UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549




FORM 10-Q/A


AMENDMENT
NO. 1




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


SECURITIES EXCHANGE ACT OF
1934




For the quarterly period ended
September 30, 2008




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  x No  ̈




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 ̈
            Accelerated
      filer ̈Non-accelerated
      filerx(Do not check if a smaller reporting company)
            Smaller
      reporting company ̈


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


Yes  ̈ No x





As of March 20, 2009, 17,080,000
shares of the Issuer's common stock were outstanding.




Explanatory
Note:


China-Biotics,
Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2008 on November 10, 2008.







TABLE OF CONTENTS





PagePart I - Financial
      InformationITEM
      1.
                  
                  FINANCIAL
      STATEMENTS
                  
                  3ITEM
      2.
                  
                  MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                  
                  17ITEM
      3.
                  
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  
                  26ITEM
      4T.
                  
                  CONTROLS
      AND PROCEDURES
                  
                  26Part II - Other
      InformationITEM
      1.
                  
                  LEGAL
      PROCEEDINGS
                  
                  26ITEM
      1A.
                  
                  RISK
      FACTORS
                  
                  26ITEM
      2.
                  
                  UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                  
                  26ITEM
      3.
                  
                  DEFAULTS
      UPON SENIOR SECURITIES
                  
                  26ITEM
      4.
                  
                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
                  26ITEM
      5.
                  
                  OTHER
      INFORMATION
                  
                  27ITEM
      6.
                  
                  EXHIBITS
                  
                  28SIGNATURES
                  
                  30





2





PART I - FINANCIAL
INFORMATION





ITEM 1. FINANCIAL
STATEMENTS





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
expressed in US Dollars)




September 30,
              2008
            
            March 31,
              2008ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            65,633,495
            
            $
            64,310,448Accounts
      receivable
            
            
            10,447,251
            
            
            13,214,531Other
      receivables
            
            
            243,497
            
            
            238,835Inventories
            
            
            765,640
            
            
            408,358Prepayment
            
            
            1,828,612
            
            
            1,806,605Total current
      assets
            
            $
            78,918,495
            
            $
            79,978,777Property, plant and equipment
      and land use right
            
            
            27,309,641
            
            
            13,812,749Total
    assets
            
            $
            106,228,136
            
            $
            93,791,526LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            3,448,485
            
            $
            2,786,180Tax
      payables
            
            
            24,094,685
            
            
            22,317,982Other
      payables and accruals
            
            
            2,127,050
            
            
            1,792,156Total current
      liabilities
            
            $
            29,670,220
            
            $
            26,896,318Non-current
      liabilitiesConvertible
      note, with embedded derivatives of $5,087,000, net of discount of
      $7,341,762 as of September 30, 2008
            
            $
            22,745,238
            
            $
            22,197,635Interest
      payable
            
            
            740,628
            
            
            302,306Total non-current
      liabilities
            
            $
            23,485,866
            
            $
            22,499,941Commitments and
      contingenciesStockholders'
      equity:Common
      stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004
      shares issued and outstanding as of September 30, 2008)
            
            $
            4,146
            
            $
            4,146Additional
      paid-in capital
            
            
            7,863,031
            
            
            7,863,031Retained
      earnings
            
            
            37,536,014
            
            
            29,827,144Treasury
      stock at cost (24,381,004 shares)
            
            
            (2,438
            )
            
            (2,438
            )Accumulated
      other comprehensive income
            
            
            4,645,503
            
            
            3,677,590Capital
      and statutory reserves
            
            
            3,025,794
            
            
            3,025,794Total stockholders'
      equity
            
            $
            53,072,050
            
            $
            44,395,267Total liabilities and
      stockholders' equity
            
            $
            106,228,136
            
            $
            93,791,526




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





3





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
expressed in US Dollars)





Three months ended
              September 30,
            
            Six months ended
              September 30,2008
            
            2007
            
            2008
            
            2007Net
sales
            
            $
            11,495,249
            
            $
            7,820,163
            
            $
            22,865,906
            
            $
            17,335,496Cost
      of sales
            
            
            (3,462,853
            )
            
            (2,205,623
            )
            
            (6,721,522
            )
            
            (4,856,595
            )Gross
    profit
            
            $
            8,032,396
            
            $
            5,614,540
            
            $
            16,144,384
            
            $
            12,478,901Operating
      expenses:Selling
      expenses
            
            $
            (2,813,563
            )
            $
            (1,561,936
            )
            $
            (5,183,422
            )
            $
            (2,878,280
            )General
      and administrative expenses
            
            
            (1,438,137
            )
            
            (1,087,053
            )
            
            (2,864,933
            )
            
            (1,896,617
            )Total
      operating expenses
            
            $
            (4,251,700
            )
            $
            (2,648,989
            )
            $
            (8,048,355
            )
            $
            (4,774,897
            )Income from
      operations
            
            $
            3,780,696
            
            $
            2,965,551
            
            $
            8,096,029
            
            $
            7,704,004Other
      income and expenses:Changes
      in the fair value of embedded derivatives
            
            $
            1,904,000
            
            $
            -
            
            $
            665,000
            
            $
            -Other
      income
            
            
            157,468
            
            
            282
            
            
            1,862,988
            
            
            71,942Other
      expenses
            
            
            (50,947
            )
            
            (13,011
            )
            
            (217,579
            )
            
            (19,935
            )Total
      other income (expenses)
            
            $
            2,010,521
            
            $
            (12,729
            )
            $
            2,310,409
            
            $
            52,007Income before
      taxes
            
            $
            5,791,217
            
            $
            2,952,822
            
            $
            10,406,438
            
            $
            7,756,011Provision
      for income taxes
            
            
            (1,319,097
            )
            
            (982,689
            )
            
            (2,697,568
            )
            
