UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





þ QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2009





o  TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE


EXCHANGE
ACT





For
the Transition Period from _______ to _________





001-34123


(Commission
File Number)





CHINA-BIOTICS,
INC.


(Exact
Name of registrant as specified in its charter)





Delaware
              98-0393071(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              (I.R.S.
      Employer Identification No.)





No. 999
Ningqiao Road


Jinqiao
Export Processing Zone


Pudong,
Shanghai 201206


People’s
Republic of China


(Address
of Principal Executive Offices)




Telephone
number: (86 21) 5834 9748




(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check mark 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 þ
  No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes þ  No o




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




Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              þ
      (Do not check if a smaller reporting company)
              Smaller
      reporting company
              o




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


Yes o No þ





As
of August 14, 2009, 17,080,000 shares of the Issuer’s common stock
were outstanding.





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
                FINANCIAL
      STATEMENTS
                1ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                14ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                23ITEM
      4.
                CONTROLS
      AND PROCEDURES
                24PART
      II - OTHER INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS
                25ITEM
      1A.
                RISK
      FACTORS
                25ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                25ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES
                25ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                25ITEM
      5.
                OTHER
      INFORMATION
                25ITEM
      6.
                EXHIBITS
                25SIGNATURES
                28


i


PART
I - FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
expressed in US Dollars)




June 30,
                                2009
                              
                              
                              March 31,
                                2009ASSETSCurrent
      assetsCash
      and cash equivalents
                              
                              $
                              77,406,721
                              
                              
                              $
                              70,824,041Accounts
      receivable
                              
                              
                              16,011,086
                              
                              
                              
                              14,428,382Other
      receivables
                              
                              
                              6,493
                              
                              
                              
                              6,493Inventories
                              
                              
                              1,014,565
                              
                              
                              
                              563,853Prepayment
                              
                              
                              1,231,785
                              
                              
                              
                              1,547,582Total
      current assets
                              
                              $
                              95,670,650
                              
                              
                              $
                              87,370,351Property,
      plant and equipment and land use right
                              
                              
                              34,870,707
                              
                              
                              
                              33,079,839Deferred
      tax assets
                              
                              
                              354,157
                              
                              
                              
                              354,157Total
      assets
                              
                              $
                              130,895,514
                              
                              
                              $
                              120,804,347LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                              
                              $
                              4,027,051
                              
                              
                              $
                              2,909,898Tax
      payables
                              
                              
                              26,160,571
                              
                              
                              
                              25,528,447Other
      payables and accruals
                              
                              
                              1,251,126
                              
                              
                              
                              1,517,753Amount
      due to a director
                              
                              
                              4,523,050
                              
                              
                              
                              2,380,007Total
      current liabilities
                              
                              $
                              35,961,798
                              
                              
                              $
                              32,336,105Non-current
      liabilitiesConvertible
      note, net of discount of $5,274,945 and $6,000,054 as of
      June 30, 2009 and March 31, 2009 respectively
                              
                              $
                              19,725,055
                              
                              
                              $
                              18,999,946Embedded
      derivatives
                              
                              
                              2,146,000
                              
                              
                              
                              2,660,000Interest
      payable
                              
                              
                              1,794,909
                              
                              
                              
                              1,411,942Total
      non-current liabilities
                              
                              $
                              23,665,964
                              
                              
                              $
                              23,071,888Commitments and
      contingenciesStockholders’
      equity:Common
      stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004
      shares issued and 17,080,000 outstanding as of June 30, 2009 and
      March 31, 2009 respectively)
                              
                              $
                              4,146
                              
                              
                              $
                              4,146Additional
      paid-in capital
                              
                              
                              7,863,031
                              
                              
                              
                              7,863,031Retained
      earnings
                              
                              
                              55,561,782
                              
                              
                              
                              49,794,033Treasury
      stock at cost (24,381,004 shares)
                              
                              
                              (2,438
                              )
                              
                              
                              (2,438
                              )Accumulated
      other comprehensive income
                              
                              
                              4,815,437
                              
                              
                              
                              4,711,788Capital
      and statutory reserves
                              
                              
                              3,025,794
                              
                              
                              
                              3,025,794Total
      stockholders’ equity
                              
                              $
                              71,267,752
                              
                              
                              $
                              65,396,354Total
      liabilities and stockholders’ equity
                              
                              $
                              130,895,514
                              
                              
                              $
                              120,804,347




The
accompanying notes are an integral part of these financial
statements.


1


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
expressed in US Dollars)





Three months ended
                                                  June 30,2009
                                                
                                                
                                                2008Net
      sales
                                                
                                                $
                                                15,412,462
                                                
                                                
                                                $
                                                11,370,657Cost
      of sales
                                                
                                                
                                                (4,498,673
                                                )
                                                
                                                
                                                (3,258,669
                                                )Gross
      profit
                                                
                                                $
                                                10,913,789
                                                
                                                
                                                $
                                                8,111,988Operating
      expenses:Selling
      expenses
                                                
                                                $
                                                (2,347,592
                                                )
                                                
                                                $
                                                (2,369,859
                                                )General
      and administrative expenses
                                                
                                                
                                                (1,734,665
                                                )
                                                
                                                
                                                (1,426,797
                                                )Other
      income
                                                
                                                
                                                36,448
                                                
                                                
                                                
                                                1,452,503Total
      operating expenses
                                                
                                                $
                                                (4,045,809
                                                )
                                                
                                                $
                                                (2,344,153
                                                )Income
      from operations
                                                
                                                $
                                                6,867,980
                                                
                                                
                                                $
                                                5,767,835Other
      income and expenses:Changes
      in the fair value of embedded derivatives
                                                
                                                $
                                                514,000
                                                
                                                
                                                $
                                                (1,239,000
                                                )Interest
      income
                                                
                                                
                                                67,088
                                                
                                                
                                                
                                                86,386Total
      other income (expenses)
                                                
                                                $
                                                581,088
                                                
                                                
                                                $
                                                (1,152,614
                                                )Income
      before taxes
                                                
                                                $
                                                7,449,068
                                                
                                                
                                                $
                                                4,615,221Provision
      for income taxes
                                                
                                                
                                                (1,681,319
                                                )
                                                
                                                
                                                (1,378,471
                                                )Net
      income
                                                
                                                $
                                                5,767,749
                                                
                                                
                                                $
                                                3,236,750Earnings
      per share:Basic
      and Diluted
                                                
                                                $
                                                0.34
                                                
                                                
                                                $
                                                0.19Weighted
      average shares outstandingBasic
      and Diluted
                                                
                                                
                                                17,080,000
                                                
                                                
                                                
                                                17,080,000





The
accompanying notes are an integral part of these financial
statements.


2


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


(Amounts
expressed in US Dollars)





Common Stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        Accumulated
                        
                        
                        Capital &Shares
                        
                        
                        Par value
                          $0.0001
                        
                        
                        Additional
                          Paid-in Capital
                        
                        
                        Retained
                          Earnings
                        
                        
                        Treasury
                          Stock
                        
                        
                        Comprehensive
                          Income
                        
                        
                        Statutory
                          Reserves
                        
                        
                        TotalBalance-March 31,
      2009
                        
                        
                        41,461,004
                        
                        
                        $
                        4,146
                        
                        
                        $
                        7,863,031
                        
                        
                        $
                        49,794,033
                        
                        
                        $
                        (2,438
                        )
                        
                        $
                        4,711,788
                        
                        
                        $
                        3,025,794
                        
                        
                        $
                        65,396,354Comprehensive
      income:Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,767,749
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,767,749Other
      comprehensive income:Foreign
      currency translation adjustments, net of taxes of $0
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        103,649
                        
                        
                        
                        
                        
                        
                        
                        103,649Total
      comprehensive income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,871,398Balance-
      June 30, 2009
                        
                        
                        41,461,004
                        
                        
                        $
                        4,146
                        
                        
                        $
                        7,863,031
                        
                        
                        $
                        55,561,782
                        
                        
                        $
                        (2,438
                        )
                        
                        $
                        4,815,437
                        
                        
                        $
                        3,025,794
                        
                        
                        $
                        71,267,752





The
accompanying notes are an integral part of these financial
statements.


