**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended June 30, 2007**




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


**EXCHANGE
      ACT**




**For
      the Transition Period from _______ to _________**




**333-110733**


(Commission
      File Number)




**CHINA-BIOTICS,
      INC.**


(Exact
      Name of Small Business Issuer 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**


(Issuer's
      Telephone Number, Including Area Code)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to the filing requirements for at least the past 90 days.


Yes
o
      No o




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


Yes
o
      No o





As
      of
      August 10, 2007, 17,080,000 shares of the Issuer's common stock were
      outstanding.





Transitional
      Small Business Disclosure Format (check one): **** Yes
o No o










**TABLE
      OF CONTENTS**




Page**Part
                I - Financial Information**ITEM
                1.
            
            FINANCIAL
                STATEMENTS
            
            1ITEM
                2.
            
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS
            
            13ITEM
                3.
            
            CONTROLS
                AND PROCEDURES
            
            27**Part
                II - Other Information**ITEM
                6.
            
            EXHIBITS
            
            27SIGNATURES
            
            28









**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
      expressed in US Dollars)




March
                31, 2007
            
            
            June
                30, 2007**ASSETS****Current
              assets**Cash
                and cash equivalents
            
            $
            26,992,025
            
            $
            34,694,864Accounts
                receivable
            
            
            14,309,818
            
            
            11,682,011Deposit
                Paid
            
            
            216,236
            
            
            218,991Inventories
            
            
            203,054
            
            
            199,271Prepayment
            
            
            176,094
            
            
            235,933**Total
                current assets**
            
            $
            41,897,227
            
            $
            47,031,070**Plant,
                equipment and leasehold improvements, net**
            
            
            2,682,617
            
            
            3,110,882**Total
                assets**
            
            $
            44,579,844
            
            $
            50,141,952**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            1,523,471
            
            $
            2,137,895Tax
                payables
            
            
            18,019,721
            
            
            19,090,614Other
                payables and accruals
            
            
            1,126,645
            
            
            1,030,316**Total
                current liabilities**
            
            $
            20,669,837
            
            $
            22,258,825**Commitments****Stockholders'
                equity:**Preferred
                stock
            
            $
            -
            
            $
            -Common
                stock
            
            
            1,708
            
            
            1,708Additional
                paid-in capital
            
            
            7,863,031
            
            
            7,863,031Retained
                earnings
            
            
            12,284,900
            
            
            15,825,133Accumulated
                other comprehensiveincome
                (loss)
            
            
            734,574
            
            
            1,167,461Capital
                and statutory reserves
            
            
            3,025,794
            
            
            3,025,794**Total
                stockholders' equity**
            
            $
            23,910,007
            
            $
            27,883,127**Total
                liabilities and stockholders' equity**
            
            $
            44,579,844
            
            $
            50,141,952





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




1





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
      expressed in US Dollars)





Three
                months ended June 30,Note
            
            2006
            
            2007**Net
                sales**
            
            
            
            
            $
            8,002,964
            
            $
            9,515,333Cost
                of sales
            
            
            
            
            
            (2,358,739
            )
            
            (2,650,972
            )**Gross
                profit**
            
            
            
            
            $
            5,644,225
            
            $
            6,864,361Operating
                expenses:Selling
                expenses
            
            
            
            
            $
            (1,269,532
            )
            $
            (1,316,344
            )General
                and administrative expenses
            
            
            
            
            
            (405,990
            )
            
            (809,564
            )Total
                operating expenses
            
            
            
            
            $
            (1,675,522
            )
            $
            (2,125,908
            )**Income
                from operations**
            
            
            
            
            $
            3,968,703
            
            $
            4,738,453Other
                income and expenses:Other
                income
            
            
            
            
            $
            35,523
            
            $
            71,660Other
                expenses
            
            
            
            
            
            (3,859
            )
            
            (6,924
            )Total
                other income (expenses)
            
            
            
            
            $
            31,664
            
            $
            64,736**Income
                before taxes**
            
            
            
            
            $
            4,000,367
            
            $
            4,803,189Provision
                for income taxes
            
            
            
            
            
            (1,124,711
            )
            
            (1,262,956
            )**Net
                income**
            
            
            
            
            $
            2,875,656
            
            $
            3,540,233**Earnings
                per share:**Basic
                and diluted
            
            
            
            
            $
            0.17
            
            $
            0.21**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            5
            
            
            17,080,000
            
            
            17,080,000




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





2





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(Amounts
      expressed in US Dollars)




Common
                StockShares
            
            Par
                value $0.0001
            
            Additional
                Paid-in
                  Capital
            
            Retained
                Earnings
            
            AccumulatedComprehensive
                    Income
            
            Capital
                  &Statutory
                  Reserves
            
            TotalBalance-
                March 31, 2007
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            12,284,900
            
            $
            734,574
            
            $
            3,025,794
            
            $
            23,910,007Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            3,540,233
            
            
            -
            
            
            -
            
            
            3,540,233Other
                comprehensive income:Foreign
                currency translation adjustments, net of taxes of $-0-
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            432,887
            
            
            -
            
            
            432,887Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,973,120Balance-
                June 30, 2007
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            15,825,133
            
            $
            1,167,461
            
            $
            3,025,794
            
            $
            27,883,127




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





3


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
      expressed in US Dollars)




Three
                months ended
              June
                30,2006
            
            2007**CASH
                FLOW FROM OPERATING ACTIVITIES**Net
                income
            
            $
            2,875,656
            
            $
            3,540,233Adjustment
                for:Depreciation
            
            
            99,376
            
            
            142,310(Increase)/Decrease
                in restricted cash
            
            
            83,635
            
            
            -(Increase)/Decrease
                in accounts receivable
            
            
            (2,536,130
            )
            
            2,786,747(Increase)/Decrease
                in inventories
            
            
            94,479
            
            
            6,318(Increase)/Decrease
                in prepayments
            
            
            (40,199
            )
            
            (57,156
            )Increase/(Decrease)
                in accounts payable
            
            
            (257,147
            )
            
            590,026Increase/(Decrease)
                in income tax, surcharge tax and dividends withholding tax
            
            
            1,124,711
            
            
            622,305Increase/(Decrease)
                in other payables and accruals, and value added tax
                payable
            
            
            (498,059
            )
            
            130,688**NET
                CASH PROVIDED BY OPERATING ACTIVITIES**
            
            $
            946,322
            
            $
            7,761,471**CASH
                FLOWS USED IN INVESTING ACTIVITIES**Additions
                of fixed assets
            
            
            (816,689
            )
            
            (533,080
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Effect
                of exchange rate changes on cash
            
            $
            54,931
            
            $
            474,448**NET
                INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
            
            $
            184,564
            
            $
            7,702,839**CASH
                AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                PERIOD**
            
            
            19,840,812
            
            
            26,992,025**CASH
                AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
            
            $
            20,025,376
            
            $
            34,694,864




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





4




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)




1.
            BASIS
                OF PRESENTATION AND PRINCIPLES OF
                CONSOLIDATION





The
      accompanying unaudited interim financial statements of China-Biotics, Inc.
      (the
“Company” or “we”) have been prepared in accordance with accounting principles
      generally accepted in the United States of America and the rules of the
      Securities and Exchange Commission (“SEC”), and should be read in conjunction
      with the audited financial statements and notes thereto contained in our Annual
      Report filed with the SEC on Form 10-KSB. In the opinion of management, all
      adjustments, consisting of normal recurring adjustments, necessary for a fair
      presentation of financial position and the results of operations for the interim
      periods presented have been reflected herein. The results of operations for
      the
      interim periods are not necessarily indicative of the results to be expected
      for
      the full year. Notes to the financial statements which would substantially
      duplicate the disclosure contained in the audited financial statements for
      fiscal year ended March 31, 2007 as reported in the Form 10-KSB have been
      omitted.





