CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Information included in this Quarterly Report Form 10-Q contains forward-looking statements that reflect the views of the management of the Company with respect to certain future events. Forward-looking statements made by penny stock issuers such as the Company are excluded from the safe harbor in Section 21E of the Securities Exchange Act of 1934. Words such as "expects," "should," "may," "will," "believes," "anticipates," "intends," "plans," "seeks," "estimates" and similar expressions or variations of such words, and negatives thereof, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that matters anticipated in our forward-looking statements will come to pass.

Forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated. Such risk and uncertainties include, but are not limited to: (1) if the Company is not able to obtain further financing, its business operations may fail, (2) the Company has only started generating revenue and has not generated positive operating cash flow, and as a result, faces a high risk of business failure,
(3) the Company's lack of diversification increases the risks associated with its business and an investment in the Company, and the Company's financial condition may deteriorate rapidly if it fails to succeed in developing its business, (4) the Company may not effectively execute its business plan or manage its potential future business development, (5) the Company's business could be impaired if it fails to comply with applicable regulations, (6) the Company has experienced substantial turnover of key management personnel and may not be able to attract and retain key management personnel to manage the Company or laboratory scientists to carry out its business operations, which could have a material adverse effect on its business, (7) the Company has expended time and resources in connection with the restatement of its financial statements and other disclosures and the Company may expend a substantial amount of time and in connection with responding to potential inquiries or legal actions by the Securities and Exchange Commission, stockholders or other parties, which may impair its ability to raise capital and to operate its business, (8) the Company's revenues have derived primarily from a single customer and may continue to be concentrated in the future, and (9) such other risks and uncertainties as have been disclosed or are hereafter disclosed from time to time in the Company's filings with the Securities and Exchange Commission, including, without limitations described under Risk Factors set forth in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended March 31, 2012.

You are cautioned not to place undue reliance on forward-looking statements. You are also urged to review and consider carefully the various disclosures made in the Company's other filings with the Securities and Exchange Commission, including any amendments to those filings. Except as may be required by applicable laws, the Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

GENERAL

Corporate History

We were incorporated on September 17, 2009 in the State of Nevada under the name Krossbow Holdings Corporation ("Krossbow"). Krossbow's original business plan was focused on offsetting carbon dioxide (CO2) emissions through the creation and protection of forest-based carbon "sinks." Krossbow planned to assess carbon resource potentials, prescribe and implement ecosystem restorations to develop those resources, and thereby generate carbon offset products. However, we have since abandoned that original business plan and restructured our business to focus on man-made diamond technology development. We decided to acquire existing technology and to seek to efficiently and effectively produce man-made diamond. In connection with this change in business purpose, Krossbow changed its name to Scio Diamond Technology Corporation to reflect its new business direction.

On August 5, 2011, Edward S. Adams and Michael R. Monahan, both of whom now serve on the Company's Board of Directors, acquired control of the Company through the purchase of two million (2,000,000) shares of the Company's issued and outstanding common stock from Jason Kropp, Krossbow's sole director and executive officer at that time, in accordance with a common stock purchase agreement among Mr. Kropp, Mr. Adams and Mr. Monahan. Concurrently with the execution of the common stock purchase agreement, Mr. Kropp resigned from all positions with Krossbow, including, but not limited to, that of President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director.

On August 5, 2011, the Company executed an Asset Purchase Agreement (the "Scio Asset Purchase Agreement") with another privately-held Nevada corporation that also had the name "Scio Diamond Technology Corporation" ("Private Scio"). Under the terms of the Scio Asset Purchase Agreement, the Company purchased the name "Scio Diamond Technology Corporation" and acquired other rights from Private Scio for 13,000,000 newly issued shares of common stock of the Company. Mr. Adams and Mr. Monahan were directors of Private Scio and our former Chief Executive Officer Joseph D. Lancia was an officer of Private Scio, and they owned 31.5%, 31.5%, and 15.4%, respectively, of Private Scio. Mr. Adams and Mr. Monahan each acquired, directly or indirectly, 4,100,000 shares of our common stock pursuant to the Scio Asset Purchase Agreement, Mr. Lancia acquired 2,000,000 shares pursuant to the Scio Asset Purchase Agreement.

On August 31, 2011, the Company acquired certain assets of Apollo Diamond, Inc. ("ADI") (the "ADI Asset Purchase"), consisting primarily of diamond growing machines and intellectual property related thereto, for which the Company paid ADI an aggregate of $2,000,000 in a combination of cash and a promissory note to ADI. In connection with the ADI Asset Purchase, the Company also agreed to provide certain current and former stockholders of ADI that were at the time accredited investors the right to acquire up to approximately 16 million shares of common stock of the Company for $0.01 per share (the "ADI Offering"). Accordingly, the purchase price for the ADI assets was an aggregate of $2,000,000, in a combination of cash and a promissory note, plus the ADI subscription rights.