3


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
expressed in US Dollars)




Three months ended
                                            June 30,2009
                                          
                                          
                                          2008CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                                          
                                          $
                                          5,767,749
                                          
                                          
                                          $
                                          3,236,750Adjustment
      for:Changes
      in the fair value of embedded derivatives
                                          
                                          
                                          (514,000)
                                          
                                          
                                          
                                          1,239,000Depreciation
                                          
                                          
                                          455,593
                                          
                                          
                                          
                                          298,691(Increase)/Decrease
      in accounts receivable
                                          
                                          
                                          (1,554,722)
                                          
                                          
                                          
                                          2,793,079(Increase)/Decrease
      in inventories
                                          
                                          
                                          (442,744)
                                          
                                          
                                          
                                          (197,308)(Increase)/Decrease
      in prepayments
                                          
                                          
                                          310,213
                                          
                                          
                                          
                                          211,580Increase/(Decrease)
      in accounts payable
                                          
                                          
                                          1,097,403
                                          
                                          
                                          
                                          434,924Increase/(Decrease)
      in other payables and accruals
                                          
                                          
                                          (515,764)
                                          
                                          
                                          
                                          (192,336)Increase/(Decrease)
      in tax payables
                                          
                                          
                                          620,948
                                          
                                          
                                          
                                          511,633NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                                          
                                          $
                                          5,224,676
                                          
                                          
                                          $
                                          8,336,013CASH
      FLOWS USED IN INVESTING ACTIVITIESPurchases
      of fixed assets
                                          
                                          $
                                          (881,407)
                                          
                                          
                                          $
                                          (7,193,855)NET
      CASH USED IN INVESTING ACTIVITIES
                                          
                                          $
                                          (881,407)
                                          
                                          
                                          $
                                          (7,193,855)CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      advance from a director
                                          
                                          $
                                          2,106,368
                                          
                                          
                                          $
                                          11,661NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                          
                                          $
                                          2,106,368
                                          
                                          
                                          $
                                          11,661Effect
      of exchange rate changes on cash
                                          
                                          
                                          133,043
                                          
                                          
                                          
                                          740,436NET
      INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
                                          
                                          $
                                          6,582,680
                                          
                                          
                                          $
                                          1,894,255CASH
      AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
                                          
                                          
                                          70,824,041
                                          
                                          
                                          
                                          64,310,448CASH
      AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
                                          
                                          $
                                          77,406,721
                                          
                                          
                                          $
                                          66,204,703Supplemental
      disclosure cash flow information:Interest
      paid
                                          
                                          $
                                          505,833
                                          
                                          
                                          $
                                          306,849Income
      tax paid
                                          
                                          $
                                          1,303,396
                                          
                                          
                                          $
                                          789,785





The
accompanying notes are an integral part of these financial
statements.


4


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





1.
            BASIS
      OF PRESENTATION AND PRINCIPALS OF
CONSOLIDATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The accompanying condensed consolidated financial
statements do reflect all the adjustments that, in the opinion of management,
are necessary to present fairly the financial position, results of operations
and cash flows for the interim periods reported. Such adjustments are of a
normal, recurring nature. Our operating results for the three months ended
June 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2010.





These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes to consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended March 31, 2009. There have been no material changes in the
significant accounting policies followed by us during the three months ended
June 30, 2009.





2.
            EARNINGS
      PER SHARE





Basic
earnings per share is computed in accordance with SFAS No.128, “Earnings Per
Share”, by dividing the net income by the weighted average number of outstanding
common stock during the period. The diluted earnings per share calculation
includes the impact of dilutive convertible securities, if applicable. The
weighted average number of outstanding common stock is determined by relating
the portion of time within a reporting period that a particular number of common
stock has been outstanding to the total time in that period.


5


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
following table sets forth the computation of basic and diluted earnings per
share:





Three months ended
                                    June 30,2009
                                  
                                  2008Earnings
      per share – Basic and dilutedIncome
      for the period
                                  
                                  
                                  $
                                  5,767,749
                                  
                                  
                                  $
                                  3,236,750Basic
      average common stock outstanding
                                  
                                  
                                  
                                  17,080,000
                                  
                                  
                                  
                                  17,080,000Net
      earnings per share
                                  
                                  
                                  $
                                  0.34
                                  
                                  
                                  $
                                  0.19





For the
quarters ended June 30, 2009 and 2008, potential common stock of 2,083,000
shares related to the convertible note at the exercise price of $12 per share
are excluded from the computation of diluted earnings per share as the exercise
price of $12
was higher than the average market price during the period.




3.
            RISKS,
      UNCERTAINTIES, AND CONCENTRATIONS





(a)           Nature
of Operations





Substantially
all of the Group’s operations are conducted in the People’s Republic of China
(“PRC”) and are subject to various political, economic, and other risks and
uncertainties inherent in this country. Among other risks, the Group’s
operations are subject to the risks of restrictions on transfer of funds; export
duties, quotas and embargoes; domestic and international customs and tariffs;
changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations.





(b)           Concentration
of Credit Risk





Financial
instruments that potentially subject the Group to concentrations of credit risk
consist principally of cash and accounts receivable.





As of
June 30, 2009 and March 31, 2009 the Group had cash deposits of $67.8
million out of $77.4 million and $61.3 million out of $70.8 million respectively
placed in one bank in the PRC where there is currently no rules or regulations
in place for obligatory insurance of bank accounts.





For the
three months ended June 30, 2009 and 2008, all of the Group’s sales arose
in the PRC. In addition, all accounts receivable as at June 30, 2009 also
arose in the PRC.





(c)           Concentration
of Customers





A
substantial percentage of the Group's sales are made to a small number of
customers. During the three months ended June 30, 2009 and 2008, the
following customers accounted for more then 10% of total gross
sales:
 
 Percentage
      of Gross Sales
                                        Three
      Months ended
                                        June
      30,
                                      
                                      
                                      Percentage
      of
                                        Accounts
      Receivable
                                        as
      at June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Customer
      A
                                      
                                      
                                      *
                                      
                                      
                                      
                                      15
                                      %
                                      
                                      
                                      *
                                      
                                      
                                      
                                      *Customer
      B
                                      
                                      
                                      12
                                      %
                                      
                                      
                                      *
                                      
                                      
                                      
                                      15
                                      %
                                      
                                      
                                      *
 
 * less
than 10%


4.
            ACCOUNTS
      RECEIVABLE





The
Group’s accounts receivable as of the balance sheet date as presented in these
financial statements are summarized as follows:


6





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





June 30,
                                2009
                              
                              March 31,
                                2009Trade
      receivables
                              
                              
                              $
                              16,011,086
                              
                              
                              $
                              14,428,382Less
      : Allowances for doubtful debt
                              
                              
                              
                              -
                              
                              
                              
                              -$
                              16,011,086
                              
                              
                              $
                              14,428,382





5.
            INVENTORIES





The
Group’s inventories as of the balance sheet date as presented in these financial
statements are summarized as follows:





June 30,
                          2009
                        
                        
                        March 31,
                          2009Raw
      materials
                        
                        $
                        594,093
                        
                        
                        $
                        343,011Work-in-progress
                        
                        
                        117,481
                        
                        
                        
                        143,966Finished
      goods
                        
                        
                        302,991
                        
                        
                        
                        76,876$
                        1,014,565
                        
                        
                        $
                        563,853


7


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





6.
            PROPERTY,
      PLANT AND EQUIPMENT AND LAND USE
RIGHT





The
Group’s property, plant and equipment and land use right as of the balance sheet
date as presented in these financial statements are summarized as
follows:




June 30,
      2009
                          
                          
                          March 31,
      2009Land
      use right
                          
                          $
                          1,878,643
                          
                          
                          $
                          1,878,643Plant
      and machinery
                          
                          
                          7,511,405
                          
                          
                          
                          7,510,635Office
      equipment
                          
                          
                          3,567,701
                          
                          
                          
                          3,565,390Motor
      vehicles
                          
                          
                          245,989
                          
                          
                          
                          245,989Leasehold
      improvements
                          
                          
                          2,886,205
                          
                          
                          
                          2,422,57516,089,943
                          
                          
                          
                          15,623,232Less:
      Accumulated depreciation
                          
                          $
                          (6,924,147
                          )
                          
                          $
                          (6,460,354
                          )9,165,796
                          
                          
                          
                          9,162,878Construction
      in progress
                          
                          $
                          25,704,911
                          
                          
                          $
                          23,916,961$
                          34,870,707
                          
                          
                          $
                          33,079,839




Depreciation
and amortization expenses were $455,593 and $1,768,127 for the period ended June
30, 2009 and for the year ended March 31, 2009 respectively.