As
      disclosed in Note 1 to our audited financial statements for fiscal year ended
      March 31, 2007, the share exchange between us and the shareholders of Sinosmart
      Group Inc. (“SGI”) had been accounted for in accordance with the accounting and
      financial reporting interpretations and guidance set out by the Corporate
      Finance Division of the Securities and Exchange Commission (“SEC Interpretations
      and Guidance”) and accounting principles generally accepted in the United States
      of America (“US GAAP”). The share exchange was treated as a recapitalization of
      SGI, accompanied by a reverse acquisition of our company with SGI as the
      accounting acquirer. The unaudited interim financial statements presented
      herewith have been prepared on the following basis:





(a)
            The
                Unaudited Condensed Consolidated Balance Sheet as of June 30, 2007
                includes the accounts of SGI, Shining, Growing State Limited (“GSL”),
                Growing Bioengineering (Shanghai) Co. Limited (“GBS”) and our
                company.




(b)
            The
                Unaudited Condensed Consolidated Statements of Operations for the
                three
                months ended June 30, 2007 and 2006 reflect the following: (i) result
                of
                operations of SGI, Shining, GSL and our company from April 1, 2006
                to June
                30, 2006 and (ii) result of operations of SGI, Shining, GSL, GBS
                and our
                company from April 1, 2007 to June 30, 2007. The earnings per share
                as
                shown on the Unaudited Condensed Consolidated Statements of Operations
                were computed based on the weighted average number of shares of our
                outstanding common stock after giving effect to the recapitalization
                and
                reverse acquisition accounting treatment as set out in Note 1 to
                our
                audited financial statements for fiscal year ended March 31,
                2007.(c)
            The
              Unaudited Condensed Consolidated Statement of Changes in Stockholders'
              Equity and the Unaudited Condensed Consolidated Statements of Cash
              Flow
              for the three months ended June 30, 2007 include the accounts of SGI,
              Shining, GSL, GBS and our company.(d)
            The
                Company adopted the provision of Financial Accounting Standards Board
                (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income
                Taxes–An
                Interpretation of FASB Statement No. 109,” (FIN48”) as of the first day of
                the first quarter of fiscal 2008. The Company has not otherwise materially
                changed its significant accounting
                policies.




5





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
                (continued)





In
      preparing the unaudited interim financial statements presented herewith, all
      significant intercompany balances and transactions have been eliminated on
      consolidation.





The
      term
“Group”, as used in these unaudited interim financial statements, refers to a
      group of companies comprising SGI, Shining and GSL for any period prior to
      March
      22, 2006; and to a group of companies comprising the Company, SGI, Shining,
      GSL
      and GBS for any period from March 23, 2006.





2.
            WEIGHTED
                AVERAGE NUMBER OF OUTSTANDING SHARES OF COMMON
                STOCK





Earnings
      per share is computed by dividing the net income for each reporting period
      by
      the weighted average number of outstanding common stock for the same reporting
      period. The weighted average number of outstanding shares of common stock is
      determined by relating the portion of time within a reporting period that a
      particular number of shares of common stock has been outstanding to the total
      time in that period.





The
      weighted average number of outstanding shares of common stock as shown in the
      financial statements presented herewith was computed based on the number of
      shares of common stock outstanding, and took into account the recapitalization
      transactions and the reverse acquisition transaction as described in the Notes
      to the financial statements contained in the audited financial statements for
      fiscal year ended March 31, 2007 as reported in our Form 10-KSB. Detailed
      computations are set out as follows:


Date
                  of issue or purchase
              
              
              
              No.
                  of the
              
              No.
                  of days outstanding
              
              Weighted
                  average number of outstanding common stock(as-if
                  basis
              
              
              
              Company's
              
              Three
              
              Threefor
                  the
              
              No.
                  of
              
              common
                  stock
              
              months
              
              monthsCompany's
              
              SGI
              
              (Restated
                  for
              
              ended
              
              endedcommon
              
              ordinary
              
              recapitalization
              
              June
                  30,
              
              June
                  30,stock)
              
              shares
              
              of
                  SGI)
              
              2006
              
              2007
              
              2006
              
              2007Number
                  of days in reporting period
              
              
              
              
              
              
              
              
              
              
              
              91
              
              
              91SGI
                  existing shares as of March 31, 2004
              
              
              Pre-
                  3/31/2004
              
              
              1,000
              
              
              1,118,600
              
              
              91
              
              
              91
              
              
              1,118,600
              
              
              1,118,600SGI
                  issued new shares upon receipt of cash
              
              
              3/15/2006
              
              
              9,000
              
              
              10,067,400
              
              
              91
              
              
              91
              
              
              10,067,400
              
              
              10,067,400SGI
                  issued new shares for convertible bond conversion
              
              
              3/22/2006
              
              
              1,429
              
              
              2,924,000
              
              
              91
              
              
              91
              
              
              2,924,000
              
              
              2,924,000SGI
                  issued new shares for cash of $5M under private placement
              
              
              3/22/2006
              
              
              2,858
              
              
              1,870,000
              
              
              91
              
              
              91
              
              
              1,870,000
              
              
              1,870,00014,287Stock
                  issued in exchange for 14,287 shares of SGI stock (100% equity
                  in
                  SGI)
              
              
              
              
              
              
              
              
              15,980,000The
                  Company's stock at time of reverse acquisitionExisting
                  stock in issue at time of reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              25,481,004
              
              
              91
              
              
              91
              
              
              25,481,004
              
              
              25,481,004Stock
                  held in treasury prior to reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              (4,381,004
              )
              
              91
              
              
              91
              
              
              (4,381,004
              )
              
              (4,381,004
              )Repurchased
                  stock from Stan Ford in conjunction with reverse
                  acquisition
              
              
              3/22/2006
              
              
              
              
              
              (20,000,000
              )
              
              91
              
              
              91
              
              
              (20,000,000
              )
              
              (20,000,000
              )17,080,000
              
              
              
              
              
              
              
              
              17,080,000
              
              
              17,080,000




6




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
      June 30, 2007 the Group had cash deposits of $35million 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 ended June 30, 2006 and 2007, all of the Group's sales arose in
      the
      PRC. In addition, all accounts receivable as at June 30, 2007 also arose in
      the
      PRC.





7




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:




March
                31,
              2007
            
            June
                30,
              2007Trade
                receivables
            
            $
            14,309,818
            
            $
            11,682,011Less
                : Allowances for doubtful debt
            
            
            -
            
            
            —$
            14,309,818
            
            $
            11,682,011


5.
                  INVENTORIES


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




March
                31,
              2007
            
            June
                30,
              2007Raw
                materials
            
            $
            165,337
            
            $
            135,179Work-in-progress
            
            
            12,385
            
            
            29,645Finished
                goods
            
            
            25,332
            
            
            34,447$
            203,054
            
            $
            199,271





8




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)


6.
                  PLANT
                              AND
                              EQUIPMENT


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




March
                31,
                2007
            
            June
                30,
              2007Plant
                and machinery
            
            $
            3,486,207
            
            $
            3,530,652Office
                equipment
            
            
            1,781,637
            
            
            2,311,787Motor
                vehicles
            
            
            40,793
            
            
            71,452Leasehold
                improvements
            
            
            577,052
            
            
            584,409$
            5,885,689
            
            
            6,498,300Less:
                Accumulated depreciation
            
            
            (3,203,072
            
            
            (3,387,418
            )$
            2,682,617
            
            $
            3,110,882


7.
                  TAX
                                PAYABLES


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




March
                31,
                2007
            
            June
                30,
              2007Value
                added tax and other taxes
            