            (2,245,645
            )Net
    income
            
            $
            4,472,120
            
            $
            1,970,133
            
            $
            7,708,870
            
            $
            5,510,366Earnings per
      share:Basic
            
            $
            0.26
            
            $
            0.11
            
            $
            0.45
            
            $
            0.32Diluted
            
            $
            0.13
            
            $
            0.11
            
            $
            0.37
            
            $
            0.32Weighted average shares
      outstandingBasic
            
            
            17,080,000
            
            
            17,080,000
            
            
            17,080,000
            
            
            17,080,000Diluted
            
            
            19,163,333
            
            
            17,080,000
            
            
            19,163,333
            
            
            17,080,000




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





4





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, 2008
              
              
              41,461,004
              
              $
              4,146
              
              $
              7,863,031
              
              $
              29,827,144
              
              $
              (2,438
              )
              $
              3,677,590
              
              $
              3,025,794
              
              $
              44,395,267Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              7,708,870
              
              
              
              
              
              
              
              
              
              
              
              7,708,870Other
      comprehensive income:Foreign
      currency translation adjustments, net of taxes of $0
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              967,913
              
              
              
              
              
              967,913Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,676,783Balance-
      September 30, 2008
              
              
              41,461,004
              
              $
              4,146
              
              $
              7,863,031
              
              $
              37,536,014
              
              $
              (2,438
              )
              $
              4,645,503
              
              $
              3,025,794
              
              $
              53,072,050




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





5




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
expressed in US Dollars)




Six months ended
                        September 30,2008
                      
                      2007CASH FLOW FROM OPERATING
      ACTIVITIESNet
      income
                      
                      $
                      7,708,870
                      
                      $
                      5,510,366Adjustment
      for:Changes
      in the fair value of embedded derivatives
                      
                      
                      (665,000
                      )
                      
                      -Depreciation
                      
                      
                      863,740
                      
                      
                      349,111(Increase)/Decrease
      in accounts receivable
                      
                      
                      3,044,946
                      
                      
                      5,992,036(Increase)/Decrease
      in inventories
                      
                      
                      (344,093
                      )
                      
                      (383,380
                      )(Increase)/Decrease
      in prepayments
                      
                      
                      19,822
                      
                      
                      (1,693,248
                      )Increase/(Decrease)
      in accounts payable
                      
                      
                      586,894
                      
                      
                      239,274Increase/(Decrease)
      in income tax, surcharge and dividends withholding tax
                      
                      
                      1,249,548
                      
                      
                      828,172Increase/(Decrease)
      in other payables and accruals, and value added tax
payable
                      
                      
                      205,230
                      
                      
                      348,841NET CASH PROVIDED BY OPERATING
      ACTIVITIES
                      
                      $
                      12,669,957
                      
                      $
                      11,191,172CASH FLOWS USED IN INVESTING
      ACTIVITIESPurchases
      of fixed assets
                      
                      $
                      (11,662,222
                      )
                      $
                      (4,027,160
                      )Capital
      expenditure
                      
                      $
                      (556,164
                      )
                      $
                      -NET
      CASH USED IN INVESTING ACTIVITIES
                      
                      
                      (12,218,386
                      )
                      
                      (4,027,160
                      )CASH FLOWS USED IN FINANCING
      ACTIVITIESEffect
      of exchange rate changes on cash
                      
                      $
                      871,476
                      
                      $
                      1,065,937NET INCREASE IN CASH AND CASH
      EQUIVALENTS BALANCES
                      
                      $
                      1,323,047
                      
                      $
                      8,229,949CASH AND CASH EQUIVALENTS
      BALANCES AT BEGINNING OF PERIOD
                      
                      
                      64,310,448
                      
                      
                      26,992,025CASH AND CASH EQUIVALENTS
      BALANCES AT END OF PERIOD
                      
                      $
                      65,633,495
                      
                      $
                      35,221,974




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





6




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





1.
            BASIS
      OF PRESENTATION AND PRINCIPLES 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 he the interim periods reported. Such adjustments are of a
normal, recurring nature. Our operating results for the three and six month
periods ended September 30, 2008 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2009.
  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-KSB for the year
ended March 31, 2008. There have been no material changes in the significant
accounting policies followed by us during the three and six month periods ended
September 30, 2008.





7





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




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.




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


Three months ended
                September 30,
              
              Six months ended
                September 30,2008
              
              2007
              
              2008
              
              2007Earnings per share -
      BasicIncome
      for the period
              
              $
              4,472,120
              
              $
              1,970,133
              
              $
              7,708,870
              
              $
              5,510,366Basic
      average common stock outstanding
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000Net
      earnings per share
              
              $
              0.26
              
              $
              0.11
              
              $
              0.45
              
              $
              0.32Earnings per share -
      DilutedIncome
      for the period
              
              $
              4,472,120
              
              $
              1,970,133
              
              $
              7,708,870
              
              $
              5,510,366Change
      in fair value of embedded derivatives
              
              
              (1,904,000
              )
              
              -
              
              
              (665,000
              )
              
              -$
              2,568,120
              
              $
              1,970,133
              
              $
              7,043,870
              
              $
              5,510,366Basic
      average common stock outstanding
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000Diluted
      effect from embedded derivatives
              
              
              2,083,333
              
              
              -
              
              
              2,083,333
              
              
              -Diluted
      average common stock
              
              
              19,163,333
              
              
              17,080,000
              
              
              19,163,333
              
              
              17,080,000Net
      earnings per share
              
              $
              0.13
              
              $
              0.11
              
              $
              0.37
              
              $
              0.32




8




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




3.
            RISKS,
      UNCERTAINTIES, AND CONCENTRATIONS





(a)  
Nature of Operations





Substantially
all of the Group's operations are conducted in the 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
September 30, 2008 the Group had cash deposits of $65.6 million placed with
several banks in the People's Republic of China (“PRC”), which includes the
Special Administrative Region of Hong Kong, where there is currently no rules or
regulations in place for obligatory insurance of bank accounts.





For the
three months and six months ended September 30, 2007 and 2008, all of the
Group's sales arose in the PRC. In addition, all accounts receivable as at
September 30, 2008 also arose in the PRC.




(c)  
Concentration of Customers





For the
period ended September 30, 2008, there is a customer that accounted for 12% of
our sales revenue. For the period ended September 30, 2007, there is a customer
accounted for 17% of our total sales.