7.
            TAX
      PAYABLES





The
Group’s tax payables as of the balance sheet date as presented in these
financial statements are summarized as follows:




June 30,
      2009
                        
                        
                        March 31,
      2009Value
      added tax and other taxes
                        
                        $
                        6,197,255
                        
                        
                        $
                        5,949,853Income
      tax
                        
                        
                        3,965,494
                        
                        
                        
                        4,120,961Surcharge
                        
                        
                        12,053,939
                        
                        
                        
                        11,513,750Dividends
      withholding tax
                        
                        
                        3,943,883
                        
                        
                        
                        3,943,883$
                        26,160,571
                        
                        
                        $
                        25,528,447





Pursuant
to the Provisional Regulation of PRC on Value Added Tax, or VAT, and their
implementing rules, all entities and individuals that are engaged in the sale of
goods are generally required to pay VAT at a rate of 17% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer.





The Group
has its principal operations in the PRC. Business enterprises are subject to
income taxes and VAT under PRC tax laws and regulations unless they have
exemptions. It has been the belief of the Group’s management that its PRC
operations from 1999 to 2004 were exempted from income taxes and VAT as these
operations were considered by the local government as "high technology" company.
The Group, however, has never received a written confirmation from the
appropriate tax authorities for the tax exemption status of its PRC operations.
The Group took the initiative to make tax payments to the PRC authorities for
the calendar year 2005 and subsequent years and accrued for all applicable tax
liabilities.





According
to PRC tax regulations, overdue tax liabilities in the PRC for the calendar
years prior to 2005 may be subject to potential penalties for the late payment
of taxes, which is calculated on the basis of 0.5 times to five times the amount
of overdue tax liabilities. This amounts to $4.9 million (if calculated based on
0.5 times the taxes payable) to $49 million (if calculated based on five times
the amount of taxes payable) as of June 30, 2008 and 2009. The Group has
reserved for the payment of taxes that may be owed for calendar years prior to
2005 and any associated interest surcharges (which are calculated at 0.05% per
day on the accrued tax liabilities) in its financial statements until the matter
is fully resolved. Following the adoption of FIN48, the Group has reserved for
the surcharges payable for this reporting period. We consider it more likely
than not that the associated penalty will not need to be paid.


8


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
income/(loss) generated in the United States, the British Virgin Islands and the
PRC before income taxes during the periods as presented in these financial
statements is summarized as follows:




Three months ended June 30,2009
                          
                          
                          2008Income/(Loss)
      in the United States before income taxes
                          
                          $
                          56,008
                          
                          
                          $
                          (1,271,879
                          )(Loss)/
      Income in the British Virgin Islands before income taxes
                          
                          
                          (12,981
                          )
                          
                          
                          411,931Income
      in the PRC before income taxes
                          
                          
                          7,406,041
                          
                          
                          
                          5,475,169$
                          7,449,068
                          
                          
                          $
                          4,615,221




The
Company, which is incorporated in the United States, is subject to U.S. tax
law.  Other than legal and professional expenses for the daily
operations of the Company, the income/(loss) generated from the United States is
the change in the fair value of the embedded derivatives of the 4% Senior
Convertible Promissory Note issued on December 11, 2007.





There is
no income tax for companies not carrying out business activities in the British
Virgin Islands. Accordingly, the Company’s financial statements do not present
any income tax provisions or credits related to the British Virgin Islands tax
jurisdiction.





The
provision for income tax for the periods as presented in these financial
statements are summarized as follows:





Three months ended June
      30,2009
                          
                          
                          2008Current
                          
                          $
                          1,681,319
                          
                          
                          $
                          1,378,471Deferred
                          
                          
                          -
                          
                          
                          
                          -$
                          1,681,319
                          
                          
                          $
                          1,378,471





The Group
has its principal operations in the PRC and is subject to a PRC Enterprise
Income Tax rate of 25% in calendar years 2009 and 2008.





However,
one of the PRC subsidiaries of the Group, Shining located in the Shanghai
Jinqiao special economic zone is awarded the status of “high technology”
enterprise for the calendar year 2007 till 2011. Hence Shining enjoys a
preferential income tax of 15%, which represents a tax concession of 10% in the
year 2009 and 2008.


9


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Another
newly set up PRC subsidiary of the Group, GBS, is located in Qingpu, will have
the same business and operation as Shining but with a larger production scale,
is believed by the management to be qualified for the application for the status
of being a “high technology” enterprise once operation is commenced. If the
“high technology” status is awarded, GBS would then be fully exempted from PRC
Enterprise Income Tax for two years starting from calendar year 2008, followed
by 50% tax exemption for the next three calendar years, period from 2010 to
2012. There is no financial effect from the tax holiday as GBS did not generate
any assessable profit in 2009 and 2008.





The
principal reconciling items from income tax computed at the statutory rates and
at the effective income tax rates are as follows:




Three months ended June 30,2009
                                  
                                  
                                  2008Computed
      tax at the local PRC statutory rate (25%)
                                  
                                  $
                                  1,862,267
                                  
                                  
                                  $
                                  1,153,805Non-deductible
      items
                                  
                                  
                                  4,126
                                  
                                  
                                  
                                  432,439Non-taxable
      items
                                  
                                  
                                  (175,059)
                                  
                                  
                                  
                                  (303,934)Effect
      of different tax rate in other jurisdictions
                                  
                                  
                                  5,041
                                  
                                  
                                  
                                  (114,469)Change
      in valuation allowance
                                  
                                  
                                  221,037
                                  
                                  
                                  
                                  -Tax
      concession
                                  
                                  
                                  (766,733
                                  )
                                  
                                  
                                  (326,995)Surcharge
      at 0.05% per day on accrued taxes
                                  
                                  
                                  530,640
                                  
                                  
                                  
                                  537,625Total
      provision for income at effective rate
                                  
                                  $
                                  1,681,319
                                  
                                  
                                  $
                                  1,378,471




Deferred
tax assets were primarily raised from the tax losses carry forwards. As at June
30, 2009, one the Company's PRC subsidiaries has incurred tax losses which
can be carried forward to a maximun of 5 years of approximately US$1,600,285
(June 30, 2008: US$398,844). Tax losses arising from the US company were
approximately US$4,275,298 as at June 30, 2009 (June 30, 2008: US$563,064), and
a valuation allowance has been established for these deferred tax assets since
the management believes that the US Company will not generate future taxable
income to utilize the deferred tax assets.




Three months ended
                          June 302009
                        
                        
                        2008Deferred
      tax assets:Net
      operating loss carryforward
                        
                        $
                        1,788,601
                        
                        
                        $
                        240,477Less:
      Valuation allowance
                        
                        
                        (1,434,404)
                        
                        
                        
                        (240,477)Net
      deferred tax assets
                        
                        $
                        354,197
                        
                        
                        $
                        -





10


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)







8.
            COMMITMENTS





(a)  
Operating Leases





The Group
leases office space, warehouse facilities and retail outlets under various
operating leases, certain of which contain escalation clauses. Rental expenses
under operating leases included in the statement of income were $880,828 and
$754,173 for the period ended June 30, 2009 and 2008.








June 30,
      2009Payable
      within1
      year
                          
                          $
                          477,9562
      to 5 years
                          
                          
                          -Thereafter
                          
                          
                          -$
                          477,956





(b)  
Capital commitments





During
the period ended June 30, 2009, GSL entered into the agreements with the
contractors to construct a plant consisting bulk manufacturing facilities in the
Shanghai Qingpu Industrial Park District. The amount of future payment is
$4,515,560 which was contracted, but not provided for as of June 30,
2009.