            
            4,688,344
            
            $
            4,958,116Income
                tax
            
            $
            3,338,947
            
            
            3,504,578Surcharge
                tax
            
            
            6,506,198
            
            
            7,097,244Dividends
                withholding tax
            
            
            3,486,232
            
            
            3,530,67618,019,721
            
            $
            19,090,614$




9


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)


8.
                  COMMON
                                  STOCK


We
      are
      authorized to issue 100,000,000 shares of common stock, $0.0001 par value per
      share. The common stock as of June 30, 2007, as presented in these financial
      statements, comprise the following:


March
                  31, 2007
              
              Changes
                  from April 1, 2007 to
                June
                  30, 2007
              
              June
                  30, 2007Number
                  of shares
              
              Par
                  value $0.0001
              
              Number
                  of shares
              
              Par
                  value $0.0001
              
              Number
                  of shares
              
              Par
                  value $0.0001In
                  issue
              
              
              41,461,004
              
              $
              4,146
              
              
              —
              
              $
              —
              
              
              41,461,004
              
              $
              4,146Stock
                  held in treasury (Treasury stock)
              
              
              (24,381,004
              )
              
              (2,438
              )
              
              —
              
              
              —
              
              
              (24,381,004
              )
              
              (2,438
              )Issued
                  and outstanding
              
              
              17,080,000
              
              $
              1,708
              
              
              —
              
              $
              —
              
              
              17,080,000
              
              $
              1,708


9.
                  INCOME
                                    TAXES
 On
              April
              1, 2007, the Company adopted FIN48. As a result of the implementation
              of FIN48,
              the Company’s tax assets and liabilities did not differ from the assets and
              liabilities before adoption, therefore, the Company did not record
              any
              adjustments as of the adoption date.


The
      income (loss) generated in 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
              June
                30,2006
            
            2007Loss
                in the British Virgin Islands before income taxes
            
            $
            (43,652
            )
            $
            (230,194
            )Income
                in the PRC before income taxes
            
            
            4,044,019
            
            
            5,033,383$
            4,000,367
            
            $
            4,803,189




10


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 domiciled in the British Virgin Islands.
      Accordingly, our financial statements do not present any income tax provisions
      or credits related to the British Virgin Islands tax jurisdiction. The provision
      for income tax relating to the PRC for the periods as presented in these
      financial statements are summarized as follows:





Three
                months ended
              June
                30,2006
            
            2007Current
            
            $
            1,124,711
            
            $
            1,262,956Deferred
            
            
            —
            
            
            —$
            1,124,711
            
            $
            1,262,956




As
      of
      June 30, 2007, we had no deferred tax assets and liabilities.





The
      Group
      has its principal operations in the People’s Republic of China (“PRC”) in the
      Shanghai Jinqiao special economic zone and hence enjoys a preferential income
      tax rate of 15%. From 1 January 2008, the income tax rate is expected to
      gradually increase to the standard rate of 25% over a five-year transition
      period. However, the New Corporate Tax Law has not set out the details as to
      how
      the existing preferential tax rate will gradually increase to standard rate
      of
      25%





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




Three
                months ended
              June
                30,2006
            
            2007Computed
                tax at the local PRC statutory rate of 33%
            
            $
            1,334,526
            
            $
            1,661,016Non-deductible
                items
            
            
            238,102
            
            
            -Valuation
                allowance
            
            
            -
            
            
            9,014Tax
                concession
            
            
            (857,797
            )
            
            (910,925
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            409,880
            
            
            503,851Total
                provision for income at effective rate
            
            $
            1,124,711
            
            $
            1,262,956





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 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, the Group may be subject to
      potential penalties for the late payment of taxes calculated on the basis of
      0.5
      times to 5 times amount of taxes, which amounted from $4.9 million to $49
      million as of June 30, 2007. No provision for the potential tax penalties has
      been made in the Group's financial statements as management of the Group
      believes that the Group did not cause the late payment of taxes, and that the
      possibility of having to pay such late payment penalties is highly
      unlikely.





11




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
      expressed in US Dollars)




10.
                COMMITMENTS





COMMITMENTS





(a)
        Operating Leases





The
      Group
      leases office space, warehouse facilities and retail shops under non-cancelable
      operating agreements that expire at various dates through 2007. 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:





March
                310,
            
            June
                30,2007
            
            2007Payable
                withinthe
                next twelve months
            
            $
            375,395
            
            $
            440,096the
                next 13th to 24th months
            
            
            274,792
            
            
            264,880the
                next 25th to 36th months
            
            
            63,714
            
            
            77,926the
                next 37th to 48th months
            
            
            -
            
            
            -the
                next 49th to 60th months
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -$
            713,901
            
            $
            782,902




(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 the room for expansion to 300 tons per year. This
      agreement contemplates a one-time leasing fee of $2,100,828. 10% of the leasing
      fee was due and payable by 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 this land lease.




12




**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-QSB, 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-QSB 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-QSB to “we,” ᦩ “us,”
or ᦯ “our”
are
      to the combined business of China-Biotics, Inc. (“the Company”) and its
      wholly-owned direct subsidiaries, Sinosmart Group Inc. (“SGI”) and Growing State
      Limited (“GSL”), and SGI's wholly-owned subsidiary, Shanghai Shining
      Biotechnology Co. Ltd. (“Shining”), and GSL's wholly-owned subsidiary, Growing
      Bioengineering (Shanghai) Co. Ltd. (“GBS”). References to “China” or to the
“PRC” are references to the People's Republic of China. All references to
“dollars” or “$”refers to United States dollars.





**Overview**





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





The
      products are mainly sold to distributors, which then distribute them to various
      retail outlets such as drug stores and supermarkets. During the three months
      ended June 30, 2006 and 2007, substantially all our sales revenue comprises
      amounts receivable from the distributors for the sale of these products.
      Typically, 90 to 120 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 stores (training and logistics centers). In this regard,
      we
      opened our first pilot centre in Shanghai in March 2006 and intend to open
      over
      300 stores over the next two years. 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.
      A ccording
      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
      planning to construct a plant that will enable us to capture the anticipated
      demand for food additives. We expect the new plant will commence production
      by
      the middle of 2008 and start to make significant contribution to our earnings
      in
      fiscal year 2009. The costs for business expansion, expected to be approximately
      $18 million for the first phase, will be financed by our internal working
      capital. In connection with our plan to build the new plant, on March 21, 2006,
      our wholly-owned subsidiary, Growing State Limited, 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 we will construct a plant consisting of
      bulk
      manufacturing facilities that will have an initial capacity of 150 tons per
      year
      of bulk product with the room for expansion to 300 tons per year. We have made
      a
      construction application relating to the new plant. As of June 30, 2007, we
      were
      still awaiting these government approvals.




13




**Results
      of Operations**





**Quarter
      Ended June 30, 2006 Compared with the Quarter Ended June 30,
      2007**





We
      achieved a net income of $3.54 million in the quarter ended June 30, 2007,
      which
      was 23% above our net income of $2.88 million for the quarter ended June 30,
      2006. Our growth in net income primarily resulted from growth in our sales
      volume on our products. Shining Essence continued to be our best selling
      product, accounting for 55% of our sales revenue in the quarter ended June
      30,
      2007 (62% in the quarter ended June 30, 2006). The growth rate on all products’
sales volume was 22% in the quarter ended June 30, 2007 (96% in the quarter
      ended June 30, 2006).





As
      of
      June 30, 2007, we had a total of nine direct sales retail outlets. In July
      2007,
      we opened five additional retail stores and now have a total of fourteen direct
      retail outlets.




