**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended September 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**


**Telephone
      number: (86 21) 5834 9748**


(Address
      of Principal Executive Offices)


(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.


xYes o No




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


oYes
xNo





As
      of
      November 13, 2007, 17,080,000 shares of the Issuer's common stock were
      outstanding.





Transitional
      Small Business Disclosure Format (check one): **** o Yes
xNo










**TABLE
      OF CONTENTS**


Page**Part
                  I - Financial Information**ITEM
                  1.
              FINANCIAL
                  STATEMENTS
              1ITEM
                  2.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS
              13ITEM
                  3.
              CONTROLS
                  AND PROCEDURES
              22**Part
                  II - Other Information**ITEM
                  6.
              EXHIBITS
              22SIGNATURES
              
              23







**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
              
              September
                  30,2007**ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              $
              26,992,025
              
              $
              35,221,974Accounts
                  receivable
              
              
              14,309,818
              
              
              8,654,511Deposit
                  paid
              
              
              216,236
              
              
              222,747Inventories
              
              
              203,054
              
              
              595,127Prepayment
              
              
              176,094
              
              
              1,887,561**Total
                  current assets**
              
              $
              41,897,227
              
              $
              46,581,920**Plant
                  and equipment, net**
              
              
              2,682,617
              
              
              6,474,621**Total
                  assets**
              
              $
              44,579,844
              
              $
              53,056,541**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              1,523,471
              
              $
              1,821,337Tax
                  payables
              
              
              18,019,721
              
              
              19,546,360Other
                  payables and accruals
              
              
              1,126,645
              
              
              1,379,976**Total
                  current liabilities**
              
              $
              20,669,837
              
              $
              22,747,673**Commitments
                  and contingencies****Stockholders'
                  equity:**Common
                  stock, par value $0.0001, 100,000,000 shares authorized, 17,080,000
                  shares
                  issued and outstanding
              
              
              1,708
              
              
              1,708Additional
                  paid-in capital
              
              
              7,863,031
              
              
              7,863,031Retained
                  earnings
              
              
              12,284,900
              
              
              17,795,266Accumulated
                  other comprehensive income
              
              
              734,574
              
              
              1,623,069Capital
                  and statutory reserves
              
              
              3,025,794
              
              
              3,025,794**Total
                  stockholders' equity**
              
              $
              23,910,007
              
              $
              30,308,868**Total
                  liabilities and stockholders' equity**
              
              $
              44,579,844
              
              $
              53,056,541





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 September30,
            
            Six
                months ended September30,2006
            
            2007
            
            2006
            
            2007**Net
                sales**
            
            $
            5,467,037
            
            $
            8,184,983
            
            $
            13,470,001
            
            $
            17,700,316Cost
                of sales
            
            
            (1,650,364
            )
            
            (2,205,623
            )
            
            (4,009,103
            )
            
            (4,856,595
            )**Gross
                profit**
            
            $
            3,816,673
            
            $
            5,979,360
            
            $
            9,460,898
            
            $
            12,843,721Operating
                expenses:Selling
                expenses
            
            $
            (952,454
            )
            $
            (1,926,756
            )
            $
            (2,221,986
            )
            $
            (3,243,100
            )General
                and administrative expenses
            
            
            (384,734
            )
            
            (1,087,053
            )
            
            (790,724
            )
            
            (1,896,617
            )Total
                operating expenses
            
            $
            (1,337,188
            )
            $
            (3,013,809
            )
            $
            (3,012,710
            )
            $
            (5,139,717
            )**Income
                from operations**
            
            $
            2,479,485
            
            $
            2,965,551
            
            $
            6,448,188
            
            $
            7,704,004Other
                income and expenses:Other
                income
            
            $
            68,855
            
            $
            282
            
            $
            104,378
            
            $
            71,942Other
                expenses
            
            
            (34,886
            )
            
            (13,011
            )
            
            (38,745
            )
            
            (19,935
            )Total
                other income (expenses)
            
            $
            33,969
            
            $
            (12,729
            
            $
            65,633
            
            $
            52,007**Income
                before taxes**
            
            $
            2,513,454
            
            $
            2,952,822
            
            $
            6,513,821
            
            $
            7,756,011Provision
                for income taxes
            
            
            (932,091
            )
            
            (982,689
            )
            
            (2,056,802
            )
            
            (2,245,645
            )**Net
                income**
            
            $
            1,581,363
            
            $
            1,970,133
            
            $
            4,457,019
            
            $
            5,510,366**Earnings
                per share:**Basic
                and diluted
            
            $
            0.09
            
            $
            0.11
            
            $
            0.26
            
            $
            0.32**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            17,080,000
            
            
            17,080,000
            
            
            17,080,000
            
            
            17,080,000





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





2




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(Amounts
      expressed in US Dollars)





Common
                Stock
            
            AdditionalPaid-in
            
            Retained
            
            Accumulated
                Other Comprehensive
            
            Capital
                &StatutoryShares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
            
            Reserves
            
            TotalBalance-
                March 31, 2007 (audited)
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            12,284,900
            
            $
            734,574
            
            $
            3,025,794
            
            $
            23,910,007Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            5,510,366
            
            
            888,495
            
            
            -
            
            
            6,398,861Other
                comprehensive income:Foreign
                currency translation adjustments, net of taxes of $-0-
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,398,861Balance-
                September 30, 2007
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            17,795,266
            
            $
            1,623,069
            
            $
            3,025,794
            
            $
            30,308,868




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)