9.
            CONVERTIBLE
      NOTES





On
December 11, 2007, the Company sold a 4% Senior Convertible Promissory Note
in the amount of $25,000,000 (the “Note”) with a maturity date of
December 11, 2010 to Pope Investments II LLC, an affiliate of Pope
Investments, LLC, in a private placement. In connection with the sale, the
Company entered into an Investment Agreement and a Registration Rights
Agreement. In addition, Mr. Song Jinan, the Company’s Chief Executive Officer,
Chairman, and largest stockholder, entered into a Guaranty Agreement and a
Pledge Agreement pursuant to which Mr. Song agreed to guaranty the Company’s
obligations under the Note and to secure such guaranty with a pledge of
4,000,000 shares of China-Biotics common stock owned by Mr. Song. The principal
amount of the Note is convertible into shares of the Company’s common stock at
an exercise price of $12.00 per share at any time until the maturity date
subject to adjustment for subdivision or combination of the Company’s common
stock and similar events. If the Note is not converted at maturity, the Company
will redeem the Note to provide Pope Investments II LLC with a total yield of
10% per annum inclusive of the annual interest. The Note also provides for
mandatory conversion into the Company’s common stock if the Group achieves
a net income of $60 million in fiscal year 2010. Pope Investments II LLC may
declare the outstanding principal amount and any accrued but unpaid interest,
calculated at a rate of 10% per annum, to be immediately due and payable upon an
event of default, including non-payment of obligations under the Note,
bankruptcy or insolvency, or failure to perform any covenant set forth in the
Note or Investment Agreement. Pursuant to the Investment Agreement the Company
has secured payment of obligations under the Note with a pledge of 100% of
the stock of SGI to Pope Investments II LLC.


11


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Net
proceeds of the Note are being used to fund the construction of a proposed
150-metric-ton-per-year manufacturing facility and for other capital
expenditures.





The
Company accounted for the net proceeds from the issuance of the Note as two
separate components; an embedded derivative component (conversion option with
mandatory conversion feature) and a debt component. The Company determined the
initial carrying value of the debt component by subtracting the fair value of
embedded derivatives amounted to US$9,118,000 from the net proceeds received
from the issuance of the Note. This resulted in US$15,882,000 initial carrying
amount of the debt component.





On April
1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements”, (“SFAS
157”) which defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements. SFAS 157 does
not require any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to classify the
source of the information. In February 2008, the FASB deferred the effective
date of SFAS 157 by one year for certain non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The Company
adopted the provisions of SFAS 157, except as it applies to those non-financial
assets and non-financial liabilities for which the effective date has been
delayed by one year.





SFAS 157
establishes a three-level valuation hierarchy of valuation techniques based on
observable and unobservable inputs, which may be used to measure fair value and
include the following:





Level 1 -
Quoted prices in active markets for identical assets or
liabilities.





Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.





Level 3 -
Unobservable inputs that are supported by little or no market activity an that
are significant to the fair value of the assets or liabilities.





Classification
within the hierarchy is determined based on the lowest level of input that is
significant to the fair value measurement.





As of
June 30, 2009, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, including its
derivative instruments related to its 2007 Notes. The fair value of the embedded
derivatives was determined using the following inputs in accordance with SFAS
157 at June 30, 2009:




Fair Value MeasurementsBalance
                                
                                
                                Quoted
                                  Prices in
                                  Active
                                  Markets
                                  (Level 1)
                                
                                
                                Significant Other
                                  Observable
                                  Inputs
                                  (Level 2)
                                
                                
                                Significant
                                  Unobservable
                                  Inputs
                                  (Level 3)Embedded
      derivatives - conversion rightAs
      at June 30, 2009
                                
                                $
                                2,146,000
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                2,146,000As
      at March 31, 2009
                                
                                $
                                2,660,000
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                2,660,000


12


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
following table presents a reconciliation of the assets and liabilities measured
at fair value on a recurring basis using significant unobservable inputs (Level
3) from March 31, 2009 to June 30, 2009:





Derivative Liability -
                                    Conversion Rights2009
                                  
                                  2008Balance
      at March 31
                                  
                                  $
                                  2,660,000
                                  $
                                  5,752,000Adjustment
      to fair value included in earnings
                                  
                                  
                                  (514,000)
                                  
                                  1,239,000Balance
      at June 30
                                  
                                  $
                                  2,146,000
                                  $
                                  6,991,000





The embedded derivatives are
revalued at the end of each reporting period and the resulting difference is
included in the results of operations. The estimated fair value of the embedded
derivatives as of June 30, 2009 and March 31, 2009 was $2,146,000 and
$2,660,000, respectively. The change in the fair value of the embedded
derivatives amounted to $514,000 for the quarter ended June 30, 2009 and
$2,660,000 for the year ended March 31, 2009 were charged to the consolidated
statement of operation.





The fair
value of the embedded derivatives was determined using the Binomal Model based
on the following assumptions:





June 30,
                                2009
                              
                              
                              March 31,
                                2009Risk-free
      rate of return
                              
                              
                              0.48
                              %
                              
                              
                              0.54
                              %Time
      to expiration
                              
                              1.50 years
                              
                              
                              1.67 yearsVolatility
      rate
                              
                              
                              85.17
                              %
                              
                              
                              69.08
                              %Dividend
      yield
                              
                              
                              -
                              
                              
                              
                              -





As at
June 30, 2009 and March 31, 2009, the Note interest amounting to $3,351,073
and $2,718,791 was capitalized under construction in progress.




The
capitalized debt discount under construction in progress was $3,843,055 and
$3,117,946 as at June 30, 2009 and March 31, 2009 respectively.


13


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





NOTE
REGARDING FORWARD-LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”, contains
forward-looking statements which involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “will,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “forecast,” “project” or “continue,” the negative of such terms or
other comparable terminology.





You
should not rely on forward-looking statements as predictions of future events or
results. Any or all of our forward-looking statements may turn out to be wrong.
They can be affected by inaccurate assumptions, risks and uncertainties and
other factors which could cause actual events or results to be materially
different from those expressed or implied in the forward-looking statements. In
evaluating these statements, you should consider various factors, including the
risks described in this Form 10-Q under “Risk Factors” and elsewhere. These
factors may cause our actual results to differ materially from any
forward-looking statement. In addition, new factors emerge from time to time and
it is not possible for us to predict all factors that may cause actual results
to differ materially from those contained in any forward-looking statements. We
disclaim any obligation to publicly update any forward-looking statements to
reflect events or circumstances after the date of this report, except as
required by applicable law.





Except as
otherwise indicated by the context, references in this Quarterly Report on Form
10-Q to “we,” “us,” or “our” are to the combined business of China-Biotics, Inc.
(the “Company”) and its wholly-owned direct subsidiaries, Sinosmart Group Inc.
(“SGI”) and Growing State Limited (“GSL”), and SGI’s wholly-owned subsidiary,
Shanghai Shining Biotechnology Co. Ltd. (“Shining”), and GSL’s wholly-owned
subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“GBS”). References to
“China” or to the “PRC” are references to the People’s Republic of China. All
references to “dollars” or “$” refers to United States dollars.





Overview





We
manufacture and sell probiotics products. Probiotics comprise mainly live
bacteria, which we produce using advanced proprietary fermentation technology.
Currently, our products are mainly sold in the Greater Shanghai
region.





The
products are mainly sold to distributors, which then distribute them to various
retail outlets such as drug stores and supermarkets. During the three months
ended June 30, 2009, approximately 82% of our sales revenue comprises
amounts receivable from the distributors for the sale of these products.
Typically, 60 to 90 days’ credits are given to the distributors.





We intend
to expand our sales to other cities in China through a combination of
distributors and our outlets (training and logistics centers). Our management
believes that as China becomes more affluent, its citizens are becoming more
health conscious. This has led to higher demand for health and functional food
such as probiotics and yogurt.





In
addition, probiotics are increasingly used as additives in the production of
infant formula. According to statements made by the Nutrition Development Centre
of National Development and Reform Commission in China, effective April 1,
2007, probiotics will be added to baby milk powders produced in China.
Currently, the probiotics used in China for such purposes are imported. To
capitalize on what we believe is a significant opportunity in this area, we are
constructing a new plant that will enable us to capture the anticipated demand
for food additives.


14


In 2008,
milk samples (including samples of infant formula) from several Chinese dairy
companies, including the three largest producers, were found to have been
tainted with melamine, an industrial chemical. In September 2008, China’s
State Council, officiated by Premier Wen Jiabao, elected to take steps to
conduct comprehensive testing of dairy products and carry out other industry
reforms. Although sales of Chinese dairy products have fallen significantly as a
result of the melamine scandal, there has not been a significant impact on our
business to date as our current sales to the dairy industry are minimal. We
believe that the strengthening of product quality and testing standards in the
dairy industry are a positive development for domestic suppliers that operate to
high international standards. We are engaged in discussion and qualification
processes with several large global suppliers of infant formula and dairy
products to the China market, and believe that we are well-positioned to benefit
as more stringent requirements are implemented in the industry. We are also in
discussions with a number of suppliers of bakery, dairy and pharmaceutical
products in preparation for the opening of our new plant. Therefore, although
the full scope of the melamine problem remains unknown, we do not foresee that
it will have a material negative effect on our business and results of
operations.