Our
      results for the quarters ended June 30, 2006 and 2007 are summarized
      below:


Three
                  months ended June 30, 2006
              
              Three
                  months ended June 30, 2007Amount
              
              %
                  of Net sales
              
              Amount
              
              %
                  of Net sales**Net
                  sales**
              
              $
              8,002,964
              
              
              100.00
              %
              $
              9,515,333
              
              
              100.00
              %Cost
                  of sales
              
              
              (2,358,739
              )
              
              -29.47
              %
              
              (2,650,972
              )
              
              -27.86
              %**Gross
                  profit**
              
              $
              5,644,225
              
              
              70.53
              %
              $
              6,864,361
              
              
              72.14
              %Operating
                  expenses:Selling
                  expenses
              
              $
              (1,269,532
              )
              
              -15.86
              %
              $
              (1,316,344
              )
              
              -13.83
              %General
                  and administrative expenses
              
              
              (405,990
              )
              
              -5.07
              %
              
              (809,564
              )
              
              -8.51
              %Total
                  operating expenses
              
              $
              (1,675,522
              )
              
              -20.94
              %
              $
              (2,125,908
              )
              
              -22.34
              %**Income
                  from operations**
              
              $
              3,968,703
              
              
              49.59
              %
              $
              4,738,453
              
              
              49.80
              %Other
                  income and expenses:Other
                  income
              
              $
              35,523
              
              
              0.44
              %
              $
              71,660
              
              
              0.75
              %Other
                  expenses
              
              
              (3,859
              )
              
              -0.05
              %
              
              (6,924
              )
              
              -0.07
              %Total
                  other income (expenses)
              
              $
              31,664
              
              
              0.40
              %
              $
              64,736
              
              
              0.68
              %**Income
                  before taxes**
              
              $
              4,000,367
              
              
              49.99
              %
              $
              4,803,189
              
              
              50.48
              %Provision
                  for income taxes
              
              
              (1,124,711
              )
              
              -14.05
              %
              
              (1,262,956
              )
              
              -13.27
              %**Net
                  income**
              
              $
              2,875,656
              
              
              35.93
              %
              $
              3,540,233
              
              
              37.21
              %




14





*Net
      sales*





Net
      sales
      in our financial statements are stated at invoiced value less sales tax. Our
      net
      sales for the quarters ended June 30, 2006 and 2007 comprised of the
      following:




Three
                months ended June 30,2006
            
            2007Invoiced
                value on sales
            
            
            8,054,492
            
            
            9,576,724Less
                : sales tax
            
            
            (51,528
            )
            
            (61,390
            )8,002,964
            
            
            9,515,333





Net
      sales
      of $9,515,333 for the quarter ended June 30, 2007 were 18.90% above the net
      sales of $8,002,964 for the quarter ended June 30, 2006. The increase was mainly
      because of increased sales volume.





The
      contributions of each product as a percentage of invoiced value on sales for
      the
      quarters ended June 30, 2006 and 2007 are summarized below:




Three
                  months ended June 30,2006
              
              2007Shining
                  Essence Capsules
              
              
              62.06
              %
              
              54.53
              %Shining
                  Signal Capsules
              
              
              19.70
              %
              
              14.35
              %Shining
                  Golden Shield Capsules
              
              
              8.93
              %
              
              13.99
              %Shining
                  Energy Capsules
              
              
              8.57
              %
              
              12.11
              %Miscellaneous
              
              
              0.74
              %
              
              5.03
              %100.00
              %
              
              100.00
              %





Unit
      volume and unit prices comparatives (on the invoiced value of sales) for the
      quarters ended June 30, 2006 and 2007 are summarized below:


Percentages
                  increase (decrease) from the prior yearThree
                  months ended June 30,2006
              
              
              2007Unit
                  volume
              
              
              Selling
                  prices
              
              
              Overall
                  increase / (decrease)
              
              
              Unit
                  volume
              
              
              Selling
                  prices
              
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              65
              %
              
              -7
              %
              
              58
              %
              
              2
              %
              
              -1
              %
              
              1
              %Shining
                  Signal Capsules
              
              
              187
              %
              
              -17
              %
              
              170
              %
              
              -14
              %
              
              -4
              %
              
              -17
              %Shining
                  Golden Shield Capsules
              
              
              57
              %
              
              2
              %
              
              59
              %
              
              65
              %
              
              6
              %
              
              75
              %Shining
                  Energy Capsules
              
              
              120
              %
              
              23
              %
              
              143
              %
              
              52
              %
              
              6
              %
              
              61
              %Miscellaneous
              
              
              100
              
              
              N/A
              
              
              100
              
              
              855
              %
              
              57
              %
              
              1,399
              %





15




*Cost
      of sales*





Cost
      of
      sales for the quarter ended June 30, 2007 was $2,650,972 compared with
      $2,358,739 for the quarter ended June 30, 2006. The increase in cost of sales
      was primarily because of increase in sales volume. The increase in production
      volume has resulted in slightly lower overhead on a per unit basis.




Unit
      volume and unit costs comparatives for the quarters ended June 30, 2006 and
      2007
      are summarized below:


Percentages
                  increase (decrease) from the prior yearThree
                  months ended June 30,2006
              
              
              2007Unit
                  volume
              
              
              Unit
                  costs
              
              
              Overall
                  increase / (decrease)
              
              
              Unit
                  volume
              
              
              Unit
                  costs
              
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              65
              %
              
              -9
              %
              
              56
              %
              
              2
              %
              
              -8
              %
              
              -6
              %Shining
                  Signal Capsules
              
              
              187
              %
              
              -41
              %
              
              146
              %
              
              -14
              %
              
              -6
              %
              
              -19
              %Shining
                  Golden Shield Capsules
              
              
              57
              %
              
              -12
              %
              
              45
              %
              
              65
              %
              
              -5
              %
              
              57
              %Shining
                  Energy Capsules
              
              
              120
              %
              
              2
              %
              
              122
              %
              
              52
              %
              
              11
              %
              
              69
              %Miscellaneous
              
              
              100
              %
              
              N/A
              
              
              100%
              %
              
              855
              %
              
              241
              %
              
              3,156
              %




16




*Gross
      profit*





Gross
      profit for the quarter ended June 30, 2007 was $6,864,361 compared with
      $5,644,225 for the quarter ended June 30, 2006. The increase in gross profit
      was
      primarily due to an increase in sales volume.





The
      average gross profit percentage for all of our products for the quarters ended
      June 30, 2006 and 2007 is summarized below:





Three
                months ended June 30,2006
            
            2007Average
                for all products
            
            
            70.72
            %
            
            72.14
            %





17




*Selling
      expenses*





Selling
      expenses were $1,316,344 or 13.83% of net sales for the quarter ended June
      30,
      2007 compared with $1,269,532 or 15.86% of net sales for the quarter ended
      June
      30, 2006. The selling expenses were slightly increased by 3.7% compared with
      the
      same period of last year.





*General
      and administrative expenses*





General
      and administrative expenses were $809,564 or 8.51% of net sales for the quarter
      ended June 30, 2007 compared with 405,990 or 5.07% of net sales for the quarter
      ended June 30, 2006. The increase of $403,574 was primarily due to the
      additional research cost of $305,735.





*Provision
      for income taxes*





Provision
      for income taxes for the quarters ended June 30, 2006 and 2007 comprised the
      following items:





Three
                months ended June 30,2006
            
            2007Income
                taxes
            
            $
            714,831
            
            $
            759,105Surcharge
                at 0.5% per day on accrued taxes
            
            
            409,880
            
            
            503,851Total
                provision for income
            
            $
            1,124,711
            
            $
            1,262,956




The
      increase in income taxes was due to higher income before taxes which increased
      20.07 %. The tax surcharge was accrued for unpaid taxes relating to calendar
      years prior to 2005.