Six
                  months ended September 30,2006
              
              2007**CASH
                  FLOW FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              4,457,019
              
              $
              5,510,366Adjustment
                  for:Depreciation
              
              
              220,104
              
              
              349,111Gain
                  on disposal of plant and equipment
              
              
              (14,793
              )
              
              -(Increase)/Decrease
                  in restricted cash
              
              
              114,037
              
              
              -(Increase)/Decrease
                  in accounts receivable
              
              
              (140,449
              )
              
              5,992,036(Increase)/Decrease
                  in other receivables
              
              
              (209,030
              )
              
              -(Increase)/Decrease
                  in inventories
              
              
              (41,775
              )
              
              (383,380
              )(Increase)/Decrease
                  in prepayments
              
              
              (104,876
              )
              
              (1,693,248
              )Increase/(Decrease)
                  in accounts payable
              
              
              (358,998
              )
              
              239,274Increase/(Decrease)
                  in income tax, surcharge tax and dividends withholding tax
              
              
              2,056,803
              
              
              828,172Increase/(Decrease)
                  in other payables and accruals, and value added tax
                  payable
              
              
              (771,307
              )
              
              348,841**NET
                  CASH PROVIDED BY OPERATING ACTIVITIES**
              
              $
              5,206,735
              
              $
              11,191,172**CASH
                  FLOWS USED IN INVESTING ACTIVITIES**Sales
                  proceeds from disposal of plant and equipment
              
              
              14,793
              
              
              -Additions
                  of fixed assets
              
              
              (1,317,328
              )
              
              (4,027,160
              )**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              $
              (1,302,535
              )
              $
              (4,027,160
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Effect
                  of exchange rate changes on cash
              
              $
              189,162
              
              $
              1,065,937**NET
                  INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
              
              $
              4,093,362
              
              $
              8,229,949**CASH
                  AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                  PERIOD**
              
              
              19,840,812
              
              
              26,992,025**CASH
                  AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
              
              $
              23,934,174
              
              $
              35,221,974




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
      principles generally accepted in the United States of America. 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 September 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
                six
                months ended September 30, 2007 and 2006 reflect the following: (i)
                result
                of operations of SGI, Shining, GSL and our company from April 1,
                2006 to
                September 30, 2006 and (ii) result of operations of SGI, Shining,
                GSL, GBS
                and our company from April 1, 2007 to September 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 six months ended September 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.





6




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)








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(as-if
                basisfor
                theCompany's
            
            No.
                of
              SGI
            
            No.
                of theCompany'scommon
                stock(Restated
                for
            
            No.
                of days outstandingThree
                months ended September 30,
            
            Weighted
                average number of outstanding common stock
              Three
                months ended September 30,common
              stock)
            
            ordinary
              shares
            
            recapitalization
              of
                SGI)
            
            2006
            
            2007
            
            2006
            
            2007Number
                of days in reporting period
            
            
            
            
            
            
            
            
            
            
            
            92
            
            
            92SGI
                existing shares as of March 31, 2004
            
            
            Pre-3/31/2004
            
            
            1,000
            
            
            1,118,600
            
            
            92
            
            
            92
            
            
            1,118,600
            
            
            1,118,600SGI
                issued new shares upon receipt of cash
            
            
            3/15/2006
            
            
            9,000
            
            
            10,067,400
            
            
            92
            
            
            92
            
            
            10,067,400
            
            
            10,067,400SGI
                issued new shares for convertible bond conversion
            
            
            3/22/2006
            
            
            1,429
            
            
            2,924,000
            
            
            92
            
            
            92
            
            
            2,924,000
            
            
            2,924,000SGI
                issued new shares for cash of $5million under private
                placement
            
            
            3/22/2006
            
            
            2,858
            
            
            1,870,000
            
            
            92
            
            
            92
            
            
            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
            
            
            92
            
            
            92
            
            
            25,481,004
            
            
            25,481,004Stock
                held in treasury prior to reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            (4,381,004
            )
            
            92
            
            
            92
            
            
            (4,381,004
            
            
            (4,381,004
            )Repurchased
                stock from Stan Ford in conjunction with reverse
                acquisition
            
            
            3/22/2006
            
            
            
            
            
            (20,000,000
            )
            
            92
            
            
            92
            
            
            (20,000,000
            
            
            (20,000,000
            )17,080,000
            
            
            
            
            
            
            
            
            17,080,000
            
            
            17,080,000






7




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)






Date
                of issue or purchase
              (as-if
                basis
              for
                the
              Company's
              common
                stock)
            
            No.
                of
              SGI
              ordinary
                shares
            
            No.
                of the
              Company's
              common
                stock
              (Restated
                for
              Recapitalization
                of SGI)
            
            No.
                of days outstanding
              Six
                months ended September 30,
            
            
            
            Weighted
                average number of outstanding common stock
              Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Number
                of days in reporting period
            
            
            
            
            
            
            
            
            
            
            
            183
            
            
            183SGI
                existing shares as of March 31, 2004
            
            
            Pre-3/31/2004
            
            
            1,000
            
            
            1,118,600
            
            
            183
            
            
            183
            
            
            1,118,600
            
            
            1,118,600SGI
                issued new shares upon receipt of cash
            
            
            3/15/2006
            
            
            9,000
            
            
            10,067,400
            
            
            183
            
            
            183
            
            
            10,067,400
            
            
            10,067,400SGI
                issued new shares for convertible bond conversion
            
            
            3/22/2006
            
            
            1,429
            
            
            2,924,000
            
            
            183
            
            
            183
            
            
            2,924,000
            
            
            2,924,000SGI
                issued new shares for cash of $5 million under private
                placement
            
