11,664
Accumulated 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.

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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		$	51,336
Including sales to related parties		986			3,800			6,406			5,661
Cost of sales		22,208			15,624			49,855			27,280
Including 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			5,725
Advertising and promotion expenses		11,060			6,198			17,534			11,455
General & administrative expenses		1,372			2,106			2,404			3,021
Total 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			104
Other 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.

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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	$	20,951
Net income		-		-		-		12,892		-		12,892
Other 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.

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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		$	3,061
Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization		804			746
Bad debt expense		(45	)		4
Gain on short term investment		(6	)		7
Minority interest		-			1
Financial consultants and finders fee		-			567
Changes in operating assets and liabilities:
Accounts receivable		(5,907	)		(374	)
Inventories		(1,051	)		(184	)
Advances to suppliers		(3,366	)		268
Due from related parties		1,834			(10	)
Other receivable		(418	)		-
Deferred expense		(254	)		(2,392	)
Accounts payable		(4,034	)		1,044
Due to related parties		(1,522	)		(496	)
Advances from customers		1,052			131
Tax payable		679			-
Other liabilities		1,492			1,510
Deferred 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		-			35
Purchases 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			34,308
Repayment 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		$	720
Income taxes paid	$	1,116		$	305

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

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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.

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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-01
Qingdao Sheng Yuan Dairy Co. Ltd		100	%		Jan-98
Heilongjiang Loubei Sheng Yuan Food Co. Ltd		100	%		Apr-01
Bei’an Yipin Dairy Co. Ltd		100	%		Jun-04
Qingdao Women and Children Nutrition Research Co. Ltd *		100	%		Apr-04
Zhangjiakou 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.

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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 years
Plant and machinery	5 - 10 years
Office equipment and furnishings	5 years
Motor 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.

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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.

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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-01
Qingdao Sheng Yuan Dairy Co., Ltd.		30	%		30	%		25	%		25	%		25	%		25	%		Jan-98
Heilongjiang Luobei Sheng Yuan Dairy Co., Ltd.		0	%		0	%		16.5	%		16.5	%		16.5	%		25	%		Apr-01
Bei’an Yipin Dairy Co., Ltd.		0	%		16.5	%		16.5	%		16.5	%		25	%		25	%		Jun-04
Zhangjiakou Shen Yuan Dairy Co., Ltd.		0	%		0	%		16.5	%		16.5	%		16.5	%		25	%		Mar-04
Qingdao 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

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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.

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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	$	1.00
Operating statement	RMB	7.95	to US	$	1.00
September 30, 2005
Balance sheet	RMB	8.11	to US	$	1.00
Operating 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.

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(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.

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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	$	2,957
Less: Allowance for doubtful accounts		372		417
Trade receivables, net		8,396		2,540
Notes 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	$	7,252
Plant and machinery		6,927		7,206
Office equipment and furnishings		1,636		988
Motor vehicles		1,272		1,212
		17,288		16,658
Less: Accumulated depreciation:
Buildings and leasehold improvement		1,484		1,265
Plant and machinery		2,533		2,306
Office equipment and furnishings		523		336
Motor vehicles		731		631
		5,271		4,538
Construction in progress		25,851		21,198
Property, 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.

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7. LAND USE RIGHT

(in thousands)	September 30, 2006		March 31, 2006
Cost:	$	1,939	$	1,660
Accumulated amortization		132		114
Land 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	$	1,985
Work in Process		8,467		7,586
Finished Goods		1,478		2,132
Packing Materials & Other Consumables		798		86
Total	$	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)	$	-	$	1,761
Beijing Ludin Xueyuan Trading Co. Ltd		30		692
Beijing Ao Naier Feed Stuff LLC		307		298
Beijing Kelqin Dairy Co. Ltd		556		1,708
Sheng Zhi Da Dairy Group Corporation		808		(268	)
Heilongjiang Baoquanling Shen Yuan Dairy Co. Ltd		858		226
Beijing Honnete Dairy Corporation Ltd		4,210		4,185
Total Due from Related Companies	$	6,769	$	8,602

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b. Due to related parties

(in thousands)	September 30, 2006		March 31, 2006
Beijing Kelqin Dairy Co. Ltd	$	92	$	63
Beijing Honnete Dairy Corporation Ltd		445		1,339
Heilongjiang Baoquanling Shen Yuan Dairy Co. Ltd		920		706
Sheng Zhi Da Dairy Group Corporation		1,323		2,193
Total 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	$	2,018
Prepayments		5,357		4,526
Other 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	$	4,301
Advance 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.

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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)	$	-	$	376
Beijing Ludin Xueyuan Trading Co. Ltd		13		153
Total	$	13	$	529

Other income to related parties

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

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Purchases from related parties

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

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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.

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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	$	62
Office facilities in Beijing (SOHO 2903-2905)		15-Dec-04	to	14-Dec-07		11		66		92
Office 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.

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· 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 the three and six months ended September 30, 2006 respectively. We did not recognize any of the subsidies during the three and six months ended September 30, 2006 as 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 sales for 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.

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· 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, other payable and other accrued liabilities have been combined as other current 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	)	$	5,677
Restricted cash		-		19,641			19,641		-		16,457			16,457
Short-term investments		48		(48	)		-		43		(43	)		-
Notes receivable		95		(95	)		-		-		-			-
Accounts receivable		8,396		95			8,491		2,540		-			2,540
Other receivable, net		3,751		(1,103	)		2,648		2,230		-			2,230
Deferred 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			36,680
Notes payable		24,330		(24,330	)		-		19,113		(19,113	)		-
Accounts payable		9,045		-			9,045		12,580		499			13,079
Other 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		-			11,664
Accumulated 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

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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	)	$	94,724
Cost 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	)		17,534
General and administrative expenses		1,323			49			1,372			2,317			87			2,404
Total 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

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	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		$	3,021
Subsidy 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	)	$	12,892
Changes 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	)		1,492
Deferred 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			40,366
Repayment 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

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				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			34,308
Repayment 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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. 

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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.

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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.

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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.

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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 Zhang
		Name: Liang Zhang
		Title: Chief Executive Officer

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