On June 5, 2012, the Company acquired substantially all of the assets of Apollo Diamond Gemstone Corporation ("ADGC") (the "ADGC Asset Purchase"), consisting primarily of cultured diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the opportunity for certain current and former stockholders of ADGC that are accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share (the "ADGC Offering") with the intent that ADI Offering be conducted substantially concurrently with the ADGC Offering (collectively, the "ADI/ADGC Stockholder Offering").

During the three months ended December 31, 2012, the Company issued 1,336,708 shares of common stock pursuant to the ADI/ADGC Stockholder Offering. Cumulatively as of December 31, 2012, the Company has issued 14,337,473 shares under the ADI and ADGC subscription rights. On December 31, 2012 there remained a maximum of 2,662,527 shares available to be issued as part of the ADI/ADGC Stockholder Offering. The Company is in the process of finalizing the matching of ADI and ADGC records with subscription documents submitted by hundreds of former ADI and ADGC shareholders and expects this process to be completed by March 31, 2013. As of February 11, 2013, a total of 15,576,973 shares had been issued under these rights.

Business Overview

The Company's primary mission is the development of profitable and sustainable commercial applications for its planned mass production of high quality, single-crystal diamond in a laboratory environment using its diamond technology and patented mosaic production approach. The Company intends to target both the commercial/industrial and gemstone markets and anticipates opportunities in areas including, but not limited to, cutting devices, life sciences, diamond gemstone jewelry, power switches, optoelectronics, and semi-conductors.

As of September 30, 2012, the Company had begun generating limited revenue from the sale of diamond materials. On July 24, 2012, the Company announced that it had signed a purchase order with an international supplier of precision diamond cutting tool products pursuant to which the Company is providing Chemical Vapor Disposition ("CVD") single crystal diamond in specified wafer sizes. Through December 31, 2012, the Company sold approximately $615,000 of product under this purchase order. Under certain circumstances and depending upon, among other things, ongoing demand as estimated by the end product manufacturer, this agreement could produce aggregate sales by the Company of up to an estimated $5,000,000 during the first 24 months of the order.

If the Company is able to produce high-quality, relatively low-cost diamond and diamond materials in reliable quantities, then the products mentioned above may be incorporated into existing applications and technologies and spur new technologies. In such case, the Company expects numerous product development and licensing opportunities for the Company. We believe that the unique physical properties of diamond combined with consistent availability made possible by our diamond technology and patented mosaic production approach may lead to potential market opportunities in electronics, optics, communications, and computing.

RESULTS OF OPERATIONS

Three and Nine Month Periods Ended December 31, 2012 Compared to the Three and Nine Month Periods Ended December 31, 2011

During the three month period ended December 31, 2012, we recorded net revenue of $555,772, compared to $0 in revenue during the three months ended December 31, 2011. During the nine month period ended December 31, 2012, we recorded net revenue of $628,873, compared to $0 in net revenue for the nine months ended December 31, 2011. The increase in revenue is primarily due to the Company's initiation of production and sales activities.

Our net loss for the three month period ended December 31, 2012 was $1,723,840, compared to a net loss of $656,399 during the three months ended December 31, 2011. Our net loss for the nine month period ended December 31, 2012 was $4,807,015, compared to a net loss of $1,187,806 during the nine months ended December 31, 2011.

During the three month period ended December 31, 2012, we incurred total operating expenses of $2,293,724, compared to total operating expenses of $647,625 during the three months ended December 31, 2011. During the nine month period ended December 31, 2012, we incurred total operating expenses of $5,448,409, compared to total operation expenses of $1,187,589 during the nine months ended December 31, 2011. The increase in expenses is primarily due to the Company's initiation of production activities as well as compensation expense related to option issuances and executive severance pay. We incurred salary and benefit expense including direct labor costs recorded in cost of goods sold of $976,837 during the three months ended December 31, 2012 and $2,816,653 during the nine months ended December 31, 2012, which the three and nine month amount included $457,230 and $1,715,399, respectively, of compensation expense related to option issuances and $265,803 of severance expense for both periods ended. We also incurred $471,088 and $1,220,301 in professional and consulting fees during the three and nine month periods, respectively, including litigation defense costs of approximately $21,119 and $258,610 for the three and nine months ended December 31, 2012, compared to $574,294 and $1,081,446 in professional and consulting fees during the three months and nine months ended December 31, 2011. With production and sales of manufactured products continuing, we had cost of goods sold expense of $605,754 during the three month period and $818,646 for the nine months ended December 31, 2012.

Depreciation expense of $152,380 and $307,147 was recorded in cost of goods sold during the three and nine months ended December 31, 2012, respectively. No depreciation expense was recorded in cost of goods sold in prior periods.