            
            3/22/2006
            
            
            2,858
            
            
            1,870,000
            
            
            183
            
            
            183
            
            
            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
            
            
            183
            
            
            183
            
            
            25,481,004
            
            
            25,481,004Stock
                held in treasury prior to reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            (4,381,004
            )
            
            183
            
            
            183
            
            
            (4,381,004
            
            
            (4,381,004
            )Repurchased
                stock from Stan Ford in conjunction with reverse
                acquisition
            
            
            3/22/2006
            
            
            
            
            
            (20,000,000
            )
            
            183
            
            
            183
            
            
            (20,000,000
            
            
            (20,000,000
            )17,080,000
            
            
            
            
            
            
            
            
            17,080,000
            
            
            17,080,000






8




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)






3.
            RISKS,
                UNCERTAINTIES, AND CONCENTRATIONS





(a) Nature
      of Operations





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





(b) Concentration
      of Credit Risk





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





As
      of
      September 30, 2007, the Group had cash deposits of $35 million placed with
      several banks in the PRC, which includes the Special Administrative Region of
      Hong Kong, where there are currently no rules or regulations in place for
      obligatory insurance of bank accounts.





For
      the
      three months and six months ended September 30, 2006 and 2007, all of the
      Group's sales arose in the PRC. In addition, all accounts receivable as at
      September 30, 2007 also arose in the PRC.




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
            
            September
                30,
              2007Trade
                receivables
            
            $
            14,309,818
            
            $
            8,654,511Less
                : Allowances for doubtful debt
            
            
            -
            
            
            -$
            14,309,818
            
            $
            8,654,511





9




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)






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
            
            September
                30,
              2007Raw
                materials
            
            $
            165,337
            
            $
            325,796Work-in-progress
            
            
            12,385
            
            
            50,612Finished
                goods
            
            
            25,332
            
            
            218,719$
            203,054
            
            $
            595,127





6.
            PLANTS
                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
            
            September
                30,
              2007Plant
                and machinery
            
            $
            3,486,207
            
            $
            6,065,767Office
                equipment
            
            
            1,781,637
            
            
            2,939,840Motor
                vehicles
            
            
            40,793
            
            
            101,998Leasehold
                improvements
            
            
            577,052
            
            
            1,020,7775,885,689
            
            
            10,128,382Less:
                Accumulated depreciation
            
            
            (3,203,072
            )
            
            (3,653,761
            )$
            2,682,617
            
            $
            6,474,621




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
            
            September
                30,
              2007Value
                added tax and other taxes
            
            $
            4,688,344
            
            $
            4,964,200Income
                tax
            
            
            3,338,947
            
            
            3,253,210Surcharge
                tax
            
            
            6,506,198
            
            
            7,737,729Dividends
                withholding tax
            
            
            3,486,232
            
            
            3,591,221$
            18,019,721
            
            $
            19,546,360





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 September 30, 2007, as presented in these
      financial statements, comprised the following:




March
                31, 2007
            
            Changes
                from April 1,2007 to
              September
                30, 2007
            
            September
                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




10




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)






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 PRC before income
      taxes during the periods as presented in these financial statements is
      summarized as follows:




Three
                months ended September30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Income/(Loss)
                in the British Virgin Islands before income taxes
            
            $
            (198,315
            )
            $
            (271,765
            )
            $
            (241,967
            )
            $
            (501,959
            )Income
                in the PRC before income taxes
            
            
            2,711,769
            
            
            2,874,112
            
            
            6,755,788
            
            
            7,907,494$
            2,513,454
            
            $
            2,602,347
            
            $
            6,513,821
            
            $
            7,405,535





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 September 30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Current
            
            $
            932,091
            
            $
            982,689
            
            $
            2,056,802
            
            $
            2,245,645Deferred
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            932,091
            
            $
            982,689
            
            $
            2,056,802
            
            $
            2,245,645





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





The
      Group
      has its principal operations in the PRC in the Shanghai Jinqiao special economic
      zone and hence enjoys a preferential income tax rate of 15%. From January 1,
      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 September 30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Computed
                tax at the local PRC statutory rate of 33%
            
            $
            894,885
            
            $
            1,002,890
            
            $
            2,229,411
            
            $
            2,663,906Non-deductible
                items
            
            
            2,567
            
            
            17,700
            
            
            240,669
            
            
            26,714Tax
                concession
            
            
            (489,519
            )
            
            (556,688
            )
            
            (1,347,316
            )
            
            (1,467,613
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            524,158
            
            
            518,787
            
            
            934,038
            
            
            1,022,638Total
                provision for income at effective rate
            
            $
            932,091
            
            $
            982,689
            
            $
            2,056,802
            
            $
            2,245,645





The
      Group
      has its principal operations in the 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 the amount of taxes, which amounts to $4.9 million to $49 million
      as of September 30, 2007. No provision for the potential tax penalties has
      been
      made in the Group's financial statements as management 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
                31,
            
            September
                30,2007
            
            2007Payable
                withinthe
                next twelve months
            
            $
            375,395
            
            $
            572,302the
                next 13th to 24th months
            
            
            274,792
            
            
            320,948the
                next 25th to 36th months
            
            
            63,714
            
            
            34,039the
                next 37th to 48th months
            
            
            -
            
            
            -the
                next 49th to 60th months
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -$
            713,901
            
            $
            927,289




(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 under “Risk Factors” in our Forms 10-KSB, Forms 10-QSB and other
      SEC filings. 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,” 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 year ended
      March
      31, 2007 and the second quarter ended September 30, 2007, substantially all
      our
      sales revenue comprised amounts receivable from the distributors for the sale
      of
      these products. Typically, 90 to 120 days' credits are given to the
      distributors.