9




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




4.
            ACCOUNTS
      RECEIVABLE




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




September 30,
              2008
            
            March 31,
              2008Trade
      receivables
            
            $
            10,447,251
            
            $
            13,214,531Less
      : Allowances for doubtful debt
            
            
            -
            
            
            -$
            10,447,251
            
            $
            13,214,531




5.
            INVENTORIES




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




September 30,
              2008
            
            March 31,
              2008Raw
      materials
            
            $
            264,554
            
            $
            254,648Work-in-progress
            
            
            169,827
            
            
            9,943Finished
      goods
            
            
            331,259
            
            
            143,767$
            765,640
            
            $
            408,358





10




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:




September 30,
              2008
            
            March 31,
              2008Land
      use right
            
            $
            1,876,078
            
            $
            1,777,860Plant
      and machinery
            
            
            7,383,837
            
            
            6,493,190Office
      equipment
            
            
            3,374,323
            
            
            3,293,598Motor
      vehicles
            
            
            245,653
            
            
            109,186Leasehold
      improvements
            
            
            2,394,485
            
            
            1,817,62315,274,376
            
            
            13,491,457Less:
      Accumulated depreciation
            
            $
            (5,566,705
            )
            
            (4,585,976
            )9,707,671
            
            
            8,905,481Construction
      in progress
            
            $
            17,601,970
            
            $
            4,907,268$
            27,309,641
            
            $
            13,812,749




7.
            TAX
      PAYABLES




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




September 30,
              2008
            
            March 31,
              2008Value
      added tax and other taxes
            
            $
            5,540,379
            
            $
            5,436,331Income
      tax
            
            
            4,181,744
            
            
            3,714,102Surcharge
            
            
            10,434,063
            
            
            9,323,273Dividends
      withholding tax
            
            
            3,938,499
            
            
            3,844,27624,094,685
            
            $
            22,317,982




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 People's Republic of China ("PRC"). Business
enterprises are subject to income taxes and value added taxes under PRC tax laws
and regulations unless they have exemptions. It has been the belief of the
Group's management that its PRC operations were exempted from 1999 to 2004 from
income taxes and value added taxes as these operations were considered by
the local government as an advanced technology. The Group, however, has never
received a written confirmation from the appropriate tax authorities for the tax
exemption status of its PRC operations. In January 2006, management of the Group
took the initiative to make tax payments to the PRC tax authorities for the
calendar year 2005 and subsequent years and accrued for all applicable
tax liabilities, plus surcharge, which is calculated as 0.05% per day on the
overdue tax liabilities in accordance with PRC tax laws and regulations, for all
prior fiscal years were reflected in the Group's financial
statements.
  Provision
for the PRC enterprise income tax is calculated at the prevailing rate based on
the estimated assessable profits. On March
1, 2007, the Fifth Plenary Session of the Tenth National People's Congress
passed the Corporate Income Tax Law of the PRC ("new tax law") which will take
effect on January 1, 2008.  As a result of the new tax law, the
statutory income tax rate will change from 33% to 25% with effect from January
1, 2008.  The preferential tax rate currently enjoyed by the Company
will be gradually transitioned to the new standard rate of 25% over a five-year
transitional period.  In addition, article 28 of the new tax law
stated that the income tax rate of a "high technology" company will remain at
15%, and such "high technology" company could still enjoy the existing tax
holiday.  As most of the subsidiaries operating in the PRC are
currently recognized as "high technology" companies under the existing Income
Tax Law of the PRC, the management reasonably believed that these subsidiaries
can transit this status under the new tax law.




Dividends
withholding tax in the PRC is charged at a rate of 20% on the dividend payable
to the shareholders.




11





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




8.
            TREASURY
      STOCK




The Group
treated common stock repurchased but not yet canceled as treasury stock.
Treasury stock is reported in the balance sheets and statements of changes in
stockholders’ equity with its par value charged to common stock, and with the
excess of the purchase price over par, if any, first charged against any
available additional paid-in capital and the balance charged to retained
earnings.




9.
            INCOME
      TAXES




The
income (loss) generated in the United States, the British Virgin Islands and the
People's Republic of China (“PRC”) before income taxes during the periods as
presented in these financial statements is summarized as follows:




Three months ended September
      30,
            
            Six months ended September 30,2008
            
            2007
            
            2008
            
            2007Income
      in the United States before income taxes
            
            $
            1,760,181
            
            $
            -
            
            $
            488,302
            
            $
            -(Loss)/
      Income in the British Virgin Islands before income taxes
            
            
            55,987
            
            
            (271,765
            )
            
            467,918
            
            
            (501,959
            )Income
      in the PRC before income taxes
            
            
            3,975,049
            
            
            3,224,587
            
            
            9,450,218
            
            
            8,257,970$
            5,791,217
            
            $
            2,952,822
            
            $
            10,406,438
            
            $
            7,756,011




Our
principal operations are carried out in the PRC.  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 (loss)/income 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.





Effective
April 1, 2007, the Group adopted the Financial Accounting Standards Board
(“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109”, (“FIN48”) which clarifies the
accounting for uncertainty income taxes recognized in an enterprise’s financial
statements. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides accounting guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Group
classifies interest and/or penalties related to unrecognized tax benefits as a
component of income tax provisions. There is no material impact of FIN 48 on the
Group’s consolidated financial statements.





12





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




9.
            INCOME
      TAXES (continued)




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 September 30,
              
              Six months ended September 30,2008
              
              2007
              
              2008
              
              2007Current
              
              $
              1,319,097
              
              $
              982,689
              
              $
              2,697,568
              
              $
              2,245,645Deferred
              
              
              -
              
              
              -
              
              
              -
              
              
              -$
              1,319,097
              
              $
              982,689
              
              $
              2,697,568
              
              $
              2,245,645





The Group
has its principal operations in the People’s Republic of China (“PRC”) and is
subject to a PRC Enterprise Income Tax rate of 33% in 2007 and 25% in
2008.