We have generated limited revenue to offset our expenses, and so we have incurred net losses. Our net loss per share for the three month period ended December 31, 2012 was ($0.04) per share, compared to a net loss per share of ($0.03) for the three months ended December 31, 2011. The weighted average number of shares outstanding was 44,437,064 and 23,588,380, respectively, for the three month periods ended December 31, 2012 and 2011.

Our net loss per share for the nine month period ended December 31, 2012 was ($0.14) per share, compared to a net loss per share of ($0.08) for the nine months ended December 31, 2011. The weighted average number of shares outstanding was 35,123,493 and 14,562,232, respectively, for the nine month periods ended December 31, 2012 and 2011.

FINANCIAL CONDITION

At December 31, 2012, we had total assets of $16,380,818, compared to total assets of $14,323,173 at March 31, 2012. This increase in assets was primarily related to the purchase of assets from ADGC. We had cash of $1,203,013 at December 31, 2012 compared to cash of $808,516 at March 31, 2012.

Total liabilities at December 31, 2012 were $990,064, compared to total liabilities of $723,501 at March 31, 2012. Total liabilities at December 31, 2012 were comprised primarily of accounts payable and accrued expenses.

Total shareholders' equity was $15,390,754 at December 31, 2012, compared to $13,599,672 at March 31, 2012. Shareholders' equity increased $4,044,118 during the period primarily due to capital raised through private placement of common stock. Other components of the increase in shareholders' equity included the grants of incentive stock options to employees of $1,724,979, subscription right issuance related to the ADGC asset purchase of $790,000, and warrants issued in exchange for real property lease of $39,000. Offsetting these increases is a net loss of $4,807,015 for the period.

CASH FLOWS

Operating Activities

We have not generated positive cash flows from operating activities. For the nine month period ended December 31, 2012, net cash flows used in operating activities were $2,441,305 consisting primarily of a net loss of $4,807,015 offset by non-cash stock option issuance of $1,724,979, compared to net cash flows used in operating activities for the nine months ended December 31, 2011 of $1,051,344. The reason for this increase in cash used in operating activities is the Company's commencement of operations and production activities.

Investing Activities

For the nine month period ended December 31, 2012, net cash flows used in investing activities were $983,316, consisting of the purchase of and deposits on property, plant and equipment. Net cash flows used in investing activities were $970,803 for the nine months ended December 31, 2011.

Financing Activities

We have financed our operations primarily through advancements or the issuance of equity or debt securities. For the nine month periods ended December 31, 2012 and December 31, 2011, we generated $3,819,118 and $3,485,123, respectively, from financing activities.

LIQUIDITY AND CAPITAL RESOURCES

We expect that working capital requirements will continue to be funded through a combination of our existing funds, revenue from sales and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business.

Existing cash and revenues are expected to be adequate to fund our operations over the next two fiscal quarters through June 30, 2013. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of sales of our common stock and warrants to acquire common stock.

Since June 30, 2012, the Company achieved specified performance milestones that triggered the funding of $1,100,000 in net proceeds under subscription agreements that were entered into in May of 2012 with respect to the sale of units, each unit consisting of one share of common stock and one warrant for the purchase of a share of common stock at a strike price of $1.60 at a unit price of $0.80. A total of 1,375,000 units were issued in connection with this performance-milestone-related funding, which represented the final commitment to acquire units under certain subscription agreements. In addition to the foregoing, since June 30, 2012 and up to December 31, 2012, the Company has sold an additional 2,352,500 units for aggregate net proceeds of $1,874,257.

In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to, among other things: (i) manufacturing operations; (ii) developmental expenses associated with a start-up business; and (iii) marketing expenses. We intend to finance these expenses through the generation of revenue and with further issuances of securities. Thereafter, we expect we may need to raise additional capital and generate revenues to meet long-term operating requirements.

Additional issuances of equity or convertible debt securities may result in dilution to our current shareholders. Such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.

MATERIAL COMMITMENTS AND ARRANGEMENTS

As described above, on August 31, 2011 the Company acquired certain assets of ADI, consisting primarily of diamond growing machines and intellectual property related thereto, for which the Company paid ADI an aggregate of $2,000,000 in a combination of cash and a promissory note to ADI. The promissory note was paid in full during the month of December 2012. In connection with the ADI Asset Purchase, the Company also agreed to provide certain current and former stockholders of ADI that are accredited investors the right to acquire up to approximately 16 million shares of common stock of the Company for $0.01 per share of which approximately 14,659,996 have been issued at February 11, 2013.

On June 5, 2012, the Company acquired substantially all of the assets of ADGC, consisting primarily of cultured diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the right for certain current and former stockholders of ADGC that are accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share of which approximately 916,977 have been issued at February 11, 2013.

The ADI Offering and the ADGC Offering began in June and has been substantially completed except for ongoing efforts relating to matching of ADI and ADGC records and subscription documents submitted to the Company. The Company expects to complete this process by March 31, 2013.

