**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended June 30, 2006**




**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. x Yes o
      No




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


o
      Yes x No





As
      of
      August 4, 2006, 17,080,000 shares of the Issuer’s common stock were outstanding.





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





**TABLE
      OF CONTENTS**





Page**Part
                I - Financial Information**ITEM
                1.
            
            FINANCIAL
                STATEMENTS
            
            3ITEM
                2.
            
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS
            
            15ITEM
                3.
            
            CONTROLS
                AND PROCEDURES
            
            33**Part
                II - Other Information**ITEM
                6.
            
            EXHIBITS
            
            34SIGNATURES
            
            35




2


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
      expressed in US Dollars)




June
                30,
                2006**ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            20,025,376Restricted
                cash
            
            
            668,118Accounts
                receivable
            
            
            13,517,664Advances
                to related partiesInventories
            
            
            163,749Prepayment
            
            
            71,365Travel
                advances
            
            
            8,959**Total
                current assets**
            
            $
            34,455,231**Plant
                and equipment, net**
            
            
            2,317,846**Total
                assets**
            
            $
            36,773,077**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            1,575,288Tax
                payables
            
            
            15,990,526Loan
                from stockholders
            
            
            2,297,570Other
                payables and accruals
            
            
            1,664,004**Total
                current liabilities**
            
            $
            21,527,388**Commitments
                and contingencies****Stockholders'
                equity:**Preferred
                stock-par value $0.01, 10,000,000shares
                authorized, no shares issued and outstanding
            
            $
            —Common
                stock, par value $0.0001, 100,000,000 shares authorized, 17,080,000
                shares
                issued and outstanding
            
            
            1,708Additional
                paid-in capital
            
            
            7,863,031Retained
                earnings
            
            
            4,255,570Accumulated
                other comprehensiveincome
                (loss)
            
            
            99,586Capital
                and statutory reserves
            
            
            3,025,794**Total
                stockholders' equity**
            
            $
            15,245,689**Total
                liabilities and stockholders' equity**
            
            $
            36,773,077




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


3


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
      expressed in US Dollars)





Three
                months ended June 30,2005
            
            2006**Net
                sales**
            
            $
            4,312,847
            
            $
            8,002,964Cost
                of sales
            
            
            (1,282,030
            )
            
            (2,358,739
            )**Gross
                profit**
            
            $
            3,030,817
            
            $
            5,644,225Operating
                expenses:Selling
                expenses
            
            $
            (317,651
            )
            $
            (1,269,532
            )General
                and administrative expenses
            
            
            (92,423
            )
            
            (405,990
            )Total
                operating expenses
            
            $
            (410,074
            )
            $
            (1,675,522
            )**Income
                from operations**
            
            $
            2,620,743
            
            $
            3,968,703Other
                income and expenses:Other
                income
            
            $
            17,319
            
            $
            35,523Other
                expenses
            
            
            —
            
            
            (3,859
            )Total
                other income (expenses)
            
            $
            17,319
            
            $
            31,664**Income
                before taxes**
            
            $
            2,638,062
            
            $
            4,000,367Provision
                for income taxes
            
            
            (879,136
            )
            
            (1,124,711
            )**Net
                income**
            
            $
            1,758,926
            
            $
            2,875,656**Earnings
                per share:**Basic
                and diluted
            
            $
            1.57
            
            $
            0.17**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            1,118,600
            
            
            17,080,000





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


4





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


(Amounts
      expressed in US Dollars)




Common
                Stock
            
            Additional
                  Paid-in
            
            Retained
            
            Accumulated
                Other Compre-hensive
            
            Capital
                & StatutoryShares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
            
            Reserves
            
            TotalBalance-
                March 31, 2006
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            1,379,914
            
            $
            66,565
            
            $
            3,025,794
            
            $
            12,337,012Comprehensive
                income:Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            2,875,656
            
            
            —
            
            
            —
            
            
            2,875,656Other
                comprenhensive income:Foreign
                currency translation ajustments, net of taxes of $-0-
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            33,021
            
            
            —
            
            
            33,021Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,908,677Balance-
                June 30, 2006
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            4,255,570
            
            $
            99,586
            
            $
            3,025,794
            
            $
            15,245,689




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





5


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
      expressed in US Dollars)