However,
one of the PRC subsidiaries of the Group located in the Shanghai Jinqiao special
economic zone (“Jinqiao subsidiary”) is awarded the status of “high technology”
enterprise for the year 2007 till 2010.  Hence the Jinqiao subsidiary
enjoys a preferential income tax of 15%, which represents a tax concession of
18% and 10% in the year 2007 and 2008.  The benefit of the tax
concession on net income per share (diluted) was approximately $0.086 and $0.033
for the six months ended September 30, 2007 and 2008.




Another
newly set up subsidiary of the Group, which is located in Qingpu (“Qingpu
subsidiary”), will have the same business and operation as the Jinqiao
subsidiary 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, the Qingpu subsidiary would then be fully exempted from PRC
Enterprise Income Tax for two years starting from 2008, followed by 50% tax
exemption for the next three years, period from 2010 to 2012. There is no
financial effect from the tax holiday as the Qingpu subsidiary did not generate
any assessable profit in 2007 and 2008.




On March
1, 2007, the Fifth Plenary Session of the Tenth National People's Congress
passed a new tax law which took effect on January 1, 2008. As a result of the
new tax law, the statutory income tax rate changed from 33% to 25%, effective
January 1, 2008. The preferential tax rate currently enjoyed by the Company will
gradually transition to the new standard rate of 25% over a five-year
transitional period. In addition, article 28 of the new tax law states that the
income tax rate of a "high technology" company will remain at 15%, and such
"high technology" company may continue to use any existing tax holiday. As the
subsidiaries operating in the PRC are currently recognized as "high technology"
companies under the existing Income Tax Law of the PRC, the management
reasonably believes that these subsidiaries may use this status under the new
tax law.




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 September 30,
                
                Six months ended September 30,2008
                
                2007
                
                2008
                
                2007Computed
      tax at the local PRC statutory rate (2007:33%, 2008:25%)
                
                $
                1,901,846
                
                $
                974,432
                
                $
                2,601,609
                
                $
                2,559,484Non-deductible
      items
                
                
                24,456
                
                
                89,682
                
                
                444,667
                
                
                165,646Non-taxable
      items
                
                
                1,249,372
                
                
                (61,221
                )
                
                (928,620
                )
                
                (61,227
                )Effect
      of different tax rate in other jurisdiction
                
                
                316,832
                
                
                -
                
                
                43,947
                
                
                -Valuation
      allowance
                
                
                74,575
                
                
                17,704
                
                
                74,575
                
                
                26,718Tax
      concession
                
                
                (299,134
                )
                
                (556,686
                )
                
                (626,129
                )
                
                (1,467,612
                )Surcharge
      at 0.05% per day on accrued taxes
                
                
                549,894
                
                
                518,785
                
                
                1,087,519
                
                
                1,022,636Total
      provision for income at effective rate
                
                $
                1,319,097
                
                $
                982,689
                
                $
                2,697,568
                
                $
                2,245,645




As at
September 30, 2008, one of the Company’s PRC subsidiaries has incurred tax
losses which can be carried forward to a maximum of 5 years of approximately
US$697,142 (2007: US$215,814).


Three
      months ended Sep 30,
                                                                                              
                                                                                              Six
      months ended Sep 30,2008
                                                                                              
                                                                                              2007
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              2007Deferred
      tax assets:Net
      operating loss carryforward
                                                                                              
                                                                                              $
                                                                                              74,575
                                                                                              
                                                                                              $
                                                                                              17,704
                                                                                              
                                                                                              $
                                                                                              74,575
                                                                                              
                                                                                              $
                                                                                              26,718Less:
      Valuation allowance
                                                                                              
                                                                                              
                                                                                              (74,575
                                                                                              )
                                                                                              
                                                                                              (17,704
                                                                                              )
                                                                                              
                                                                                              (74,575
                                                                                              )
                                                                                              
                                                                                              (26,718
                                                                                              )Net
      deferred tax assets
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              -
  Deferred
tax assets were primarily raised from the tax losses carry forwards, and a
valuation allowance has been established for the entire deferred tax assets, as
the management believes that the PRC subsidiary may not be fully utilized the
deferred tax assets because of the uncertainly regarding the tax deductibility
of expenses incurred.




The Group
has its principal operations in the People's Republic of China (“PRC”). Business
enterprises are subject to income taxes and value added taxes under PRC tax laws
and regulations unless they have exemptions. It had been the belief of the
Group's management that its PRC operations were exempt from income taxes and
value added taxes as these operations were recognized by the local government as
an advanced technology enterprise. The Group, however, has never received a
written confirmation from the appropriate tax authorities regarding the tax
exempt status of its PRC operations. In January 2006, management of the Group's
PRC operations took initiative to make tax payments to the PRC tax authorities
for the Calendar year 2005, and has made accrual for all applicable tax
liabilities, plus surcharge, for all prior Calendar years were reflected in the
Group's financial statements.




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 September 30,
2007 and 2008. 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.





13




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




10.
            COMMITMENTS




(a)  
Operating Leases




The Group
leases office space, warehouse facilities and retail shops under non-cancelable
operating agreements that expire at various dates from 2008 to 2010.
As of the balance sheet dates as presented in these financial statements, the
amount of future minimum lease payment under the above-mentioned operating
leases were as follows:




September 30,
            
            March 31,2008
            
            2008Payable
      withinthe
      next twelve months
            
            $
            540,118
            
            $
            556,907the
      next 13th to 24th months
            
            
            24,132
            
            
            111,670the
      next 25th to 36th months
            
            
            -
            
            
            -the
      next 37th to 48th months
            
            
            -
            
            
            -the
      next 49th to 60th months
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -$
            564,250
            
            $
            668,577




(b)
  Land lease





On March
21, 2006, the Company's wholly-owned subsidiary, GSL, entered into an agreement
with Shanghai Qingpu Industrial Park District Development (Group) Company
Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu
Industrial Park District on which the Company will construct a plant consisting
bulk manufacturing facilities that will have an initial capacity of 150 tons per
year of bulk product with room for expansion to 300 tons per
year.  This agreement contemplates a one-time leasing fee of
$2,100,828.  The leasing fee was later reduced to $1,777,860 because
the size of the leased land was reduced to 36,075 square meters.  10%
of the leasing fee was due and paid on April 5, 2006 as a
deposit.  This deposit is to be refunded upon payment in full of the
aggregate lease amount, which is due and payable immediately before the issue of
the approval documents for the land lease by the Shanghai Qingpu local
government authorities.  There are no future lease payments under the
land lease.