Our
      first
      product, Shining Essence, which was launched in April 2001, remains our
      best-selling product. Sales of Shining Essence represented approximately 68%
      and
      61% of our total sales for the years ended March 31, 2006 and 2007,
      respectively, and 61% and 62% for the three months ended September 30, 2006
      and
      2007, respectively. In addition to Shining Essence, we have successfully created
      other new products, such as Shining Stomach Protection, Shining Beauty Essence,
      Shining Sicanel and Shining Bifidus Factor. In September 2007, we created and
      released our new Shining Probiotics Protein Powder product in the market. As
      we
      release new products in the future, we expect the percentage contribution of
      Shining Essence to our total sales to decrease. As our products comprise mainly
      live bacteria, which are reproduced by fermentation, we have historically had
      a
      low cost of production.




We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores, which we also refer to as training and
      logistics centers. In this regard, we opened our first pilot store in Shanghai
      in March 2006 and intend to open over 300 stores over the next two years. We
      expect that the additional demands from opening new stores will be met initially
      by increasing production from our existing plant, which currently has the
      necessary capacity, and in the longer term from our new plant. We expect that
      our stores will have a combination of full time staff and part time agents
      who
      will receive sales commissions. With our direct sales network, we will be
      selling to the end users, thereby capturing the margin previously made by our
      distributors and retail outlets. However, with more staff and agents there
      will
      be more selling and general and administrative expenses, with the result that
      we
      do not expect significant changes to our overall profit margins.





Our
      management believes that as China becomes more affluent, its citizens are
      becoming more health conscious. This has led to higher demand for health and
      functional food such as probiotics and yogurt. In addition, probiotics are
      increasingly used as additives in the production of infant formula. According
      to
      statements made by the Nutrition Development Centre of National Development
      and
      Reform Commission in China on April 1, 2007, probiotics will need to 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 have started a plan to construct a plant that
      will
      enable us to capture the anticipated demand for food additives. We expect that
      the new plant will commence production in the third quarter of fiscal year
      2008
      and start to make contributions to our earnings in the fiscal year ending March
      2009. The costs of this plant which is expected to be approximately $18 million
      including working capital for the first phase, will be financed by our internal
      working capital. Please refer to “The introduction of bulk additives products”
below for further information on this new plant.




13




Our
      management believes that the following trends in China will have an important
      impact on, and present significant opportunities for, our business:


·
              **Increasing
                  demand for functional food products.**As
                  the discretionary income and health-consciousness of the average
                  Chinese
                  consumer increase, we expect the demand for functional foods and
                  dietary
                  supplements to increase.
  ·
              **Curtailment
                  of the use of antibiotics and government support for probiotics.**China
                  has the highest per capita consumption of antibiotics in the world.
                  To
                  curtail the overuse of antibiotics, the Chinese government has
                  taken steps
                  to limit the use of antibiotic drugs. Moreover, the Chinese State
                  Food and
                  Drug Administration has acknowledged that probiotics are beneficial
                  for
                  human health.
  ·
                  **Increasing
                      demand for dairy product additives.**The
                      demand for functional foods and foods that use probiotic supplements
                      is
                      growing at a significant rate and our management believes that
                      it will
                      continue to do so. According to statements made by the Nutrition
                      Development Centre of National Development and Reform Commission
                      in China
                      on April 1, 2007, probiotics will need to be added to baby
                      milk powders
                      produced in China.
 
 ·
                  **Increasing
                      demand for dairy product additives.**The
                      demand for functional foods and foods that use probioticsupplements
                      is
                      growing at a significant rate and our management believes that
                      it will
                      continue to do so. According tostatements 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.
  Our
        management expects to capitalize on the opportunities created by these trends
        to
        achieve significant growth through:
 
 ·
                  **The
                      introduction of bulk additives products.**We
                      believe we are poised to achieve first-mover advantage in the
                      bulk
                      additive business for functional foods through the completion
                      of our
                      150-ton capacity plant, which is scheduled to commence production
                      in the
                      third quarter of 2008. Management estimates that Phase 1 of
                      the project,
                      which involves constructing a facility capable of producing
                      150 tons of
                      probiotics per annum, will cost $18 million, $16 million of
                      which is
                      expected to be paid in the third quarter of fiscal year 2008
                      and the
                      balance by the end of fiscal year 2008. Phase 2 of this project
                      will only
                      commence when demand for probiotics has exceeded the production
                      capacity
                      of the Phase 1 facility. Phase 2 of this project is expected
                      to cost $12
                      million. The construction cost of the plant will be funded
                      by cash at hand
                      and cash inflow from operations.
 