Three
                months ended
                June
                  30,2005
            
            2006**CASH
                FLOW FROM OPERATING ACTIVITIES**Net
                income
            
            $
            1,758,926
            
            $
            2,875,655Adjustment
                for:Depreciation
            
            
            207,228
            
            
            99,376(Increase)/Decrease
                in restricted cash
            
            
            —
            
            
            83,635(Increase)/Decrease
                in accounts receivable
            
            
            (23,713
            )
            
            (2,536,130
            )(Increase)/Decrease
                in other receivables
            
            
            1,525
            
            
            —(Increase)/Decrease
                in travel advances
            
            
            —
            
            
            —(Increase)/Decrease
                in inventories
            
            
            (15,294
            )
            
            94,479(Increase)/Decrease
                in prepayments
            
            
            —
            
            
            (40,199
            )Increase/(Decrease)
                in accounts payable
            
            
            (481,713
            )
            
            (257,147
            )Increase/(Decrease)
                in income tax, surcharge tax and dividends withholding tax
            
            
            879,136
            
            
            1,124,711Increase/(Decrease)
                in other payables and accruals, and value added tax payable
            
            
            (24,584
            )
            
            (498,059
            )**NET
                CASH PROVIDED BY OPERATING ACTIVITIES**
            
            $
            2,301,511
            
            $
            946,321**CASH
                FLOWS USED IN INVESTING ACTIVITIES**Additions
                of fixed assets
            
            
            —
            
            
            (816,689
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Advances
                to related parties
            
            $
            (1,712,646
            )
            $
            —Distribution
                to previous owners of subsidiary
            
            
            (6,850,585
            )
            
            —**NET
                CASH PROVIDED BY/(USED IN)********FINANCING
                ACTIVITIES**
            
            $
            (8,563,231
            )
            $
            —Effect
                of exchange rate changes on cash
            
            $
            4
            
            $
            54,932**NET
                INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
            
            $
            (6,261,716
            )
            $
            184,564**CASH
                AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                PERIOD**
            
            
            10,271,503
            
            
            19,840,812**CASH
                AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
            
            $
            4,009,787
            
            $
            20,025,376




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





6


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





1.
            BASIS
                OF PRESENTATION AND PRINCIPLES OF
                CONSOLIDATION





The
      accompanying unaudited 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, 2006 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, 2006, the share exchange between us and SGI’s shareholders had been
      accounted for in accordance with the accounting and financial reporting
      interpretations and guidance set out by the Corporate Finance Division of the
      Securities and Exchange Commission (“SEC Interpretations and Guidance”) and
      accounting principles generally accepted in the United States of America (“US
      GAAP”). The share exchange was treated as a recapitalization of SGI, accompanied
      by a reverse acquisition of our company with SGI as the accounting acquirer.
      The
      unaudited interim financial statements presented herewith have been prepared
      on
      the following basis:





(a)
            The
                Unaudited Condensed Consolidated Balance Sheet as of June 30, 2006
                includes the accounts of SGI, Shining, Growing State Limited (“GSL”), and
                our company.The historical paid-in capital of SGI and its subsidiaries (the total
                of
                ordinary share and additional paid-in capital) as of June 30, 2006
                had
                been restated for the number of shares of common stock we issued
                to the
                SGI former shareholders in connection with the share exchange occurred
                in
                March 2006, after giving effect to any difference in par value of
                our
                common stock and SGI’s ordinary share with such difference accounted for
                under additional-paid-in capital.


(b)
            The
                Unaudited Condensed Consolidated Statements of Operations and the
                Unaudited Condensed Consolidated Statements of Cash Flow for the
                three
                months ended June 30, 2005 and 2006 reflect the following:(i) result
                of
                operations and cash flow of SGI, Shining and GSL from April 1, 2005
                to
                June 30, 2005, and (ii) result of operations and cash flow of SGI,
                Shining, GSL and our company from April 1, 2006 to June 30, 2006.
                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, 2006.


(c)
            The
                Unaudited Condensed Consolidated Statement of Changes in Stockholders’
                Equity for the three months ended June 30, 2006 includes the accounts
                of
                SGI, Shining, GSL, and our company.





7


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
      and
      GSL for any period from March 23, 2006.