(c)  
Capital commitments





During
the period ended of September 30, 2008, 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
$7,928,369 which was contracted, but not provided for as of September 30,
2008.





14




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




11.
            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.




Net
proceeds of the Note are expected to be 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
January 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 orindirectly, 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 andthat 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, 2008, 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
these assets and liabilities was determined using the following inputs in
accordance with SFAS 157 atSeptember30, 2008:
  Fair
      Value Measurements as at September 30, 2008Balance
      at
                                September
      30, 2008
                              
                              Quoted
      Prices in Active Markets
                                (Level
      1)
                              
                              Significant
      Other Observable Inputs (Level 2)
                              
                              Significant
      Unobservable Inputs (Level 3)Derivative
      liability - conversion rights (1)
                              
                              $
                              5,087,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              5,087,000
 (1)
              Represents the conversion rights
      included in the Company’s 2007 Notes. Included in
      non-current liabilities on the accompanying condensed consolidated balance
      sheet.
 
 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 January 1, 2008 to
September 30, 2008:
 
 Derivative
      Liability - Conversion RightsBalance
      at January 1, 2008
                            
                            $
                            9,118,000Adjustment
      to fair value included in earnings (1)
                            
                            
                            (4,031,000
                            )Balance
      at September 30, 2008
                            
                            $
                            5,087,000
 
 (1)
              The derivative conversion option
      is revalued at the end of each reporting period and the resulting
      difference is included in the results of operations. For the period
      ended September 30, 2008, the net adjustment to fair value resulted in a
      gain of $4.03million and is included in
      “Changes in the fair
      value of embedded derivatives”on the accompanying
      condensed
      consolidated statement of
operations.




15




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




The
estimated fair value of the embedded derivatives as of March 31, 2008 and
September 30, 2008 was $5,752,000 and $5,087,000 respectively. The change in the
fair value of the embedded derivatives amounted to $665,000 was charged to the
consolidated statement of operations.





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


March 31,
      2008
              
              September 30,
      2008Risk-free
      rate of return
              
              
              1.70
              %
              
              2.29
              %Time
      to expiration
              
              
              2.66
              years
              
              2.17
              yearsVolatility
      rate
              
              
              65
              %
              
              53
              %Dividend
      yield
              
              
              -
              
              
              -





At as
September 30, 2008, the Note interest amounted to $3,325,085 was capitalized
under construction in progress.





16





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 and
six months ended September 30, 2008, approximately 80% 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.




In recent
months, 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.





We expect
our new plant will commence production in the fourth quarter of calendar year
2008 and start to make contribution to our earnings in fiscal year 2009. 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 will construct 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.




17




In
preparation for the new plant commencing operations later this year, we have
been in discussions with a large number of potential customers for our food
additive products. As at September 30, 2008, we have already signed up 5
customers for this business. During the last quarter, we have accelerated the
pace of customer acquisition efforts. We have created formulations for testing
by many potential customers. The need to create a large number of new products
for potential customers is pushing the capacity of our current production
facility. In this regard, 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 September 30, 2008, we
have opened 110 outlets in Shanghai and 12 other cities in China (as of
September 30, 2007, we had 22 retail outlets in Shanghai and Changchun). In the
last two quarters, we have accelerated customer acquisition efforts and
dedicated a significant amount of management efforts and production capacity for
this purpose. 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. We now intend to open 300 outlets during fiscal year
2010.





18





Results of
Operations





Quarter Ended September 30, 2007
Compared with the Quarter Ended September 30, 2008





Our net
income was $4.47 million in the quarter ended September 30, 2008. This included
$1.90 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 $2.57 million, which was
30.5% higher than our net income of $1.97 million for the quarter ended
September 30, 2007. 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 38% of our sales
revenue in the quarter ended September 30, 2008 (63% in the quarter ended
September 30, 2007).




Our
results for the three months and six months ended September 30, 2007 and 2008
are summarized below:




Three months ended
              September 30, 2008
            
            Three months ended
              September 30, 2007Amount
            
            % of Net sales
            
            Amount
            
            % of Net salesNet
sales
            
            $
            11,495,249
            
            
            100.00
            %
            $
            7,820,163
            
            
            100.00
            %Cost
      of sales
            
            
            (3,462,853
            )
            
            (30.12
            )%
            
            (2,205,623
            )
            
            (28.20
            )%Gross
    profit
            
            $
            8,032,396
            
            
            69.88
            %
            $
            5,614,540
            
            
            71.80
            %Operating
      expenses:Selling
      expenses
            
            $
            (2,813,563
            )
            
            (24,48
            )%
            $
            (1,561,936
            )
            
            (19.97
            )%General
      and administrative expenses
            
            
            (1,438,137
            )
            
            (12.51
            )%
            
            (1,087,053
            )
            
            (13.90
            )%Total
      operating expenses
            
            $
            (4,251,700
            )
            
            (36.99
            )%
            $
            (2,648,989
            )
            
            (33.87
            )%Income from
      operations
            
            $
            3,780,696
            
            
            32.89
            %
            $
            2,965,551
            
            
            37.93
            %Other
      income and expenses:Change
      in the fair value of embedded derivatives
            
            $
            1,904,000
            
            
            16.56
            %
            $
            -
            
            
            -
            %Other
      income
            
            
            157,468
            
            
            1.37
            %
            
            282
            
            
            0
            %Other
      expenses
            
            
            (50,947
            )
            
            (0.44
            )%
            
            (13,011
            )
            
            (0.17
            )%Total
      other income (expenses)
            
            $
            2,010,521
            
            
            17.49
            %
            $
            (12,729
            )
            
            (0.17
            )%Income before
      taxes
            
            $
            5,791,217
            
            
            50.38
            %
            $
            2,952,822
            
            
            37.76
            %Provision
      for income taxes
            
            
            (1,319,097
            )
            
            (11.48
            )%
            
            (982,689
            )
            