 On
        March
        21, 2006, Growing State, our subsidiary, 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 this plant. The agreement provides for
        the
        payment of leasing fees of approximately $2 million, 10% of which we paid
        on
        April 11, 2006 as a deposit, to be refunded upon payment in full of the
        aggregate lease amount. Payment of $2,100,828 will be due immediately before
        the
        issuance of approval documents regarding the land by the Qingpu People’s
        Republic Government. We are in the process of applying for the necessary
        approval documents. Our management believes that approval is likely, although
        it
        is not assured, and that approval may be obtained by the end of the third
        quarter of fiscal year 2008. If we fail to timely make this payment, we may
        be
        subject to monetary penalties, and the other party will have the right to
        terminate the agreement if it has not received payment within 30 days of
        such
        payment becoming due.
  ·
              **The
                  geographical expansion of retail sales through direct sales and
                  traditional sales channels.**We
                  intend to expand our sales to other cities in China through a combination
                  of distributors and our own stores. In this regard, we opened our
                  first
                  pilot store in Shanghai in March 2006 and intend to open over 300
                  stores
                  over the next two years. We expect that the additional demands
                  from
                  opening new stores will be met initially by increasing production
                  from our
                  existing plant, which currently has the necessary capacity, and
                  in the
                  longer term from our new plant that will have a capacity of 150-300
                  tons.
                  The initial, 150-ton phase of our new plant is scheduled to commence
                  operations in the third quarter of 2008.
  ·
              **The
                  development of new products.**We have introduced several new products which are sold exclusively
                  in our
                  stores. We plan to continue to develop new products aimed at improving
                  the
                  general health conditions of humans, enhancing their immune system
                  and
                  reducing health problems. This will strengthen our product pipeline
                  and
                  that we will be able to offer a wide array of products in the Shining
                  stores.




Our
      operation is generally not labor-intensive. We employed 266 people as of
      September 30, 2007. The construction of our new plant and the creation of the
      new direct sales network will result in significant increases in our number
      of
      employees as we expect to add over 1,000 staff and employees over the next
      two
      years. We also intend to recruit senior executives to strengthen our management
      team. However, as wages in China are relatively inexpensive, we expect that
      labor costs will remain insignificant.





14





Our
      principal operations are in China and we are subject to income taxes and value
      added taxes under Chinese tax laws and regulations unless there are exemptions.
      We have made regular 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. We have made full provisions in our financial
      statements 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, 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. Provisions for these potential tax penalties have
      been
      made in our financial statements.





**Results
      of Operations**





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





We
      achieved a net sales of $8.18 million and $17.7 million in the three months
      and
      six months ended September 30, 2007, respectively, which was 49% and 31% above
      our net sales of $5.46 million and 13.4 million respectively for the three
      months and six months ended September 30, 2006, respectively. Our growth in
      net
      sales primarily resulted from growth in the sales volume of our
      products. **** Shining
      Essence continued to be our best selling product, accounting for 62% of our
      sales revenue in the quarter ended September 30, 2007 (61% in the quarter ended
      September 30, 2006).





Our
      sales
      revenue was $8.18 million for the quarter ended September 30, 2007, which was
      49.7% above our sales revenue of $5.46 million for the quarter ended September
      30, 2006. The increase in sales revenue was primarily due to an increase in
      the
      sales volume of our products. The average unit selling prices of Shining Golden
      Shield, Shining Signal and Shining Energy decreased reflecting an increase
      in
      the percentage sales of smaller packages offset by increases in the selling
      prices resulting from increases in sales through our Shining stores. The rate
      of
      the sales volume growth of Shining Golden Shield, Shining Signal and Shining
      Energy were 109%, 23% and 63% respectively in the quarter ended September 30,
      2007 (17%, 143% and 75% respectively in the quarter ended September 30, 2006).





As
      of
      September 30, 2007, we had a total of 22 direct sales retail outlets, 18 in
      Shanghai and 4 in Changchun. We intend to expand our sales to other cities
      in
      China through a combination of distributors and our own stores. In this regard,
      we intend to open over 300 stores over the next two years at an anticipated
      cost
      of approximately $11 million, which comprise mainly store fit out cost, rental
      deposits and working capital. Our existing retail stores show that they have
      short pay back periods within one year, on average





We
      have
      started to construct a new plant with an overall project cost of $30 million.
      Phase 1 of the project involves construction of a facility capable of producing
      150 tons of probiotics per year and is estimated to cost $18 million, $16
      million of which is expected to be paid by the third quarter of fiscal year
      2008
      and the balance by the end of fiscal year 2008. We expect that the first phase
      of the new plant will be completed by the end of the third quarter of 2008.
      Subsequent phases of this project will only commence when demand for probiotics
      has exceeded the production capacity of the Phase 1 facility.





As
      of
      September 30, 2007, we had no debt and $35.2 million in cash. Management
      believes that we have sufficient internal resources to fund the expansion of
      our
      retail stores and the new bulk additives plant.





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




Our
      results for the three months and six months ended September 30, 2006 and 2007
      are summarized below:





Three
                months ended September 30, 2006
            
            Three
                months ended September 30, 2007Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            5,467,037
            
            
            100.00
            %
            $
            8,184,983
            
            
            100.00
            %Cost
                of sales
            
            
            (1,650,364
            )
            
            -30.19
            %
            
            (2,205,623
            )
            
            -26.95
            %**Gross
                profit**
            
            $
            3,816,673
            
            
            69.81
            %
            $
            5,979,360
            
            
            73.05
            %Operating
                expenses:Selling
                expenses
            
            $
            (952,454
            )
            
            -17.42
            %
            $
            (1,926,756
            )
            
            -23.54
            %General
                and administrative expenses
            
            
            (384,734
            )
            
            -7.04
            %
            
            (1,087,053
            )
            