The Company understands that most of the outstanding shares of ADI and ADGC were redeemed prior to and in anticipation of the Company's purchase of assets from ADI and ADGC. Mr. Adams and his spouse owned approximately 2% of the common stock of ADI and 11% of the common stock of ADGC (prior to the stock repurchases by such companies in 2011). Neither Mr. Adams nor his spouse participated in the ADI Offering or the ADGC Offering. Mr. Monahan held no stock of ADI and approximately 4% of the stock of ADGC (prior to the stock repurchases by ADGC in 2011). Mr. Monahan did not participate in the ADI Offering or the ADGC Offering. Mr. Adams and Mr. Monahan and their law firm have provided legal services to each of ADI, ADGC and the Company. Robert C. Linares, the Chairman of the Board of each of ADI and ADGC, who is also the largest stockholder of each of ADI and ADGC, is the father-in-law of Mr. Adams. Mr. R. Linares purchased 250,000 shares of common stock of the Company as a former ADI stockholder in connection with the ADI Offering and ADGC Offering. Bryant R. Linares, a former executive officer of both ADI and ADGC, and the second largest stockholder previously of both ADI and ADGC, purchased 1,000,000 shares of common stock of the Company as a former ADI stockholder in connection with the ADI Offering. Mr. B. Linares is the brother-in-law of Mr. Adams.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States ("GAAP"). We describe our significant accounting policies in the notes to our audited financial statements filed with our Form 10-K for the fiscal year ended March 31, 2012.

Some of the accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of our assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors that we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates and could materially affect the carrying values of our assets and liabilities and our results of operations.

The following is a summary of the more judgmental estimates and complex accounting principles, which represent our critical accounting policies.

Asset Purchases

The Company purchased certain assets from ADI on August 31, 2011, consisting primarily of diamond growing machines and intellectual property related thereto. The purchase price consisted of an aggregate of $2,000,000 in a combination of cash and a promissory note bearing interest at 4.00% annually and due and owing in full on September 1, 2012, plus the right for certain current and former stockholders of ADI to acquire up to approximately 16 million shares of common stock of the Company for $0.01 per share. The Company has estimated the fair value of these subscription rights to be $0.69 per right, for a total of $11,040,000 for these rights.

The following table reflects our purchase price allocation of the assets:

Machinery and equipment               $    943,685
Reactors                                 2,311,818
In-process research and development      9,784,497
Total                                 $ 13,040,000

The Company completed a third-party valuation to determine the fair value of the assets acquired. The final amounts allocated to the assets acquired are based upon the results of that valuation appraisal.

We believe that the acquisition of these assets from ADI was not the acquisition of a "business" within the definition set forth in GAAP or Rule 11-01(d).

On June 5, 2012, the Company acquired substantially all of the assets of ADGC, consisting primarily of cultured diamond gemstone-related know-how, inventory, and various intellectual property, in exchange for $100,000 in cash and the opportunity for certain current and former stockholders of ADGC that are accredited investors to acquire up to approximately 1 million shares of common stock of the Company for $0.01 per share with the intent that ADI Offering be conducted substantially concurrently with the ADGC Offering. The ADI Offering and the ADGC Offering began in June and have been substantially completed except for ongoing efforts relating to matching of ADI and ADGC records and subscription documents submitted to the Company. As of December 31, 2012, the Company had issued 14,337,473 shares of common stock pursuant to the ADI/ADGC Stockholder Offering. There remained on December 31, 2012, a maximum of 2,662,527 shares available to be issued as part of the ADI/ADGC Stockholder Offering. As of February 11, 2013, a maximum of 1,423,027 shares remained available to be issued.

The following table reflects our preliminary purchase price allocation of the assets:

Inventory                             $ 150,000
In-process research and development     740,000
Total                                 $ 890,000

The Company is in the process of obtaining appraisals of the assets acquired and expects to adjust the purchase price allocation no later than March 31, 2013, as necessary.

We believe that the acquisition of these assets from ADGC was not the acquisitions of a "business" within the definition set forth in GAAP or Rule 11-01(d).

Property, Plant and Equipment



Depreciation of property, plant and equipment is on a straight line basis
beginning at the time it is placed in service, based on the following estimated
useful lives:



                          Years
Machinery and equipment   3-15
Furniture and fixtures    3-10
Engineering equipment     5-12

Leasehold improvements are depreciated over the lesser of the remaining term of the lease or the life of the asset (generally three to five years).

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Manufacturing equipment was placed into service beginning July 1, 2012.

After initial recognition, tangible assets acquired that are used in commercialization activities are accounted for in accordance with their nature. FASB ASC 360 requires that these assets be classified as indefinite-lived until the completion or abandonment of the associated commercialization efforts, at which time the asset would be considered to be placed in service and the entity . . .