            (12.57
            )%Net
    income
            
            $
            4,472,120
            
            
            38.90
            %
            $
            1,970,133
            
            
            25.19
            %





Six months ended
              September 30, 2008
            
            Six months ended
              September 30, 2007Amount
            
            % of Net sales
            
            Amount
            
            % of Net salesNet
sales
            
            $
            22,865,906
            
            
            100.00
            %
            $
            17,335,496
            
            
            100.00
            %Cost
      of sales
            
            
            (6,721,522
            )
            
            (29.40
            )%
            
            (4,856,595
            )
            
            (28.02
            )%Gross
    profit
            
            $
            16,144,384
            
            
            70.60
            %
            $
            12,478,901
            
            
            71.98
            %Operating
      expenses:Selling
      expenses
            
            $
            (5,183,422
            )
            
            (22.67
            )%
            $
            (2,878,280
            )
            
            (16.60
            )%General
      and administrative expenses
            
            
            (2,864,933
            )
            
            (12.53
            )%
            
            (1,896,617
            )
            
            (10.94
            )%Total
      operating expenses
            
            $
            (8,048,355
            )
            
            (35.20
            )%
            $
            (4,774,897
            )
            
            (27.54
            )%Income from
      operations
            
            $
            8,096,029
            
            
            35.40
            %
            $
            7,704,004
            
            
            44.44
            %Other
      income and expenses:Change
      in the fair value of embedded derivatives
            
            $
            665,000
            
            
            2.91
            %
            $
            -
            
            
            -
            %Other
      income
            
            
            1,862,988
            
            
            8.15
            %
            
            71,942
            
            
            0.41
            %Other
      expenses
            
            
            (217,579
            )
            
            (0.95
            )%
            
            (19,935
            )
            
            (0.11
            )%Total
      other income (expenses)
            
            $
            2,310,409
            
            
            10.11
            %
            $
            52,007
            
            
            0.30
            %Income before
      taxes
            
            $
            10,406,438
            
            
            45.51
            %
            $
            7,756,011
            
            
            44,74
            %Provision
      for income taxes
            
            
            (2,697,568
            )
            
            (11.80
            )%
            
            (2,245,645
            )
            
            (12.95
            )%Net
    income
            
            $
            7,708,870
            
            
            33.71
            %
            $
            5,510,366
            
            
            31.79
            %




19




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 and six months ended September 30,
2007 and 2008 comprised the following:





Three months ended September
      30,
            
            Six months ended September 30,2008
            
            2007
            
            2008
            
            2007Invoiced
      value on sales
            
            $
            11,963,213
            
            $
            8,235,126
            
            $
            23,774,115
            
            $
            17,811,850Less:
      sales discount
            
            
            (393,086
            )
            
            (364,820
            )
            
            (758,576
            )
            
            (360,820
            )Less
      : sales tax
            
            
            (74,878
            )
            
            (50,143
            )
            
            (149,633
            )
            
            (111,534
            )$
            11,495,249
            
            $
            7,820,163
            
            $
            22,865,906
            
            $
            17,335,496





Net sales
of $11,495,249 for the quarter ended September 30, 2008 were 47.0% above the net
sales of $7,820,163 for the quarter ended September 30, 2007. Net sales of
$22,865,906 for the six months ended September 30, 2008 were 31.9% above the net
sales of $17,335,496 for the six months ended September 30, 2007. The increase
was mainly because of an increase in overall sales volume arising from new
product sales (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 and six months ended September 30, 2007 and 2008 are summarized
below:





Three months ended September
      30,
            
            Six months ended September 30,2008
            
            2007
            
            2008
            
            2007Shining
      Essence Capsules
            
            
            38.29
            %
            
            46.96
            %
            
            38.99
            %
            
            50.95
            %Shining
      Signal Capsules
            
            
            9.14
            %
            
            14.49
            %
            
            9.74
            %
            
            14.41
            %Shining
      Golden Shield Capsules
            
            
            13.60
            %
            
            14.37
            %
            
            13.82
            %
            
            14.16
            %Shining
      Energy Capsules
            
            
            10.51
            %
            
            11.82
            %
            
            11.03
            %
            
            11.98
            %Shining
      Essence Stomach Protection Capsules
            
            
            5.96
            %
            
            6.13
            %
            
            5.91
            %
            
            4.86
            %Shining
      Probiotics Protein Powder
            
            
            3.52
            %
            
            2.67
            %
            
            3.66
            %
            
            1.22
            %Other
      products
            
            
            6.80
            %
            
            3.54
            %
            
            6.35
            %
            
            2.42
            %87.82
            %
            
            100.00
            %
            
            89.50
            %
            
            100.00
            %Bulk
      additives
            
            
            12.18
            %
            
            -
            %
            
            10.50
            %
            
            -
            %100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %





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




20




Unit
volume and unit prices comparatives (on the invoiced value of sales) for the
three months and six months ended September 30, 2007 and 2008 are summarized
below:


Percentage increase (decrease) from the prior yearThree months ended September 30,2008
              
              2007Unit
                volume
              
              Selling
                prices
              
              Overall
                increase /
                (decrease)
              
              Unit
                volume
              
              Selling
                prices
              
              Overall
                increase /
                (decrease)Shining
      Essence Capsules
              
              
              8
              %
              
              (1
              )%
              
              7
              %
              
              44
              %
              
              4
              %
              
              50
              %Shining
      Signal Capsules
              
              
              (27
              )%
              
              14
              %
              
              (17
              )%
              
              23
              %
              
              (16
              )%
              
              3
              %Shining
      Golden Shield Capsules
              
              
              21
              %
              
              3
              %
              
              24
              %
              
              109
              %
              
              (23
              )%
              
              61
              %Shining
      Energy Capsules
              
              
              19
              %
              
              (2
              )%
              
              17
              %
              
              63
              %
              
              (16
              )%
              
              37
              %Shining
      Essence Stomach Protection Capsules
              
              
              82
              %
              
              (30
              )%
              
              28
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %Shining
      Probiotics Protein Powder
              