            -13.28
            %Total
                operating expenses
            
            $
            (1,337,188
            )
            
            -24.46
            %
            $
            (3,013,809
            )
            
            -36.82
            %**Income
                from operations**
            
            $
            2,479,485
            
            
            45.35
            %
            $
            2,965,551
            
            
            36.23
            %Other
                income and expenses:Other
                income
            
            $
            68,855
            
            
            1.26
            %
            $
            282
            
            
            0
            %Other
                expenses
            
            
            (34,886
            
            
            -0.64
            %
            
            (13,011
            )
            
            -0.16
            %Total
                other income (expenses)
            
            $
            33,969
            
            
            0.62
            %
            $
            (12,729
            
            
            -0.16
            %**Income
                before taxes**
            
            $
            2,513,454
            
            
            45.97
            %
            $
            2,952,822
            
            
            36.07
            %Provision
                for income taxes
            
            
            (932,091
            )
            
            -17.05
            %
            
            (982,689
            )
            
            -12.00
            %**Net
                income**
            
            $
            1,581,363
            
            
            28.93
            %
            $
            1,970,133
            
            
            24.07
            %




15




Six
                months ended September 30, 2006
            
            Six
                months ended September 30, 2007Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            13,470,001
            
            
            100.00
            %
            $
            17,700,316
            
            
            100.00
            %Cost
                of sales
            
            
            (4,009,103
            )
            
            -29.76
            %
            
            (4,856,595
            )
            
            -27.44
            %**Gross
                profit**
            
            $
            9,460,898
            
            
            70.24
            %
            $
            12,843,721
            
            
            72.56
            %Operating
                expenses:Selling
                expenses
            
            $
            (2,221,986
            )
            
            -16.50
            %
            $
            (3,243,100
            )
            
            -18.32
            %General
                and administrative expenses
            
            
            (790,724
            )
            
            -5.87
            %
            
            (1,896,617
            )
            
            -10.71
            %Total
                operating expenses
            
            $
            (3,012,710
            )
            
            -22.37
            %
            $
            (5,139,717
            )
            
            -29.03
            %**Income
                from operations**
            
            $
            6,448,188
            
            
            47.87
            %
            $
            7,704,004
            
            
            43.53
            %Other
                income and expenses:Other
                income
            
            $
            104,378
            
            
            0.77
            %
            $
            71,942
            
            
            0.41
            %Other
                expenses
            
            
            (38,745
            
            
            -0.29
            %
            
            (19,935
            )
            
            -0.11
            %Total
                other income (expenses)
            
            $
            65,633
            
            
            0.48
            %
            $
            52,007
            
            
            0.30
            %**Income
                before taxes**
            
            $
            6,513,821
            
            
            48.35
            %
            $
            7,756,011
            
            
            43.83
            %Provision
                for income taxes
            
            
            (2,056,802
            )
            
            -15.27
            %
            
            (2,245,645
            )
            
            -12.69
            %**Net
                income**
            
            $
            4,457,019
            
            
            33.08
            %
            $
            5,510,366
            
            
            31.14
            %




*Net
      sales*





Net
      sales
      in our financial statements are stated at invoiced value less sales tax. Our
      net
      sales for the three months and six months ended September 30, 2006 and 2007
      comprised the following:




Three
                months ended September 30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Invoiced
                value on sales
            
            $
            5,500,785
            
            $
            8,235,126
            
            $
            13,555,277
            
            $
            17,811,850Less
                : sales tax
            
            
            (33,748
            )
            
            (50,143
            )
            
            (85,276
            )
            
            (111,534
            )$
            5,467,037
            
            $
            8,184,983
            
            $
            13,470,001
            
            $
            17,700,316





Net
      sales
      of $8,184,983 for the quarter ended September 30, 2007 were 49.71% above net
      sales of $5,467,037 for the quarter ended September 30, 2006. Net sales of
      $17,700,316 for the six months ended September 30, 2007 were31.40% above net
      sales of $13,470,001 for the six months ended September 30, 2006. The increase
      was mainly attributable to increased sales volume.





The
      contributions of each product as a percentage of the total value on sales for
      the three months and six months ended September 30, 2006 and 2007 are summarized
      below:




Three
                months ended September 30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Shining
                Essence Capsules
            
            
            60.86
            %
            
            62.59
            %
            
            61.58
            %
            
            58.22
            %Shining
                Signal Capsules
            
            
            22.21
            %
            
            15.62
            %
            
            20.71
            %
            
            14.93
            %Shining
                Golden Shield Capsules
            
            
            8.44
            %
            
            9.31
            %
            
            8.73
            %
            
            11.84
            %Shining
                Energy Capsules
            
            
            8.49
            %
            
            7.91
            %
            
            8.54
            %
            
            10.18
            %Miscellaneous
            
            
            -
            %
            
            4.57
            %
            
            0.44
            %
            
            4.82
            %100
            %
            
            100
            %
            
            100
            %
            
            100
            %




16




Shining
      Essence continued to be our best selling product, accounting for 62% of our
      sales revenue in the three months ended September 30, 2007 (61% in the three
      months ended September 30, 2006) and accounting for 58% of our sales revenue
      in
      the six months ended September 30, 2007 (61% in the six months ended September
      30, 2006). The reduction in the relative contribution of Shining Signal and
      Shining Energy to sales revenue was caused by relative increases in the sales
      of
      other products. New products, such as Shining Stomach Protection, Shining Beauty
      Essence, Shining Sicanel and Shining Bifidus Factor, accounted for 4% of our
      sales revenue in the three months ended September 30, 2007 (negligible in the
      three months ended September 30, 2006) (these new products are included in
      the
“miscellaneous” category above).