Our
      principal operations are in China. Business enterprises established in China
      are
      subject to income taxes and value added taxes under Chinese tax laws and
      regulations unless they have exemptions. We have made tax payments to the
      Chinese tax authorities since 2005. Our management believes that our
      operations in China 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 regarding the tax exemption
      status of our operations in China. As a result, there is no way to ascertain
      the
      position which may be taken by the relevant Chinese tax authorities in the
      future.  Accordingly, our financial statements contain full provisions for
      all applicable tax liabilities, plus surcharge, for all prior calendar years.
      Such provisions for tax liabilities and surcharge will be reversed out of the
      financial statements at the appropriate point in the future.




18




According
      to Chinese tax regulations, outstanding tax payable in China 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 taxes payable. This amounts to $4.9 million (if calculated based on 0.5
      times
      the taxes payable) to $49 million (if calculated based on five times the amount
      of taxes payable) as of June 30, 2007. No provision for the potential tax
      penalties has been made in our financial statements as our management believes
      that the possibility of having to pay the penalties is remote.




*Segment
      reporting*





We
      have
      adopted the “products and services” approach for segment reporting. For the
      quarters ended June 30, 2006 and 2007, 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 $34.69 million and working capital of $24.77 million as of
        June 30, 2007, and cash of $20.03 million and working capital of $12.93
        million as of June 30, 2006. Cash generated from operations was $7.76 million
        in
        the quarter ended June 30, 2007 and $0.95 million in the quarter ended
        June 30, 2006. The increase in cash generated from operations was mainly
        due to
        a decrease in accounts receivable by $2.78 million.
 
 We
        had
        capital expenditures totaling $0.5 million in the quarter ended June 30,
        2007,
        primarily on improvements to production and research facilities. Our current
        facility commenced operations in 2000. To meet anticipated increases in sales
        volume in the near future, we are increasing the capacity of our current
        production facility. We have started our plan to construct a new plant with
        an
        overall project size of $30 million. Phase 1 of the project involves
        constructing a facility capable of producing 150 tons of probiotics per annum
        and is estimated to cost $18 million, $16 million of which is expected to
        be
        paid in the third quarter of calendar year 2007 and the balance in 2008.
 Subsequent phases of this project will only commence when demands for
        probiotics have exceeded the production capacity of the Phase 1
        facility.
 
 We
        did
        not have any changes related to financing activities for the quarters ended
        June
        30, 2006 and 2007.


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
      stores. No assurance, however, can be given that our business plan will succeed.
      In the event that our business plan does not materialize as predicted, we may
      need to seek for external financing to fund our expansion plan. 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.





**Inflation**





We
      believe that inflation has not had a material impact on our results of
      operations for the quarters ended June 30, 2006 and 2007.





**Seasonality**





Typically,
      60% of our sales take place in the second half of the fiscal year. We may
      experience additional seasonal variations in our future revenues and our
      operating costs due to seasonality, however, we do not believe that these
      variations will be material.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.




**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 $308,312
        and
        $22,574 in the three months ended June 30, 2007 and June 30, 2006,
        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, 2007, and this Form 10-QSB should be read in
      conjunction with that Annual Report. This MD&A discusses our consolidated
      financial statements for the three months ended June 30, 2006 and 2007. 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.




19





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
      caste 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 $11,682,011 as of June 30, 2007, 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-10QSB 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*





As
      disclosed in our financial statements for the fiscal years ended March 31,
      2006
      and 2007, we have made tax payments to the Chinese tax authorities for 2005.
      We
      believe that our operations in China 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 China. As a result, there is no way to
      ascertain the position which may be taken by the relevant Chinese tax
      authorities in the future. Accordingly, our financial statements contain full
      provisions for all applicable tax liabilities, plus surcharge, for all prior
      calendar years. Such provisions for tax liabilities and surcharge will be
      reversed out of the financial statements at the appropriate point in the
      future.





According
      to Chinese tax regulations, our outstanding tax payable in China 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 taxes payable. This amounts to $4.9 million (if calculated based
      on
      0.5 times of taxes payable) to $49 million (if calculated based on five times
      of
      the amount of taxes payable) as of June 30, 2007. Under the Statements of
      Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, it
      is required to accrue a charge to income for an estimated loss from a loss
      contingency if two conditions are met: (a) information available prior to
      issuance of the financial statements indicates that it is probable that an
      asset
      had been impaired or a liability had been incurred at the date of the financial
      statements, and (b) the amount of loss can be reasonably estimated. SFAS defines
      the levels of probability as to whether or not future events will confirm the
      existence of a loss as follows: (1) probable - the future event or events are
      likely to occur, (2) reasonably possible - the chance of the future events
      occurring is more than remote but less than likely, and (3) remote - the chance
      of the future event or events occurring is slight. In
      addition, we have reviewed the tax liabilities as of June 30, 2007 by adopting
      FIN 48.No provision for the potential tax penalties has been made in our
      financial statements as we believe we did not cause the late payment of taxes,
      and that the probability of having to pay such late payment penalties is remote.
      We have reviewed our tax situation up to the date of this Form-10QSB, and
      concluded that the probability of having to pay such late payment penalties
      remains remote.





**Recent
      Accounting Pronouncements**




20




In
      September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS 157 ). FAS
      157
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. The provisions of FAS
      157
      are effective for the fiscal year beginning after November 15, 2007. We are
      currently evaluating the impact of the provisions of FAS
      157.





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 results of operations. The Company does not believe that any other of the
      recently issued and adopted, but not yet effective, accounting standards would
      have a material effect on the accompanying financial statements.





**Risk
      Factors**





*Investing
      in our common stock involves a high degree of risk. Investors should carefully
      consider the risks described below together with the financial statements and
      other information contained in this document.*





**Risks
      Related to our Business**





*We
      depend on the services of our directors and key employees, the loss of which
      could harm our business.*





We
      believe our success relies on the strategies, vision, efforts and technical
      expertise of our directors and key management personnel, including Mr. Song
      Jinan, Dr. Huang Weida and Dr. Du Wen Min. The resignation or departure of
      any
      of these key people could have a material adverse impact on our operations
      and
      future prospects. In addition, if any of these key people join a competitor
      or
      form a competing company, we could lose customers and incur additional expenses
      to recruit replacements and train personnel. We have entered into standard
      form
      confidentiality agreements with our technical employees with the exception
      of
      our directors and our key executives which contain non-competition clauses.
      We
      do not maintain key-man life insurance for any of our key
      executives.





*Failure
      to attract and retain qualified employees may adversely affect our
      business.*





Our
      continued success depends largely on our ability to attract and retain highly
      skilled executive, managerial and technical employees. We may face difficulties
      in recruiting skilled personnel in our industry due to its specialized nature.
      If we are unable to attract and retain a sufficient number of suitably skilled
      and qualified personnel, our business would be materially and adversely
      affected. We may also have to pay substantial wages to attract sufficient
      numbers of skilled employees and professionals, which may adversely affect
      our
      operating margins.





*We
      are not insured against potential losses and could be seriously harmed by
      natural disasters, catastrophes or acts of war.*





Our
      facilities and inventories could be materially damaged by hurricanes, floods
      and
      other natural disasters, catastrophes, acts of war or other catastrophic
      circumstances. We do not maintain insurance covering such events. If any of
      these events occur, we could incur material losses and liabilities, which could
      negatively affect our operating results.





*We
      may incur material product liability claims, which could increase our costs
      and
      adversely affect our reputation, revenues and operating
      income.*





As
      a
      manufacturer of products designed for human consumption, we are subject to
      product liability claims that the use of our products has resulted in injury.
      Our products contain three types of live bacteria, lactobacillus acidophilus,
      bifidobacterium bifidum and bifidobacterium adolescentis, which fall within
      the
      nine types of “good” live bacteria that are approved for direct sale to the
      public in China as health food. We obtain our bacteria from human sources.
      Although we believe this reduces the risk that it will be rejected by the human
      body, there can be no assurance that consumption of such bacteria could not
      result in adverse health effects. We do not maintain any product liability
      insurance. A product liability claim against us could result in costly
      litigation and could adversely affect our reputation with our customers, which
      in turn could adversely affect our revenues and operating income.