              
              72
              %
              
              1
              %
              
              73
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %Other
      products
              
              
              172
              %
              
              (7
              )%
              
              153
              %
              
              100
              %
              
              N/A
              %
              
              100
              %Bulk
      additives
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %
  Percentage increase (decrease) from the prior yearSix months ended September 30,2008
              
              2007Unit
                volume
              
              Selling
                prices
              
              Overall
                increase /
                (decrease)
              
              Unit
                volume
              
              Selling
                prices
              
              Overall
                increase /
                (decrease)Shining
      Essence Capsules
              
              
              (10
              )%
              
              3
              %
              
              (7
              )%
              
              18
              %
              
              1
              %
              
              19
              %Shining
      Signal Capsules
              
              
              (27
              )%
              
              11
              %
              
              (19
              )%
              
              1
              %
              
              (10
              )%
              
              (9
              )%Shining
      Golden Shield Capsules
              
              
              2
              %
              
              15
              %
              
              17
              %
              
              81
              %
              
              (6
              )%
              
              70
              %Shining
      Energy Capsules
              
              
              -
              %
              
              11
              %
              
              11
              %
              
              56
              %
              
              (3
              )%
              
              51
              %Shining
      Essence Stomach Protection Capsules
              
              
              98
              %
              
              (26
              )%
              
              47
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %Shining
      Probiotics Protein Powder
              
              
              261
              %
              
              -
              %
              
              261
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %Other
      products
              
              
              236
              %
              
              (6
              )%
              
              216
              %
              
              2205
              %
              
              15
              
              
              2551
              %Bulk
      additives
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              N/A
              %
              
              N/A
              %
              
              N/A
              %





21




Cost of sales





Cost of
sales for the three months ended September 30, 2008 was $3,462,853 compared with
$2,205,623 for the three months ended September 30, 2007. Cost of sales for the
six months ended September 30, 2008 was $6,721,522 compared with $4,856,595 for
the six months ended September 30, 2007. The increase in cost of sales was
primarily because of increases in the cost of packaging materials and the
overall sales volume.




Unit
volume and unit costs comparatives for the three months and six months ended
September 30, 2007 and 2008 are summarized below:





Percentage increase (decrease) from the prior yearThree months ended September 30,2008
            
            2007Unit
              volume
            
            Unit
              costs
            
            Overall
              increase /
              (decrease)
            
            Unit
              volume
            
            Unit
              costs
            
            Overall
              increase /
              (decrease)Shining
      Essence Capsules
            
            
            8
            %
            
            19
            %
            
            28
            %
            
            44
            %
            
            4
            %
            
            50
            %Shining
      Signal Capsules
            
            
            (27
            )%
            
            15
            %
            
            (16
            )%
            
            23
            %
            
            (27
            )%
            
            (10
            )%Shining
      Golden Shield Capsules
            
            
            21
            %
            
            (2
            )%
            
            18
            %
            
            109
            %
            
            (40
            )%
            
            25
            %Shining
      Energy Capsules
            
            
            19
            %
            
            13
            %
            
            34
            %
            
            63
            %
            
            (25
            )%
            
            22
            %Shining
      Essence Stomach Protection Capsules
            
            
            82
            %
            
            (35
            )%
            
            18
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %Shining
      Probiotics Protein Powder
            
            
            72
            %
            
            49
            %
            
            156
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %Other
      products
            
            
            172
            %
            
            19
            %
            
            224
            %
            
            100
            %
            
            N/A
            %
            
            100
            %Bulk
      additives
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %





Percentage increase (decrease) from the prior yearSix months ended September 30,2008
            
            2007Unit
              volume
            
            Unit
              costs
            
            Overall
              increase /
              (decrease)
            
            Unit
              volume
            
            Unit
              costs
            
            Overall
              increase /
              (decrease)Shining
      Essence Capsules
            
            
            (10
            )%
            
            19
            %
            
            7
            %
            
            18
            %
            
            (2
            )%
            
            15
            %Shining
      Signal Capsules
            
            
            (27
            )%
            
            13
            %
            
            (17
            )%
            
            1
            %
            
            (17
            )%
            
            (16
            )%Shining
      Golden Shield Capsules
            
            
            2
            %
            
            5
            %
            
            7
            %
            
            81
            %
            
            (20
            )%
            
            45
            %Shining
      Energy Capsules
            
            
            -
            %
            
            27
            %
            
            27
            %
            
            56
            %
            
            (4
            )%
            
            50
            %Shining
      Essence Stomach Protection Capsules
            
            
            98
            %
            
            (31
            )%
            
            37
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %Shining
      Probiotics Protein Powder
            
            
            261
            %
            
            35
            %
            
            387
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %Other
      products
            
            
            236
            %
            
            3
            %
            
            246
            %
            
            2205
            %
            
            101
            %
            
            2228
            %Bulk
      additives
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %





Gross profit





Gross
profit for the three months ended September 30, 2008 was $8,032,396 compared
with $5,614,540 for the three months ended September 30, 2007.Gross profit for
the six months ended September 30, 2008 was $16,144,384 compared with
$12,478,901 for the six months ended September 30, 2007. 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 and
six months ended September 30, 2007 and 2008 are summarized below:




22


Three months ended September 30,
              
              Six months ended September 30,2008
              
              2007
              
              2008
              
              2007Average
      for all products
              
              
              70
              %
              
              72
              %
              
              71
              %
              
              72
              %




Gross
profit margin slightly decreased from 72% in the quarter ended September 30,
2007 to 70% this quarter as a result of increases in cost of packaging materials
and electricity largely offset by increase in sales prices.





Selling expenses





Selling
expenses were $2,813,563 or 24.48% of net sales for the three months ended
September 30, 2008 compared with $1,561,936 or 19.97% of net sales for the three
months ended September 30, 2007. The operating costs of the retail outlets are
included as selling expenses. The increase in selling expenses was primarily
caused by the roll out of retail outlets. As of September 30, 2008, we had a
total of 110 retail outlets in operation compared with 22 outlets as of
September 30, 2007.