The
Company’s construction of its new production facility has been on schedule since
the most recent year-end report. The company continues to plan to commence trial
production in the second quarter of fiscal year 2010. The trial phase should be
completed in approximately three months, before the regular production starts.
The cost of the new plant, which is expected to be approximately $27.5 million
for the first phase, will be funded by cash received from the convertible
promissory notes issued in December 2007 and internal sources of
funds. In this regard, we have leased 36,075 square meters of land in the
Shanghai Qingpu Industrial Park District, on which we are constructing the new
bulk manufacturing facilities. The new plant will have an initial capacity of
150 tons per year with room for expansion to 300 tons per year.





In
preparation for the new plant commencing operations in the second fiscal quarter
of this year, we have been in discussions with a large number of potential
customers for our food additive products. As at June 30, 2009, we have
entered into contracts with 16 customers for this food additives business.
In this regard, we have created a number of formulations for testing by many
potential future customers. We have established an array of business
relationships with commercial customers located in Beijing, Qinghai, Shanghai
cities, Jiangsu, Jiangxi, Shaanxi, Shandong and Zhejiang provinces. These
growing companies are among the leaders in the baked foods, dairy and
pharmaceutical industries. The Company’s existing manufacturing facility, with
current annual manufacturing capacity of 12 metric tons of probiotics for use as
bulk additives and capsules, will supply the initial orders for these customers.
The need to create a large number of new products for potential customers is
pushing the capacity of our current production facility. With the delay in the
commissioning of the new plant from our earlier projections, we have been
carefully managing the use of our production capacity and selectively increasing
the price of our products to make sure that we strike a balance between
achieving current and future sales.





In
connection with the expansion of our retail business, we originally intended to
open 300 outlets by the end of fiscal year 2009. As at June 30, 2009, we
have opened 107 outlets in Shanghai and 12 other cities in China (as of
June 30, 2008, we had 27 retail outlets in Shanghai and Changchun). During
the quarter ended on June 30, 2009, we put emphasis on the development of
our new bulk additives line, in preparation for the commencement of the new
plant. With the limited production capacity that we have in our existing
production facility, management believes that it is prudent to slow the pace of
opening new retail outlets so that we can focus on completing the new plant on
time and signing on customers to take up the capacity of our new plant when it
is up and running.




15


Results
of Operations





Quarter
Ended June 30, 2008 Compared with the Quarter Ended June 30,
2009





Our net
income was $5.77 million in the quarter ended June 30, 2009. This included
$0.51 million surplus arising from the revaluation of the conversion feature
embedded in the convertible notes issued in December 2007 as required by
FAS133. Excluding this revaluation surplus, our net income was $5.26 million,
which was 17.39% higher than our net income of $4.48 million for the quarter
ended June 30, 2008. The increase of net income before the revaluation
surplus, resulted from a combination of volume and price increases. Shining
Essence continued to be our best selling product, accounting for 27.99% of our
sales revenue in the quarter ended June 30, 2009 (40% in the quarter ended
June 30, 2008).





Our
results for the three months ended June 30, 2009 and 2008 are summarized
below:





Three months ended
                                                    June 30,
      2009
                                                  
                                                  
                                                  Three months ended
                                                    June 30,
      2008Amount
                                                  
                                                  
                                                  % of Net sales
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  % of Net salesNet
      sales
                                                  
                                                  $
                                                  15,412,462
                                                  
                                                  
                                                  
                                                  100
                                                  %
                                                  
                                                  $
                                                  11,370,657
                                                  
                                                  
                                                  
                                                  100.00
                                                  %Cost
      of sales
                                                  
                                                  
                                                  (4,498,673
                                                  )
                                                  
                                                  
                                                  (29.19
                                                  )%
                                                  
                                                  
                                                  (3,258,669
                                                  )
                                                  
                                                  
                                                  (28.66
                                                  )%Gross
      profit
                                                  
                                                  $
                                                  10,913,789
                                                  
                                                  
                                                  
                                                  70.81
                                                  %
                                                  
                                                  $
                                                  8,111,988
                                                  
                                                  
                                                  
                                                  71.34
                                                  %Operating
      expenses:Selling
      expenses
                                                  
                                                  $
                                                  (2,347,592)
                                                  
                                                  
                                                  
                                                  (15.23
                                                  )%
                                                  
                                                  $
                                                  (2,369,859
                                                  )
                                                  
                                                  
                                                  (20.84
                                                  )%General
      and administrative expenses
                                                  
                                                  
                                                  (1,734,665)
                                                  
                                                  
                                                  
                                                  (11.25
                                                  )%
                                                  
                                                  
                                                  (1,426,797
                                                  )
                                                  
                                                  
                                                  (12.55
                                                  )%Other
      income
                                                  
                                                  
                                                  36,448
                                                  
                                                  
                                                  
                                                  0.23
                                                  %
                                                  
                                                  
                                                  1,452,503
                                                  
                                                  
                                                  
                                                  12.77
                                                  %Total
      operating expenses
                                                  
                                                  $
                                                  (4,045,809
                                                  )
                                                  
                                                  
                                                  (26.25
                                                  )%
                                                  
                                                  $
                                                  (2,344,153
                                                  )
                                                  
                                                  
                                                  (20.61
                                                  )%Income
      from operations
                                                  
                                                  $
                                                  6,867,980
                                                  
                                                  
                                                  
                                                  44.56
                                                  %
                                                  
                                                  $
                                                  5,767,835
                                                  
                                                  
                                                  
                                                  50.73
                                                  %Other
      income and expenses:Change
      in the fair value of embedded derivatives
                                                  
                                                  $
                                                  514,000
                                                  
                                                  
                                                  
                                                  3.33
                                                  %
                                                  
                                                  $
                                                  (1,239,000
                                                  )
                                                  
                                                  
                                                  (10.90
                                                  )%Interest
      income
                                                  
                                                  
                                                  67,088
                                                  
                                                  
                                                  
                                                  0.43
                                                  %
                                                  
                                                  
                                                  86,386
                                                  
                                                  
                                                  
                                                  0.75
                                                  %Total
      other income (expenses)
                                                  
                                                  $
                                                  581,088
                                                  
                                                  
                                                  
                                                  3.77
                                                  %
                                                  
                                                  $
                                                  (1,152,614
                                                  )
                                                  
                                                  
                                                  (10.6
                                                  )%Income
      before taxes
                                                  
                                                  $
                                                  7,449,068
                                                  
                                                  
                                                  
                                                  48.33
                                                  %
                                                  
                                                  $
                                                  4,615,221
                                                  
                                                  
                                                  
                                                  40.59
                                                  %Provision
      for income taxes
                                                  
                                                  
                                                  (1,681,319
                                                  )
                                                  
                                                  
                                                  (10.91
                                                  )%
                                                  
                                                  
                                                  (1,378,471
                                                  )
                                                  
                                                  
                                                  (12.12
                                                  )%Net
      income
                                                  
                                                  $
                                                  5,767,749
                                                  
                                                  
                                                  
                                                  37.42
                                                  %
                                                  
                                                  $
                                                  3,236,750
                                                  
                                                  
                                                  
                                                  28.47
                                                  %


16


Net
sales





Net sales
in our financial statements are stated at invoiced value less sales discount and
sales tax. Our net sales for the three months ended June 30, 2009 and 2008
comprised the following:





Three months ended June 30,2009
                          
                          
                          2008Invoiced
      value on sales
                          
                          $
                          16,464,125
                          
                          
                          $
                          11,810,902Less:
      sales discount
                          
                          
                          (787,069
                          )
                          
                          
                          (365,489
                          )Less
      : sales tax
                          
                          
                          (264,594
                          )
                          
                          
                          (74,756
                          )$
                          15,412,462
                          
                          
                          $
                          11,370,657





Net sales
of $15,412,462 for the quarter ended June 30, 2009 were 35.55% above the
net sales of $11,370,657 for the quarter ended June 30, 2008. The increase
was mainly because of an increase in overall sales volume arising from new
product sales, particularly, bulk additives, (offsetting decrease in sales
volume of existing products) and increases in the sales price of selected
products.