Unit
      volume and unit prices comparatives (on the invoiced value of sales) for the
      three months and six months ended September 30, 2006 and 2007 are summarized
      below: We have repackaged our products for sale in our own Shining stores as
      well as through our new distributors. As a result, we have sold more packages
      with relatively smaller units. Hence, the unit sales volume increased while
      the
      unit selling prices of Shining Signal, Golden Shield and Energy capsules
      decreased.




Percentages
                increase (decrease) from the prior yearThree
                months ended September 30,2006
            
            2007Unit
                volume
            
            Selling
                prices
            
            Overall
                increase /(decrease)
            
            Unit
                volume
            
            Selling
                prices
            
            Overall
                increase /(decrease)Shining
                Essence Capsules
            
            
            4
            %
            
            1
            %
            
            5
            %
            
            44
            %
            
            4
            %
            
            50
            %Shining
                Signal Capsules
            
            
            143
            %
            
            2
            %
            
            148
            %
            
            23
            %
            
            -16
            %
            
            3
            %Shining
                Golden Shield Capsules
            
            
            17
            %
            
            2
            %
            
            19
            %
            
            109
            %
            
            -23
            %
            
            61
            %Shining
                Energy Capsules
            
            
            75
            %
            
            15
            %
            
            101
            %
            
            63
            %
            
            -16
            %
            
            37
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %




Percentages
                increase (decrease) from the prior yearSix
                months ended September 30,2006
            
            2007Unit
                volume
            
            Selling
                prices
            
            Overall
                increase /(decrease)
            
            Unit
                volume
            
            Selling
                prices
            
            Overall
                increase /(decrease)Shining
                Essence Capsules
            
            
            34
            %
            
            -1
            %
            
            33
            %
            
            18
            %
            
            1
            %
            
            19
            %Shining
                Signal Capsules
            
            
            167
            %
            
            -2
            %
            
            162
            %
            
            1
            %
            
            -10
            %
            
            -9
            %Shining
                Golden Shield Capsules
            
            
            38
            %
            
            1
            %
            
            39
            %
            
            81
            %
            
            -6
            %
            
            70
            %Shining
                Energy Capsules
            
            
            100
            %
            
            13
            %
            
            126
            %
            
            56
            %
            
            -3
            %
            
            51
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            2205
            %
            
            15
            
            
            2551
            %




*Cost
      of sales*





Cost
      of
      sales for the three months ended September 30, 2007 was $2,205,623 compared
      with
      $1,650,364 for the three months ended September 30, 2006. Cost of sales for
      the
      six months ended September 30, 2007 was $4,856,595 compared with $4,009,103
      for
      the six months ended September 30, 2006. The increase in cost of sales was
      primarily caused by an 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 three months and six months ended
      September 30, 2006 and 2007 are summarized below:





Percentages
                increase (decrease) from the prior yearThree
                months ended September 30,2006
            
            2007Unit
                volume
            
            Unit
                costs
            
            Overall
                increase /(decrease)
            
            Unit
                volume
            
            Unit
                costs
            
            Overall
                increase /(decrease)Shining
                Essence Capsules
            
            
            4
            %
            
            -4
            %
            
            -
            %
            
            44
            %
            
            4
            %
            
            50
            %Shining
                Signal Capsules
            
            
            143
            %
            
            -4
            %
            
            133
            %
            
            23
            %
            
            -27
            %
            
            -10
            %Shining
                Golden Shield Capsules
            
            
            17
            %
            
            -8
            %
            
            8
            %
            
            109
            %
            
            -40
            %
            
            25
            %Shining
                Energy Capsules
            
            
            75
            %
            
            9
            %
            
            91
            %
            
            63
            %
            
            -25
            %
            
            22
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            100
            %
            
            N/A
            
            
            100
            %




17




Percentages
                increase (decrease) from the prior yearSix
                months ended September 30,2006
            
            2007Unit
                volume
            
            Unit
                costs
            
            Overall
                increase /(decrease)
            
            Unit
                volume
            
            Unit
                costs
            
            Overall
                increase /(decrease)Shining
                Essence Capsules
            
            
            34
            %
            
            -5
            %
            
            27
            %
            
            18
            %
            
            -2
            %
            
            15
            %Shining
                Signal Capsules
            
            
            167
            %
            
            -10
            %
            
            140
            %
            
            1
            %
            
            -17
            %
            
            -16
            %Shining
                Golden Shield Capsules
            
            
            38
            %
            
            -8
            %
            
            27
            %
            
            81
            %
            
            -20
            %
            
            45
            %Shining
                Energy Capsules
            
            
            100
            %
            
            4
            %
            
            108
            %
            
            56
            %
            
            -4
            %
            
            50
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            2205
            %
            
            101
            
            
            2228
            %





*Gross
      profit*





Gross
      profit for the three and six months ended September 30, 2007 were $5,979,360
      and
      $12,843,721, respectively, representing a growth of 57% and 36% as compared
      to
      the corresponding periods of last year. The increase in gross profit was
      primarily due to an increase in sales volume. Our products are sold at a premium
      at our own Shining stores. The average gross profit percentages increased as
      a
      result of increases in sales through our own Shining stores.