General and administrative
expenses





General
and administrative expenses were $1,438,137 or 12.51% of net sales for the three
months ended September 30, 2008 compared with $1,087,053 or 13.90% of net sales
for the three months ended September 30, 2007. The increase of $351,084 was
primarily due to the additional research cost of $272,410 related to the
development and launching of new products, and staff and administrative costs
incurred in connection with the construction of the new plant. As of September
30, 2008, we had a total of 339 employees, compared with 266 as of September 30,
2007.





Provision for income
taxes





Provision
for income taxes was $1.32 million and $0.98 million for the quarters ended
September 30, 2008 and 2007, respectively. Excluding the $1.90 million surplus
on revaluation of the convertible note, income before taxes was $3.89 million
for the second quarter of fiscal year 2009 compared with $2.95 million for 2008.
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 and six
months ended September 30, 2007 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 $65.63 million and working capital of $49.25 million as of
September 30, 2008. Cash generated from operations was $12.67 million in the six
months ended September 30, 2008 and $11.19 million in the six months
ended September 30, 2007. The cash generated from operations of $12.67 million
was higher than the net income of $7.71 million due to the non-cash surplus of
revaluation of convertible notes of $0.66 million and lower working capital
needs resulting from better working capital management.





We had
capital expenditures totaling $11.66 million in the six months ended September
30, 2008, mainly in connection with the construction of the new plant. We spent
$4.0 million on fixed assets in the six months ended September 30,
2007.





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
have started to construct 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 fourth quarter of
calendar year 2008 and the balance by the end of second quarter 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 six months ended
September 30, 2007 and 2008.




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.




23


Inflation





In the
fourth quarter of 2008 fiscal year, there had been significant increases in pulp
and paper costs. As a result, our cost of production increased which led to a
decrease in our gross profit margin in the quarter ended March 31, 2008. There
had also been significant increases in steel costs which led to increases in the
cost of construction of our new plant. These costs appear to have
stabilized.





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 September 30, 2008.


Contractual
                  
                  Payment due by period (as of September 30, 2008)Obligations
                  
                  Total
                  
                  
                  Less than 1 year
                  
                  
                  1-3 years
                  
                  
                  3-5 years
                  
                  
                  More than 5 yearsCapital Lease Obligations
                  
                  $
                  7,928,369
                  
                  
                  $
                  7,928,369
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      Lease Obligations
                  
                  $
                  564,250
                  
                  
                  $
                  540,118
                  
                  
                  
                  24,132
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  8,492,619
                  
                  
                  $
                  8,468,487
                  
                  
                  
                  24,132
                  
                  
                  
                  -
                  
                  
                  
                  -




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 $765,816 and
$493,406 in the three months ended September 30, 2008 and September 30, 2007,
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-KSB for
the fiscal year ended March 31, 2008, 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 and six months ended September 30,
2007 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.




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 $10,447,251 as of September 30, 2008, 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.




24




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 September 30, 2007 and 2008. 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.





Recent Accounting
Pronouncements





In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active.” This
FSP clarifies the application of SFAS No. 157 in a market for that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. This FSP was effective for the Company upon issuance, including prior
periods for which financial statements have nt been issued; and, therefore was
effective for the Company’s financial statements as of and for the three and six
month periods ended September 30, 2008. Adoption of FSP No. FAS 157-3 did not
have a significant impact on the Company’s financial position, results of
operations or cash flows.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (“GAAP”) for
nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board Auditing amendments to
AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. Management does not anticipate that the
provisions of SFAS No. 162 will have an impact on the Company’s consolidated
results of operations or consolidated financial position.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133.” SFAS No. 161
requires enhanced disclosures about an entity’s derivative and hedging
activities to improve the transparency of financial reporting. SFAS No. 161 is
effective for financial statements issued for periods beginning after November
15, 2008. SFAS No. 161 is effective for the Company’s fiscal quarter that begins
on January 1, 2009. Management is currently evaluating the potential
impact, if any, on the Company’s disclosures in its consolidated financial
statements.




25




On
February 15, 2007 the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to
measure many financial instruments and certain other items at fair value with
changes in fair value reported in earnings. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007, with
earlier adoption permitted. The Company does not anticipate that the adoption of
this statement will have a material effect on the Company’s financial condition
and result of operations. The Company does not believe that any of the other
recently issued and adopted, but yet effective, accounting standards would have
a material effect on the accompanying financial statements.





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 People's Republic of China. 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.
 
 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 4T.  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.




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- KSB for
the year ended March 31, 2008, which could materially impact our business,
financial condition or future results. The risks described in the Annual Report on
Form 10-KSB 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





On
September 12, 2008, an Annual Meeting of Stockholders was held.





Proxies
for the election of directors were solicited. There was no solicitation in
opposition to management’s nominees, and all such nominees were elected. The
entire board as previously reported to the SEC was re-elected in its
entirety.





There
were 17,080,000 shares of common stock eligible to vote at the Annual Meeting,
of which 12,164,017 shares were present at the Annual Meeting in person or by
proxy, which constituted a quorum. The following is a summary of the results of
the voting.




26


Number of
      VotesNominees for 1-year terms
                ending in
      2009
              
              For
              
              Against
              
              Withheld
              
              Abstain
              
              Broker
                Non-VotesMr.
      Song Jinan
              
              
              12,164,017
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dr.
      Chin Ji Wei
              
              
              12,164,017
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dr.
      Du Wen Min
              
              
              12,164,017
              
              
              -
              
              
              -
              
              
              -
              
              
              -Mr.
      Simon Yick
              
              
              12,164,017
              
              
              -
              
              
              -
              
              
              -
              
              
              -Ratified the appointment of BDO
      McCabe Lo Limited as independent auditors for the fiscal year ending March
      31, 2009
              
              
              12,164,017
              
              
              -
              
              
              -
              
              
              -
              
              
              -





ITEM 5.  OTHER INFORMATION





None.





27





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 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, 20066 (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).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).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).16.1
                
                Letter
      dated April 13, 2006 from Malone & Bailey PC to the United States
      Securities and Exchange Commission (incorporated by reference to Exhibit
      16.1 to China-Biotics, Inc.’s Form 8-K filed on May 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).


28




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




* * * *
*




29





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:
      March 20, 2009
              Song
      JinanChief Executive
      Officer




30