21





*Our
      revenues primarily depend on sales of one product and a decline in sales of
      this
      product could cause our revenues to decrease.*





We
      have
      derived the majority of our revenue from the sale of our Shining Essence
      product. Sales of this product represented approximately 55% and 62% of our
      total sales for the first quarter ended June 30, 2006 and 2007 respectively.
      We
      expect that Shining Essence will continue to account for a large portion of
      our
      revenues for the foreseeable future. Any factors adversely affecting the pricing
      of, demand for or market acceptance of Shining Essence, including increased
      competition, could cause our revenues to decline and our business and future
      operating results to suffer.




*If
      our products fail to keep pace with advances in the industry, they may be
      displaced by competitors’ newly developed products.*





Other
      companies in our industry may gain significant competitive advantages by
      introducing new products to the market, delivering constant innovation in
      products and techniques and offering competitive prices. Our future growth
      partially depends on our ability to develop products that are more effective
      in
      meeting consumer needs. In addition, we must be able to manufacture and
      effectively market those products. The sales of our existing products may
      decline if a competing product is introduced by other companies.





*We
      may have difficulty competing with larger and better financed companies in
      our
      industry, which could require us, among other things, to lower our prices and
      could result in the loss of our customers.*





Some
      of
      our existing and future competitors may have greater technical and financial
      resources than we do and may use these resources to pursue a competitive
      position that threatens our products. Our products could be rendered obsolete
      or
      uneconomical by the development of new products to treat conditions addressed
      by
      our products, as a result of technological advances affecting the cost of
      production, or as a result of marketing or pricing action by one or more of
      our
      competitors.





Additionally,
      with China’s accession to the World Trade Organization, the Chinese government
      has undertaken to open up the Chinese market to foreign companies. China reduced
      its average import tariff rate overall to 11.50% in 2003 and has further reduced
      it to 9.90% in 2005. As a result, foreign competitors may form alliances with
      or
      acquire companies in our industry in China. Intensified competition from these
      foreign competitors may lead to lower profit margins due to price competition,
      loss of customers and slower than anticipated growth.





*Unfavorable
      publicity or research reports casting a negative light on our industry or our
      products could change consumer perceptions and have an adverse affect on our
      ability to market and sell our products.*





We
      believe that our industry is affected by media attention. Future research
      reports or publicity about the quality of products in our industry generally,
      or
      our products in particular, could have a material adverse effect on our
      business. Scientific research to date is preliminary and there can be no
      assurance that future scientific research or publicity will be favorable to
      our
      industry or any particular product or consistent with earlier favorable research
      or publicity. Adverse publicity could arise even if the adverse effects
      associated with such products resulted from consumers’ failure to consume such
      products appropriately. Given our dependence upon consumer perceptions, adverse
      publicity, whether or not accurate, associated with illness or other adverse
      effects resulting from the consumption of our products or any similar products
      distributed by other companies could have a material adverse effect on our
      business.





*Our
      planned expansion into the bulk additive business may not generate sufficient
      revenues and the construction of our new facility to accommodate this business
      may result in increased costs and losses.*




We
      intend
      to expand our operations into the bulk additive business through the supply
      of
      high quality probiotics to be used as additives in dairy products to
      manufacturers in China. We plan to construct a new production plant with a
      150-ton capacity which can accommodate our new bulk additive business. This
      will
      expose us to many risks, including the following:




·
            there
                may not be sufficient market demand for bulk probiotics additives
                or our
                products in particular;


·
            we
                may experience delays and cost overruns during construction of our
                new
                facility which may result in losses; and


·
            we
                may experience substantial start up losses when the plant is first
                commissioned.





*Our
      plans to geographically expand our marketing and sales efforts and directly
      sell
      our products directly to retail consumers may fail.*





To
      date,
      we have only sold our products in the greater Shanghai area. We currently intend
      to expand our marketing and sales efforts to the rest of China. There is no
      assurance that we will receive the same level of public demand for our products
      in other parts of China.





In
      addition, we have been selling through distributors since our first product,
      Shining Essence, was launched in the market in April 2001. We opened our first
      retail store in March 2006. We intend to expand our operations by opening
      additional new retail stores to facilitate direct sales of our products to
      customers. There is no assurance that we can successfully implement our direct
      selling model.




22





As
      we
      increase the geographic area of our selling efforts and implement a direct
      selling model, there is a risk that our current systems may not be able to
      accommodate the increased volume or the complexity of the future business.
      Our
      short term operating results may be adversely affected as additional capital
      investments will have to be made for system upgrades, replacements or
      improvements.





*We
      face potential tax exposure.*





Our
      principal operations are in China. Business enterprises established in China
      are
      subject to income taxes and value added taxes under Chinese tax laws and
      regulations unless they have exemptions. We have made tax payments to the
      Chinese tax authorities since 2005. Our management believes that our operations
      in China 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 China. As a result, there is no way to ascertain the position
      which may be taken by the relevant Chinese tax authorities in the future. 
Accordingly, our financial statements contain full provisions for all applicable
      tax liabilities (other than potential tax penalties), plus surcharge, for all
      prior calendar years for such taxes. Such provisions for tax liabilities and
      surcharge will be reversed out of the financial statements at the appropriate
      point in the future.





According
      to Chinese tax regulations, outstanding tax payable in China 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 taxes payable, which amount to $4.88 million (if calculated based on 0.5
      times of taxes payable) to $49 million (if calculated based on five times of
      the
      amount of taxes payable) as of June 30, 2006 and 2007. No provision for the
      potential tax penalties has been made in our financial statements as our
      management believes that the possibility of having to pay the penalties is
      unlikely.





In
      addition, in connection with dividends paid to the Shining shareholders between
      April 2003 to June 2005, Shining did not deduct a withholding tax at the rate
      of
      20% as required by applicable Chinese laws and regulations. No provision for
      the
      potential tax penalties with respect to this matter has been made in our
      financial statements as our management believes that the possibility of having
      to pay the penalties is unlikely. However, we face potential for the payment
      of
      penalties for this failure to withhold taxes if the Chinese authorities pursue
      this matter.




*We
      may not be able to protect our intellectual property against claims by other
      parties or enforce our rights with respect to our intellectual
      property.*





We
      have
      not purchased or applied for any patents other than three registered Chinese
      patents in respect of the packaging processes and technologies we use in our
      production process and a pending registration of a patent regarding the
      production of one of our products, as we are of the view that it would not
      be cost-effective to do so at this time. Without patents, we may have no legal
      recourse in the event that our processes and technologies are replicated by
      other parties. If our competitors are able to replicate our processes,
      technologies and systems at lower costs, we may lose our competitive advantage
      and our profitability will be adversely affected.




In
      addition, we believe that over the last five years our “Shining” brand has
      become a highly recognizable brand in our industry in Shanghai. To protect
      this
      brand, which we consider important to our continued success, we have registered
      four trademarks in China. If our competitors introduce products of inferior
      qualities to the market using trademarks that are confusingly similar to the
      “Shining” trademarks, our reputation and operating results will be adversely
      affected.





From
      time
      to time, we may have to resort to litigation to enforce our rights with respect
      to our intellectual property. This type of litigation could result in
      substantial costs and diversion of our resources, which would adversely affect
      our results of operations.