The
contributions of each product as a percentage of the total value on sales for
the three months ended June 30, 2009 and 2008 are summarized
below:





Three months ended June 30,2009
                                
                                
                                2008Shining
      Essence Capsules
                                
                                
                                27.99
                                %
                                
                                
                                40.45
                                %Shining
      Signal Capsules
                                
                                
                                7.21
                                %
                                
                                
                                10.34
                                %Shining
      Golden Shield Capsules
                                
                                
                                13.01
                                %
                                
                                
                                12.19
                                %Shining
      Energy Capsules
                                
                                
                                8.93
                                %
                                
                                
                                11.56
                                %Shining
      Essence Stomach Protection Capsules
                                
                                
                                5.72
                                %
                                
                                
                                3.82
                                %Shining
      Probiotics Protein Powder
                                
                                
                                7.92
                                %
                                
                                
                                5.86
                                %Other
      products
                                
                                
                                6.06
                                %
                                
                                
                                6.95
                                %76.84
                                %
                                
                                
                                91.17
                                %Bulk
      additives
                                
                                
                                23.16
                                %
                                
                                
                                8.83
                                %100.0
                                %
                                
                                
                                100.0
                                %





Certain
comparative figures have been reclassified to conform to the current year’s
presentation.


17


Unit
volume and unit prices comparatives (on the invoiced value of sales) for the
three months ended June 30, 2009 and 2008 are summarized
below:





Percentage increase (decrease) from the prior yearThree months ended June 30,2009
                                                
                                                
                                                2008Unit
                                                  volume
                                                
                                                
                                                Selling
                                                  prices
                                                
                                                
                                                Overall
                                                  increase /
                                                  (decrease)
                                                
                                                
                                                Unit
                                                  volume
                                                
                                                
                                                Selling
                                                  prices
                                                
                                                
                                                Overall
                                                  increase /
                                                  (decrease)Shining
      Essence Capsules
                                                
                                                
                                                12
                                                %
                                                
                                                
                                                (6
                                                )%
                                                
                                                
                                                (4
                                                )%
                                                
                                                
                                                (22
                                                )%
                                                
                                                
                                                6
                                                %
                                                
                                                
                                                (17
                                                )%Shining
      Signal Capsules
                                                
                                                
                                                (5
                                                )%
                                                
                                                
                                                0
                                                %
                                                
                                                
                                                (3
                                                )%
                                                
                                                
                                                (27
                                                )%
                                                
                                                
                                                9
                                                %
                                                
                                                
                                                (20
                                                )%Shining
      Golden Shield Capsules
                                                
                                                
                                                57
                                                %
                                                
                                                
                                                (7
                                                )%
                                                
                                                
                                                29
                                                %
                                                
                                                
                                                (15
                                                )%
                                                
                                                
                                                18
                                                %
                                                
                                                
                                                0
                                                %Shining
      Energy Capsules
                                                
                                                
                                                83
                                                %
                                                
                                                
                                                (10
                                                )%
                                                
                                                
                                                8
                                                %
                                                
                                                
                                                (13
                                                )%
                                                
                                                
                                                23
                                                %
                                                
                                                
                                                7
                                                %Shining
      Essence Stomach Protection Capsules
                                                
                                                
                                                779
                                                %
                                                
                                                
                                                (11
                                                )%
                                                
                                                
                                                36
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %Shining
      Probiotics Protein Powder
                                                
                                                
                                                331
                                                %
                                                
                                                
                                                (33
                                                )%
                                                
                                                
                                                189
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %Other
      products
                                                
                                                
                                                129
                                                %
                                                
                                                
                                                (25
                                                )%
                                                
                                                
                                                64
                                                %
                                                
                                                
                                                214
                                                %
                                                
                                                
                                                39
                                                %
                                                
                                                
                                                336
                                                %Bulk
      additives
                                                
                                                
                                                482
                                                %
                                                
                                                
                                                76
                                                %
                                                
                                                
                                                266
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                100
                                                %





Cost
of sales





Cost of
sales for the three months ended June 30, 2009 was $4,498,673 compared with
$3,258,669 for the three months ended June 30, 2008. The increase in cost
of sales was primarily because of the overall sales volume increase and
increases in the cost of packaging materials.





Unit
volume and unit costs comparatives for the three months ended June 30, 2009
and 2008 are summarized below:




Percentage increase (decrease) from the prior yearThree months ended June 30,2009
              
              
              2008Unit
                volume
              
              
              Unit
                costs
              
              
              Overall
                increase /
                (decrease)
              
              
              Unit
                volume
              
              
              Unit
                costs
              
              
              Overall
                increase /
                (decrease)Shining
      Essence Capsules
              
              
              12
              %
              
              
              6
              %
              
              
              5
              %
              
              
              (22
              )%
              
              
              16
              %
              
              
              (10
              )%Shining
      Signal Capsules
              
              
              (5
              )%
              
              
              5
              %
              
              
              1
              %
              
              
              (27
              )%
              
              
              5
              %
              
              
              (23
              )%Shining
      Golden Shield Capsules
              
              
              57
              %
              
              
              8
              %
              
              
              22
              %
              
              
              (15
              )%
              
              
              11
              %
              
              
              (6
              )%Shining
      Energy Capsules
              
              
              83
              %
              
              
              2
              %
              
              
              9
              %
              
              
              (13
              )%
              
              
              34
              %
              
              
              16
              %Shining
      Essence Stomach Protection Capsules
              
              
              779
              %
              
              
              (90
              )%
              
              
              24
              %
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %Shining
      Probiotics Protein Powder
              
              
              331
              %
              
              
              0
              %
              
              
              330
              %
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %Other
      products
              
              
              129
              %
              
              
              (10
              )%
              
              
              144
              %
              
              
              214
              %
              
              
              (95
              )%
              
              
              (84
              )%Bulk
      additives
              
              
              482
              %
              
              
              104
              %
              
              
              205
              %
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %


18





Gross
profit





Gross
profit for the three months ended June 30, 2009 was $10,913,789 compared
with $8,111,988 for the three months ended June 30, 2008. The increase in
gross profit was primarily due to an increase in overall sales
volume.





The
average gross profit percentage for all of our products for the three months
ended June 30, 2009 and 2008 are summarized below:





Three months ended June 30,2009
                        
                        
                        2008Average
      for all products
                        
                        
                        70.81
                        %
                        
                        
                        71.34
                        %





Gross
profit margin slightly decreased from 71.34% in the quarter ended June 30,
2008 to 70.81% this quarter as a result of increases in cost of packaging
materials and electricity largely offset by increase in sales prices. The 70.81%
gross profit margin remains solidly above our full year projection of
70%.





Selling
expenses





Selling
expenses were $2,347,592 or 15.23% of net sales for the three months ended
June 30, 2009 compared with $2,369,859 or 20.84% of net sales for the three
months ended June 30, 2008. The operating costs of the retail outlets are
included as selling expenses. With limited new retail outlet roll-out during the
quarter, selling expenses remained steady. As of June 30, 2009, we had a
total of 107 retail outlets in operation compared with 83 outlets as of
June 30, 2008.





General
and administrative expenses





General
and administrative expenses were $1,734,665 or 11.25% of net sales for the three
months ended June 30, 2009 compared with $1,426,797 or 12.55% of net sales
for the three months ended June 30, 2008. The increase of general and
administrative expenses was primarily due to the increase of legal and
professional fees. As of June 30, 2009, we had a total of 379 employees,
compared with 339 as of June 30, 2008.




19





Provision
for income taxes





Provision
for income taxes was $1.68 million and $1.38 million for the quarters ended
June 30, 2009 and 2008, respectively. Excluding the $0.51 million surplus
on revaluation of the convertible note, income before taxes was $6.94 million
for the first quarter of fiscal year 2010 compared with $5.85 million for 2009.
The increase in income tax payable is attributable to an increase in operating
profit.





Segment
reporting





We have
adopted the “products” approach for segment reporting. For the three months
ended June 30, 2009 and 2008, we had only one reporting segment—the
probiotic products as health supplement. We manufactured and sold the probiotic
products solely in China and delivered all shipments to destinations within
China, and all of our long-lived assets were physically located in China. We
made all sales to external customers.