The
      average gross profit percentage for all of our products for the three months
      and
      six months ended September 30, 2006 and 2007 is summarized below:




Three
                months ended September30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Average
                for all products
            
            
            69.81
            %
            
            73.05
            %
            
            70.24
            %
            
            72.56
            %





*Selling
      expenses*





Selling
      expenses were $1,926,756 or 23.54% of net sales for the quarter ended September
      30, 2007 compared with $952,454 or 17.42% of net sales for the quarter ended
      September 30, 2006. This increase in selling expenses was primarily caused
      by
      the gradual roll out of retail stores. As of September 30, 2007, we had a total
      of 22 retails stores in operation (as of September 30, 2006 -5 retails
      stores).





*General
      and administrative expenses*





General
      and administrative expenses were $1,087,053 or13.28% of net sales for the
      quarter ended September 30, 2007 compared with $384,734 or 7.04% of net sales
      for the quarter ended September 30, 2006. The increase of $702,319 was primarily
      due to additional research costs of $305,016, related to the development and
      launch of new products, and sponsorship fee of $110,611, for diary industry
      and
      health care products’ conferences in Shanghai.




*Provision
      for income taxes*





Provision
      for income taxes for the three months and six months ended September 30, 2006
      and 2007 comprised the following items:




Three
                months ended September30,
            
            Six
                months ended September 30,2006
            
            2007
            
            2006
            
            2007Income
                taxes
            
            $
            407,933
            
            $
            463,902
            
            $
            1,122,764
            
            $
            1,223,007Surcharge
                at 0.5% per day on accrued taxes
            
            
            524,158
            
            
            518,787
            
            
            934,038
            
            
            1,022,638Total
                provision for income
            
            $
            932,091
            
            $
            982,689
            
            $
            2,056,802
            
            $
            2,245,645





The
      increase in income taxes for the three months ended September 30, 2007 was
      due
      to higher income before taxes which increased 3.5%. The tax surcharge was
      accrued for unpaid taxes relating to calendar years prior to 2005.




18




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 regular 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.





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. The Group has reserved for the payment
      of
      taxes that may be owed for calendar years prior to 2005 and any associated
      interest surcharges in its financial statements until the matter is fully
      resolved. However, the Group has not reserved for any associated penalties
      as
      management believes that the probability of penalties being assessed is low
      because the Group has timely paid all taxes due and has informed the tax
      authorities of the matter.




19





*Segment
      reporting*





We
      have
      adopted the “products and services” approach for segment reporting. For the
      three months and six months ended September 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, and no single
      customer accounted for 10% or more of our total sales.





**Liquidity
      and Capital Resources**





We
      had
      cash of $35.22 million and working capital of $23.48 million as of September
      30,
      2007. Cash generated from operations was $11.19 million in the quarter ended
      September 30, 2007. The increase in cash generated from operations was mainly
      due to a decrease in accounts receivable by $5.99 million.





Our
      business is not capital or labor intensive. Typically, 60% of our sales take
      place in the second half of our fiscal year because many of our customers
      purchase our products to give as gifts during the Chinese festivals that occur
      during this time of the year. While it is still too early to tell, we expect
      that our bulk additive sales will not be as seasonal because the bulk products
      are purchased by food manufacturers consistently throughout the
      year. **** Since
      our
      customers have historically been large distributors with which we have done
      business for a number of years, our cash flows from our existing business have
      been, and we expect them to be, fairly reliable.





We
      had
      capital expenditures totaling $4 million in the six months ended September
      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 by the third quarter of fiscal year 2008 and the balance by the end of
      fiscal year 2008. Phase 2 of this project will only commence when demands for
      probiotics have exceeded the production capacity of the Phase 1
      facility.





We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores. In this regard, we opened our first pilot
      store
      in Shanghai in March 2006 and intend to open over 300 stores over the next
      two
      years at an anticipated cost of approximately $11 million, which comprise mainly
      store fit out costs, rental deposits and working capital. In preparation for
      the
      opening of our retail stores, we have repackaged a number of our existing
      products for sale in our stores, and have introduced several new products which
      are available exclusively in our stores. The costs of repackaging the existing
      products and releasing the new products are minimal and have been included
      in
      our cost of sales and selling and administrative expenses. We intend to continue
      to develop new products to strengthen our product pipeline and add to our retail
      store offerings. As our development costs mainly comprise staff costs, we do
      not
      expect that such costs will be significant.





We
      did
      not have any changes related to financing activities for the quarters ended
      September 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 three months and six months ended September 30, 2006 and
      2007.





**Seasonality**





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





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.




20




**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 $40,096 and
      $387,431 in the three months ended September 30, 2006 and 2007, respectively.
      This increase was related to the development and launch of new
      products.




**Critical
      Accounting Policies**





This
      MD&A discusses our consolidated financial statements for the three months
      and six months ended September 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.





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 $8,654,511 as of September 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,
      2005
      and 2006, 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 September 30, 2007. The Group has reserved
      for the payment of taxes that may be owed for calendar years prior to 2005
      and
      any associated interest surcharges in its financial statements until the matter
      is fully resolved. However, the Group has not reserved for any associated
      penalties as management believes that the probability of penalties being
      assessed is low because the Group has timely paid all taxes due and has informed
      the tax authorities of the matter.




**Recent
      Accounting Pronouncements**





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.




21




**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 September 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





*
      * * *
      *




22





**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)Date:
                November 13, 2007
            
            /s/ Li
              Chi
              YuenLi
                Chi Yuen, Chief Financial Officer




23