*Management
      by a small team of officers may create conflicts of interests and impede the
      successful implementation of our growth plans.*





Mr.
      Song and Mr. Li, our only executive officers, are responsible for all
      managerial functions of our company. This concentration of management could
      be
      disadvantageous to stockholders with interests different from those of
      Mr. Song or Mr. Li. In addition, without a more complete executive
      management team we may not be able to implement our growth plans, which could
      adversely affect our results of operations. We currently plan on hiring
      additional employees to complete our management team, but we cannot assure
      you
      that we will be able to successfully locate or hire suitable
      candidates.





**Risks
      Related to Government Regulations**





*We
      are subject to government regulation in China, and changes in Chinese
      regulations may substantially increase the cost of manufacturing and selling
      our
      products.*





The
      manufacturing and marketing of our products are subject to various governmental
      regulations in China. Government regulation includes inspection of and controls
      over manufacturing, safety and environmental controls, efficacy, labeling and
      the sale and distribution of wellness products.




23





As
      a
      company which produces probiotics supplements, we are subject to the Law on
      the
      Food Conditions of the PRC which became effective on October 30, 1995, the
      Administrative Rules for Healthy Food promulgated by the Ministry of Health
      on
      March 15, 1996 which became effective on June 1, 1996, the Notice of Circulating
      the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and its
      appendixes-Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food,
      and List of Good-Live-Bacteria Applicable for Healthy Food, promulgated by
      the
      Ministry of Health which became effective on March 23, 2001, the Administration
      Rules for the Registration of Healthy Food (experimental) promulgated by the
      State Food and Drug Administration on April 30, 2005 which became effective
      on
      July 1, 2005, and other relevant rules and regulations issued by the Ministry
      of
      Health and the State Food and Drug Administration. In addition, Shining is
      a
      Chinese corporation and therefore is subject to the Company Law of China and
      more specifically to the Foreign Company provisions of the Company Law and
      the
      Law on Foreign Capital Enterprises of China.





Our
      industry is relatively new in China, and the manner and extent to which it
      is
      regulated is evolving. Changes in existing laws or new interpretations of such
      laws may have a significant impact on our methods and costs of doing business.
      For example, new legislative proposals that affect our product pricing,
      reimbursement levels, approval criteria and manufacturing requirements may
      be
      proposed and adopted.





The
      costs
      of compliance with current or future legislation or regulatory requirements
      may
      be significant, and could force us to curtail our operations or otherwise have
      a
      material adverse effect on our financial condition, results of operations or
      cash flows. For example, we have obtained three licenses and permits which
      are
      required for us to operate our business in China. If the regulations regarding
      these licenses and permits are changed, it may be materially burdensome for
      us
      to obtain or renew these licenses and permits or they may be otherwise
      unavailable.





*Government
      regulation of our retail prices and advertising methods may adversely affect
      our
      results of operations.*





We
      are
      subject to government regulations with respect to the prices we charge, the
      rebates we may offer to customers and our marketing methods. In addition, we
      are
      required to obtain approval from Chinese government authorities regarding the
      contents of advertisements related to our products before they can be published.
      If the Chinese government requires that we set our retail prices at
      undesirable prices or significantly limits our ability to advertise our
      products, it could have a material adverse effect on our results of
      operations.





*We
      may not be able to obtain regulatory approvals for our products or reimbursement
      from the sale of our products.*





The
      manufacture and sale of our products in China is highly regulated by a number
      of
      state, regional and local authorities. These regulations significantly increase
      the difficulty and costs involved in obtaining and maintaining regulatory
      approval for marketing new and existing products. In addition, our future growth
      and profitability are, to a significant extent, dependent upon our ability
      to
      obtain timely regulatory approvals from the relevant authorities.





**Risks
      Related to Doing Business in China**





*Adverse
      changes in China’s economic, political and social conditions and government
      policies could have a material adverse effect on the overall economic growth
      of
      China, which could adversely affect our results of operations and financial
      condition.*





We
      currently conduct our business solely in China. Changes in the economic and
      political situation in China and the economic, financial, fiscal and other
      policies adopted by the Chinese government may affect our operations,
      performance and profitability. The economy of China differs from the economies
      of most developed countries in many respects, including:




·
            structure;


·
            extent
              of government involvement;




·
            level
              of development;




·
            growth rate;




·
            control of foreign exchange; and




·
            allocation of resources.




China’s
      economy has traditionally been subject to central planning, with a series of
      economic plans promulgated and implemented by the Chinese government. Over
      the
      past 25 years, the Chinese government has been reforming the economic and
      political systems in China in an attempt to achieve economic and social
      advancements. Many of these reforms were unprecedented and are expected to
      continue while political, economic and social factors may also lead to further
      adjustments to China’s reform measures. These reforms and adjustments may not
      always have a positive effect on our operations. Accordingly, we cannot assure
      you that our performance and profitability will not be adversely affected from
      these measures. In addition, there is no assurance that the Chinese government
      will continue to pursue economic liberalization and other reforms.




24





*Macroeconomic
      measures taken by the Chinese government may cause the Chinese economy to slow
      down.*





In
      response to concerns relating to China’s high rate of growth in industrial
      production, bank credit, fixed investment and money supply and growing
      inflationary pressures, the Chinese government has taken measures to slow
      economic growth to a more manageable level. Among the measures that the Chinese
      government has taken are restrictions on bank loans in certain sectors and
      the
      increase of interest rates. We cannot assure you that those measures will not
      result in a slowdown in economic growth and hence a reduction in demand for
      consumer products in China. These measures and any additional measures could
      contribute to a slowdown in the Chinese economy and could potentially cause
      the
      economy to enter a recession, which could have an adverse impact on demand
      for a
      wide range of products in China, including our products.





*There
      are uncertainties regarding interpretation and enforcement of Chinese laws
      and
      regulations.*





China’s
      legal system is a civil law system based on statutory law. Prior legal decisions
      and judgments have little precedential value. China is still in the process
      of
      developing a comprehensive statutory framework and its legal system is still
      considered to be underdeveloped in comparison with the legal systems in some
      western countries. Since 1979, the Chinese government has formulated and enacted
      a large number of laws and regulations governing economic matters, securities
      activities and foreign investments.




Despite
      significant development in its legal system, China does not have a comprehensive
      system of laws. The interpretation of Chinese law by courts and tribunals may
      be
      inconsistent and influenced by government policies and other considerations.
      In
      addition, the enforcement of existing laws and regulations can be uncertain
      and
      unpredictable. Judgments and arbitration rulings may be unenforceable. The
      promulgation of new laws, changes to existing laws and inconsistent
      interpretation of laws could have a negative impact on our
      business.





*All
      of our officers and directors, and substantially all of our assets, are located
      in China, thus it may be extremely difficult to acquire jurisdiction and enforce
      liabilities against our officers, directors and assets.*





Because
      our executive officers and directors are Chinese citizens it may be
      difficult, if not impossible, to acquire jurisdiction over them in the
      event a lawsuit is initiated against us or our officers or directors by a
      stockholder or group of stockholders in the United States. We anticipate that
      our future officers and directors will also be Chinese citizens. Because the
      majority of our assets are located in China, it would also be extremely
      difficult to access those assets to satisfy an award entered against us in
      U.S.
      court.





*Restrictions
      on currency exchange may limit our ability to receive and use our revenues
      effectively.*





Since
      almost all of our future revenues may be in the form of Renminbi, any future
      restrictions on currency exchanges may limit our ability to use revenue
      generated in Renminbi to fund any future business activities outside China
      or to
      make dividend or other payments in U.S. dollars. There are significant
      restrictions on convertibility of the Renminbi for current account
      transactions, including primarily the restriction that foreign invested
      enterprises may only buy, sell or remit foreign currencies, after providing
      valid commercial documents, at those banks authorized to conduct foreign
      exchange business. In addition, conversion of Renminbi for capital account
      items, including direct investment and loans, is subject to governmental
      approval in China, and companies are required to open and maintain separate
      foreign exchange accounts for capital account items. We cannot be certain that
      the Chinese regulatory authorities will not impose more stringent restrictions
      on the convertibility of the Renminbi, especially with respect to foreign
      exchange transactions.