Liquidity
and Capital Resources





We had
cash of $77.41 million and working capital of $59.71 million as of
June 30, 2009. Cash generated from operations was $7.33 million in the
three months ended June 30, 2009 and $8.35 million in the three
months ended June 30, 2008. The cash generated from operations of $7.33
million was higher than the net income of $5.77million due to the non-cash
surplus of revaluation of convertible notes of $0.51 million and lower
working capital needs resulting from better working capital
management.





We had
capital expenditures totaling $0.88 million in the three months ended
June 30, 2009, mainly in connection with the construction of the new plant.
We spent $7.19 million on fixed assets in the three months ended June 30,
2008.





Our
current facility commenced operations in 2000. With the increases in sales
volume in the last couple of years, we are reaching our production capacity. We
are constructing a new plant with an overall project size of $45.5 million.
Phase 1 of the project involves constructing a facility capable of producing 150
tons of probiotics per annum and is estimated to cost $27.50 million, $25
million of which is expected to be paid in the third quarter of calendar year
2009 and the balance by the end of calendar year 2009. Subsequent phases of this
project will only commence when expected demands for probiotics exceed the
production capacity of the Phase 1 facility.





We did
not have any changes related to financing activities for the three months ended
June 30, 2009. On December 11, 2007, we issued a 4% Senior Convertible
Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date
of December 11, 2010. The principal amount of the Note is convertible into
shares of our common stock at an exercise price of $12.00 per share at any time
until the maturity date. If the Note is not converted at maturity, we will
redeem the Note at a price that gives a total yield of 10% per annum inclusive
of the annual interest. The Note also provides for mandatory conversion into
common stock if the Group achieve a net income of $60 million in fiscal
year 2010. Net proceeds of the Note are being used to fund the construction of a
proposed 150-metric-ton-per-year manufacturing facility and for other capital
expenditures.





Taking
into account our current cash position and our anticipated cash flows from
operations, we expect we will be able to meet all our funding needs, including
payments required in the next twelve months to settle our contractual
obligations, for the construction of our new plant and for our opening of new
outlets. No assurance, however, can be given that our business plan will
succeed. Should we need to raise external financing for whatever reason, there
can be no assurance that we will be able to raise needed capital on favorable
terms, if at all. In addition, there is no assurance that our estimate of our
liquidity needs is accurate or that new business development or other unforeseen
events will not occur, resulting in the need to raise additional
funds.


20





Inflation





During
the quarter ended June 30, 2009, there were small increases in pulp and
paper costs. However, overall we believe that inflation did not have a
significant impact on our results of operations for the quarter.





Seasonality





Typically,
60% of our sales take place in the second half of the fiscal year because many
of our customers purchase our products to give as gifts during the Chinese
festivals that occur during this time of the year. While it is still too early
to tell, we expect that our bulk additive sales will not be seasonal
in nature because the bulk products are purchased by food manufacturers
consistently over the year.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Contractual
Obligations





The
following table summarizes our principal contractual obligations and commercial
commitments over various future periods as of June 30, 2009.





Contractual Obligations
                          
                          Total
                          
                          
                          Less than 1 year
                          
                          
                          1-3 years
                          
                          
                          3-5 years
                          
                          
                          More than 5 yearsCapital
      Lease Obligations(1)
                          
                          $
                          4,515,560
                          
                          
                          $
                          4,515,560
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Operating
      Lease Obligations(1)
                          
                          $
                          477,956
                          
                          
                          $
                          477,956
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase
      Obligations(2)
                          
                          $
                          18,529,424
                          
                          
                          $
                          18,529,424
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Long-term
      loan(3)
                          
                          $
                          25,000,000
                          
                          
                          
                          -
                          
                          
                          $
                          25,000,000
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          48,522,940
                          
                          
                          $
                          23,522,940
                          
                          
                          $
                          25,000,000
                          
                          
                          
                          -
                          
                          
                          
                          -














Research
and Development Expenditures





We have a
strong research and development team supported by a technical advisory board of
experts. In addition to having advanced technology in bacteria culturing and
protection, we also conduct research to develop products that address specific
health problems using our core technology and Chinese medicine to create
genetically engineered drugs and drug delivery solutions and expand our product
line. We incurred research and development costs of approximately $674,369 and
$709,919 in the three months ended June 30, 2009 and June 30, 2008,
respectively.





Critical
Accounting Policies





Our
critical accounting policies are described in the Notes to the Financial
Statements included in our Annual Report filed with the SEC on Form 10-K for the
fiscal year ended March 31, 2009, and this Form 10-Q should be read in
conjunction with that Annual Report. This MD&A discusses our consolidated
financial statements for the three months ended June 30, 2009 and 2008.
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States. In preparing these
financial statements, we are required to make estimates and assumptions
affecting the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.


21





We
consider accounting policies related to (a) allowance for doubtful accounts, and
(b) use of estimates as applied to potential penalties for the late payment of
taxes, to be critical accounting policies due to the estimation process involved
in each.





Allowance
for doubtful accounts





We
maintain an allowance for doubtful accounts for estimated losses that may result
from the inability of our customers to make required payments. Such allowances
are based upon several factors including, but not limited to, historical
experience and the current and projected financial condition of specific
customers. Since our inception of business, we have never experienced any
unrecoverable receivables. We have not experienced situations causing us to cast
doubt on the ability of our customers to make required payments. The balance of
our allowance for doubtful account has always been zero. We had trade
receivables totaling $16,011,086 as of June 30, 2009, and a zero balance
for allowance for doubtful accounts. We have considered all relevant factors,
including the financial conditions, affecting the payment abilities of customers
comprising these receivables up to the date of this Form 10-Q and we believe
these customers are able to make required payments. We, however, cannot give
assurance that these factors, including the financial conditions of these
customers, will not change adversely in the future. We will continue to evaluate
the ability of all our customers to make required payments. Were the financial
condition of a customer to deteriorate, resulting in an impairment of its
ability to make payments, allowances may be required.





Use
of estimates as applied to potential penalties for the late payment of
taxes





Our
principal operations are in the PRC. Business enterprises established
in the PRC are subject to income taxes and value added taxes
under PRC tax laws and regulations unless they have exemptions. We have
made tax payments to the PRC tax authorities since 2005. We believe that
our operations in the PRC were exempted from income taxes and value added taxes
for all prior years because we had been recognized by the local government as an
advanced technology enterprise. However, we have never received a written
confirmation from the appropriate tax authorities for the tax exemption status
of our operations in the PRC. As a result, there is no way to ascertain the
position which may be taken by the relevant PRC tax authorities in the
future. Accordingly, our financial statements contain full provisions for all
applicable tax liabilities for all prior calendar years. Such provisions for tax
liabilities will be reversed out of the financial statements at the appropriate
point in the future.





According
to PRC tax regulations, our overdue tax liabilities in the PRC
for the calendar years prior to 2005 may be subject to potential penalties for
the late payment of taxes which is calculated on the basis of 0.5 times to five
times the amount of overdue tax liabilities, which amounts to $4.9 million (if
calculated based on 0.5 times of taxes payable) to $49 million (if calculated
based on five times of the amount of taxes payable) as of June 30,
2008 and 2009. The Group has reserved for the payment of taxes that may be owed
for calendar years prior to 2005 and any associated interest surcharges (which
are calculated at 0.05% per day on the accrued tax liabilities) in its financial
statements until the matter is fully resolved. Following the adoption of FIN48,
the Group has reserved for the surcharges payable for this reporting period. We
consider it is more likely than not that the associated penalty will not need to
be paid.




Embedded
derivatives




On
December 11, 2007, the Company issued a 4% Senior Convertible Promissory Note in
an amount of $25,000,000 (the “Note”) which is due on December 11, 2010.
Pursuant to SFAS No. 133 “Accounting For Derivatives Instruments And Hedging
Activities” and EITF Issue No. 00-19 “Accounting For Derivatives Financial
Instruments Indexed To And Potentially Settled In A Company’s Own Stock”, the
Company bifurcates the conversion options with a mandatory conversion feature
(“embedded derivatives”) from the Note as the embedded derivatives are
determined to be not clearly and closely related to the host contract. The
embedded derivatives are recorded at fair value, mark-to-market at each
reporting period, and are carried on a separate line in the balance
sheet.