**Risks
      Related to our Common Stock**





*Shares
      of our common stock which are eligible for immediate sale by our stockholders
      may decrease the market price of our common stock.*





We
      had
      17,080,000 shares outstanding as of June 30, 2007, including approximately
      230,000 shares which are free trading and may be sold immediately by our
      stockholders and 5,664,833 shares which are included on a Form SB-2 that we
      originally filed with the Securities and Exchange Commission on March 24, 2006.
      If our stockholders sell substantial amounts of our common stock, or there
      is a
      perception in the market that such sales may occur, then the market price of
      our
      common stock could decrease.




*Concentration
      of our ownership by our President and Chief Executive Officer
      and a director and his family may dissuade new investors from
      purchasing our securities which could result in a lower trading price for our
      securities than if our ownership was less concentrated.*





As
      of
      June 30, 2007, Mr. Song, our President and Chief Executive Officer
      and a director, owned 29.8% of our outstanding common stock, and
      members of his family owned an additional 20.3% of our common stock. As a
      result, Mr. Song has the ability to exert substantial influence or absolute
      control over all matters requiring approval by our stockholders, including
      the
      election and removal of directors, any proposed merger, consolidation or sale
      of
      all or substantially all of our assets and other corporate transactions. This
      concentration of control could be disadvantageous to other stockholders with
      interests different from those of Mr. Song. For example, Mr. Song
      could delay or prevent an acquisition or merger even if the transaction would
      benefit other stockholders. In addition, this concentration of share ownership
      may adversely affect the trading price for our common stock because investors
      often perceive disadvantages in owning stock in companies with a significant
      concentration of ownership among a limited number of stockholders.




25





*Our
      common stock price has been volatile, and you may not be able to sell
      your shares at or above the price that you pay for
      the shares.*





Our
      common stock is currently quoted on the OTC Bulletin Board. Securities quoted
      on
      the OTC Bulletin Board tend to be highly illiquid, in part because there is
      no
      national quotation system by which potential investors can track the market
      price of shares except through information received or generated by a
      limited number of broker-dealers that make markets in particular stocks. There
      is a greater chance of market volatility for securities that trade on the OTC
      Bulletin Board as opposed to a national exchange or quotation system. This
      volatility may be caused by a variety of factors including:





·
            the
                lack of readily available price
                quotations;





·
            the
                absence of consistent administrative supervision of “bid” and “ask”
                quotations;





·
            lower
                trading volume; and




·
              market
                  conditions.





The
      price
      of our common stock has historically been volatile and our investors experience
      wide fluctuations in the market price of our securities. These fluctuations
      may
      have an extremely negative effect on the market price of our securities and
      may
      prevent you from obtaining a market price equal to your purchase price when
      you
      attempt to sell our securities in the open market. In these situations, you
      may
      be required to either sell our securities at a market price which is lower
      than
      your purchase price, or to hold our securities for a longer period of time
      than
      you planned.





*Volatility
      in the price of our common stock may cause it to be classified as penny stock
      which will result in limits on trading and our stock price could
      decline.*




Because
      our common stock is volatile, it may in the future fall under the SEC definition
      of “penny stock”, if our common stock is classified as “penny stock” we expect
      trading in our common stock, if any, to be limited because broker-dealers are
      required to provide their customers with disclosure documents prior to allowing
      them to participate in transactions involving our common stock. These disclosure
      requirements are burdensome to broker-dealers and may discourage them from
      allowing their customers to participate in transactions involving our common
      stock.





Rules
      promulgated by the SEC under Section 15(g) of the U.S. Securities Exchange
      Act of 1934, or Exchange Act, require broker-dealers engaging in transactions
      in
      penny stocks, to first provide to their customers a series of disclosures and
      documents, including:





·
            a
                standardized risk disclosure document identifying the risks inherent
                in
                investment in penny stocks;





·
            all
                compensation received by the broker-dealer in connection with the
                transaction;





·
            current
                quotation prices and other relevant market data;
                and





·
            monthly
                account statements reflecting the fair market value of the
                securities.





In
      addition, these rules require that a broker-dealer obtain financial and other
      information from a customer, determine that transactions in penny stocks are
      suitable for such customer and deliver a written statement to such customer
      setting forth the basis for this determination.





*Our
      preferred stock may make a third-party acquisition of our company more difficult
      which in turn would make a purchase of our shares less desirable, thereby
      potentially reducing our stock price or the liquidity of
      our shares.*





Our
      certificate of incorporation authorizes our board of directors to issue up
      to
      10,000,000 shares of preferred stock having such rights as may be
      designated by our board of directors, without stockholder approval. However,
      pursuant to the terms of the Investors’ Rights Agreement we entered into in
      connection with the share exchange, we are restricted from issuing preferred
      stock for a period of two years from the date of such agreement without first
      obtaining the approval of the holders of at least 75% of our
      outstanding shares of common stock. The issuance of preferred stock could
      inhibit a change in our control by making it more difficult to acquire the
      majority of our voting stock and thereby making the purchase of our shares
      by new investors less likely. A lesser interest in the purchase of
      our shares could reduce our market price or make it more difficult for
      stockholders to sell their shares. No shares of preferred stock are
      currently outstanding.




26





*We
      do
      not anticipate paying dividends.*





We
      do not
      anticipate paying dividends in the foreseeable future. Also, pursuant to the
      terms of the Investors’ Rights Agreement we entered into in connection with the
      share exchange, we are restricted from authorizing the payment of dividends
      for
      a period of two years from the date of such agreement without the approval
      of
      the holders of at least 75% of our outstanding shares of common stock. Any
      dividends which we may pay in the future will be at the discretion of our board
      of directors and will depend on our future earnings, any applicable regulatory
      considerations, our financial requirements and other similarly unpredictable
      factors. For the foreseeable future, we anticipate that we will retain any
      earnings which we may generate from our operations to finance and develop our
      growth.





**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**





As
      of the
      end of the period covered by this report, our principal executive officer and
      principal financial officer evaluated the effectiveness of the design and
      operation of our disclosure controls and procedures.  Based upon, and as of
      the date of that evaluation, our principal executive officer and principal
      financial officer concluded that, our disclosure controls and procedures are
      effective to assure that information required to be disclosed in the reports
      that we file or submit under the Securities and Exchange Act of 1934 is
      recorded, processed, summarized and reported within the time periods specified
      by the Securities and Exchange Commission's rules and forms and accumulated
      and
      communicated to our management to allow timely decisions regarding
      disclosure.





There
      were no changes in our internal control over financial reporting during the
      quarter ended June 30, 2007 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




**PART
      II - OTHER INFORMATION**




**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





None.




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





None.




**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





None.




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





None.




**ITEM
      5.**  **OTHER
      INFORMATION**





None.




**ITEM
      6.**  **EXHIBITS**





Exhibit
      31.1 - Certification of Chief Executive Officer pursuant to Section 302 of
      the
      Sarbanes-Oxley Act of 2002





Exhibit
      31.2 - Certification of Chief Financial Officer pursuant to Section 302 of
      the
      Sarbanes-Oxley Act of 2002





Exhibit
      32.1 - Certification of Chief Executive Officer pursuant to Section 906 of
      the
      Sarbanes-Oxley Act of 2002





Exhibit
      32.2 - Certification of Chief Financial Officer pursuant to Section 906 of
      the
      Sarbanes-Oxley Act of 2002




27




*
      * * *
      *




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**CHINA-BIOTICS,
                INC.**
              (Registrant)/s/
              Raymond LiDate:
                August 10, 2007
            Raymond
                Li
              Chief
                Financial Officer




28