Recent
Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 168”). SFAS 168 establishes the “FASB Accounting Standards Codification”
(“Codification”), which officially launched July 1, 2009, to become the source
of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The subsequent issuances of new standards will be in the
form of Accounting Standards Updates that will be included in the Codification.
Generally, the Codification is not expected to change U.S. GAAP. All other
accounting literature excluded from the Codification will be considered
nonauthoritative. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. We will adopt SFAS
168 for our quarter ending September 30, 2009. We are currently evaluating the
effect on our financial statement disclosures as all future references to
authoritative accounting literature will be references in accordance with the
Codification.


22





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)(“SFAS No. 167”). SFAS No. 167 seeks to improve financial
reporting by enterprises involved with variable interest entities. SFAS No. 167
is applicable for annual periods after November 15, 2009 and interim periods
therein and thereafter. Management does not anticipate that the provisions of
SFAS No. 167 will have an impact on the Company’s consolidated results of
operations or consolidated financial position.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140(SFAS No. 166”).
SFAS No. 166 seeks to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
SFAS No. 166 is applicable for annual periods after November 15, 2009 and
interim periods therein and thereafter. The Company is currently evaluating the
effect, if any, the adoption of SFAS No. 166 will have on its results of
operations, financial position or cash flows.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events(“SFAS No.
165”). SFAS No. 165 provides general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. SFAS No. 165 is applicable
for interim or annual periods after June 15, 2009.








In April
2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” FSP SFAS No. 157-4
provides factors to determine whether there has been a significant decrease in
the volume and level of activity for the asset or liability and circumstances
that may indicate that a transaction is not orderly. In those instances,
adjustments to the transactions or quoted prices may be necessary to estimate
fair value with SFAS No. 157. This FSP does not apply to Level 1 inputs. FSP
SFAS No. 157 also requires additional disclosures, including inputs and
valuation techniques used, and changes thereof, to measure the fair value. FSP
SFAS No. 157-4 is effective for interim and annual reporting periods ending
after June 15, 2009. Early adoption is permitted for periods ending after March
15, 2009.








ITEM 3.   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





We are
exposed to various market risks, including changes in foreign currency exchange
rates and fair value. We do not enter into derivatives or other financial
instruments for trading or speculative purposes in the normal course of
business.





Foreign
Currency Exchange Rate Risk





Our
operations are conducted mainly in the PRC. As such, our earnings are subject to
movements in foreign currency exchange rates when transactions are denominated
in RMB, which is our functional currency.





Therefore,
changes in the rate of exchange between the U.S. dollar and the RMB, in which
the financial statements of our operations are maintained, affect our results of
operations and financial position as reported in our consolidated financial
statements. We have consolidated the balance sheets of our RMB-denominated
operations into U.S. dollars at the exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at the average exchange rates
for the period.


23





These
changes result in cumulative translation adjustments, which are included in
“Accumulated other comprehensive income”, and potentially result in transaction
gains or losses, which are included in our earnings.





Fair
Value Risk





We record
an adjustment on our convertible notes adjusting the fair value of the embedded
conversion options. The change in the value of these instruments is primarily
impacted by the price of our stock at the end of each reporting period. This
adjustment creates a non-cash effect on our statement of operations which may
have a significant impact.





ITEM 4.   CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The
Company maintains a system of disclosure controls and procedures that are
designed to provide reasonable assurance that information that is required to be
timely disclosed is accumulated and communicated to management in a timely
fashion. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control systems are met. An evaluation was performed under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our management,
including our principal executive officer and principal financial officer,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms and such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.





Changes
in Internal Controls over Financial Reporting





The
Company’s internal control over financial reporting is designed to provide
reasonable assurances regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. There have been no changes in the
Company’s internal control over financial reporting identified in
connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under
the Securities Exchange Act of 1934 that occurred during the Company’s most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.  However, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues within the Company have been detected.


24


PART
II - OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





None.





ITEM 1A.   RISK FACTORS





The
information set forth in this report should be read in conjunction with the risk
factors discussed in Item 1 of our Annual Report on Form 10-K for the year ended
March 31, 2009, which could materially impact our business, financial
condition or future results. The risks described in the Annual Report on Form
10-K are not the only risks facing the company. Additional risks and
uncertainties not currently known by the company or that are currently deemed to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.





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





Please
refer to the Current Report on Form 8-K filed on December 12,
2007.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





None.





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





None.





ITEM 5.   OTHER INFORMATION





None.





ITEM 6.   EXHIBITS




Number
                  
                  Exhibit3.1
                  
                  Amended
      and Restated Certificate of Incorporation (incorporated by reference to
      Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).3.2
                  
                  Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
      China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the
      Amendment to the Amended and Restated Bylaws (incorporated by reference to
      Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10,
      2008).10.1
                  
                  Securities
      Exchange Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.2
                  
                  Form
      of Lockup Agreement dated March 22, 2006 (incorporated by reference
      to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.3
                  
                  Put
      Agreement dated March 22, 2006 (incorporated by reference to Exhibit
      10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.4
                  
                  Registration
      Rights Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).


25


Number
            
            Exhibit


10.5
              
              Investors’
      Rights Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.6
              
              Stan
      Ford Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.6 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.7
              
              Summary
      of English translation of Investment Agreement for lease of land dated
      March 21, 2006 (incorporated by reference to Exhibit 10.7 to
      China-Biotics, Inc.’s Form 8-K filed on March 23,
    2006).10.8
              
              Escrow
      Agreement dated March 22, 2006 (incorporated by reference to Exhibit
      10.8 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
      2006).10.9
              
              Stock
      Purchase Agreement with Fred Cooper dated February 6, 2006
      (incorporated by reference to Exhibit 10.9 to China-Biotics, Inc.’s Form
      10-KSB filed on June 30, 2006).10.10
              
              Loan
      agreement dated as of September 22, 2005 (incorporated by reference
      to Exhibit 10.10 to China-Biotics, Inc.’s Form 10-KSB filed on
      June 30, 2006).10.11
              
              Convertible
      Bond dated as of September 22, 2005 (incorporated by reference to
      Exhibit 10.11 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
      2006).10.12
              
              Subscription
      Agreement dated as of September 22, 2005 (incorporated by reference
      to Exhibit 10.12 to China-Biotics, Inc.’s Form 10-KSB filed on
      June 30, 2006).10.13
              
              English
      Translation of Equity Transfer Agreement dated August 11, 2005
      (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s
      Amendment No. 2 to Form SB-2 filed on November 13,
      2006).10.14
              
              English
      Translation of Subscription Agreement dated August 11, 2005
      (incorporated by reference to Exhibit 10.14 to China-Biotics, Inc.’s
      Amendment No. 2 to Form SB-2 filed on November 13,
      2006).10.15
              
              Investment
      Agreement dated December 11, 2007 (incorporated by reference to
      Exhibit 10.1 to China-Biotics, Inc’s Form 8-K filed on December 12,
      2007).10.16
              
              Registration
      Rights Agreement dated December 11, 2007 (incorporation by reference
      to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K on December 12,
      2007).10.17
              
              4%
      Senior Convertible Promissory Note dated December 11, 2007
      (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form
      8-K filed on December 12, 2007).10.18
              
              Guaranty
      by Song Jinan in favor of Pope Investments II LLC dated December 11,
      2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s
      Form 8-K filed on December 12, 2007).10.19
              
              Pledge
      Agreement between Song Jinan and Pope Investments II LLC dated
      December 11, 2007 (incorporated by reference to Exhibit 10.5 to
      China-Biotics, Inc.’s Form 8-K filed on December 12,
      2007).10.20
              
              Form
      of Purchase Agreement dated January 21, 2009 (incorporated by
      reference to Exhibit 10.15 to China-Biotics, Inc.’s Form 10-Q filed on
      February 13, 2009).10.21
              
              Form
      of Purchase Agreement dated May 19, 2009 (incorporated by reference
      to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on May 20,
      2009).


26


Number
            
            Exhibit


14.1
                
                Code
      of Ethics (incorporated by reference to Exhibit 14.1 to China-Biotics,
      Inc.’s Form 10-KSB for the year ended March 31,
  2006).21.1
                
                List
      of subsidiaries (incorporated by reference to Exhibit 21.1 to
      China-Biotics, Inc.’s Form SB-2 filed on March 24,
    2006).31.1
                
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*31.2
                
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*32.1
                
                Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002**32.2
                
                Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002**





* Filed
herewith


**
Furnished herewith





* * * *
*


27


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.





CHINA-BIOTICS,
      INC.(Registrant)/s/
      Song JinanDate: August 14,
      2009
                Song
      JinanChief Executive
      Officer




28