2.
            WEIGHTED
                AVERAGE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK





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





The
      weighted average number of outstanding shares of common stock as shown in the
      financial statements presented herewith was computed based on the number of
      shares of common stock outstanding, and took into account the recapitalization
      transactions and the reverse acquisition transaction as described in the Notes
      to the financial statements contained in the audited financial statements for
      fiscal year ended March 31, 2006, as reported in our Form 10-KSB. Detailed
      computations are set out as follows:




Date
                of issue or purchase
            
            
            
            No.
                of the
            
            No.
                of days oustanding
            
            Weighted
                average number of oustanding common stock(as-if
                basis
            
            
            
            Company's
            
            Three
            
            Threefor
                the
            
            No.
                of
            
            common
                stock
            
            months
            
            monthsCompany's
            
            SGI
            
            (Restated
                for
            
            ended
            
            endedcommon
            
            ordinary
            
            recapitalization
            
            June
                30,
            
            June
                30,stock)
            
            shares
            
            of
                SGI)
            
            2005
            
            2006
            
            2005
            
            2006Number
                of days in reporting period
            
            
            
            
            
            
            
            
            
            
            
            91
            
            
            91SGI
                existing shares as of March 31, 2004
            
            
            Pre-
                3/31/2004
            
            
            1,000
            
            
            1,118,600
            
            
            91
            
            
            91
            
            
            1,118,600
            
            
            1,118,600SGI
                issued new shares upon receipt of cash
            
            
            3/15/2006
            
            
            9,000
            
            
            10,067,400
            
            
            —
            
            
            91
            
            
            —
            
            
            10,067,400SGI
                issued new shares for convertible bond conversion
            
            
            3/22/2006
            
            
            1,429
            
            
            2,924,000
            
            
            —
            
            
            91
            
            
            —
            
            
            2,924,000SGI
                issued new shares for cash of $5M under private placement
            
            
            3/22/2006
            
            
            2,858
            
            
            1,870,000
            
            
            —
            
            
            91
            
            
            —
            
            
            1,870,00014,287Stock
                issued in exchange for 14,287 shares of SGI stock (100% equity in
                SGI)
            
            
            
            
            
            
            
            
            15,980,000The
                Company's stock at time of reverse acquisitionExisting
                stock in issue at time of reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            25,481,004
            
            
            —
            
            
            91
            
            
            —
            
            
            25,481,004Stock
                held in treasury prior to reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            (4,381,004
            )
            
            —
            
            
            91
            
            
            —
            
            
            (4,381,004
            )Repurchased
                stock from Stan Ford in conjunction with reverse
                acquisition
            
            
            3/22/2006
            
            
            
            
            
            (20,000,000
            )
            
            —
            
            
            91
            
            
            —
            
            
            (20,000,000
            )17,080,000
            
            
            
            
            
            
            
            
            1,118,600
            
            
            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 PRC and are subject to
      various political, economic, and other risks and uncertainties inherent in
      this
      country. Among other risks, the Group’s operations are subject to the risks of
      restrictions on transfer of funds; export duties, quotas and embargoes; domestic
      and international customs and tariffs; changing taxation policies; foreign
      exchange restrictions; and political conditions and governmental
      regulations.





(b)  Concentration
      of Credit Risk





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





As
      of
      June 30, 2006, the Group had cash deposits of $20  million
      placed with several banks in the People’s Republic of China (“PRC”), which
      includes the Special Administrative Region of Hong Kong, where there is
      currently no rules or regulations in place for obligatory insurance of bank
      accounts.





As
      of
      June 30, 2006, the Group had a cash deposit of $668,118 placed with a bank
      in
      the United States, which is insured by the Federal Deposit Insurance Corporation
      (FDIC) up to $100,000 for each customer account. $568,118 of the Group’s cash
      deposit at this bank therefore was in excess of the FDIC insured limit. This
      cash deposit has been shown under the caption “Restricted cash” in these
      financial statements.





For
      the
      three months ended June 30, 2005 and 2006, all of the Group’s sales arose in the
      PRC. In addition, all accounts receivable as at June 30, 2006 also arose in
      the
      PRC.





4.
            RESTRICTED
                CASH





In
      March
      2006, SGI completed a private placement for an aggregate consideration of $5.07
      million. As part of the agreement for this private placement, SGI agreed with
      the investors to place $750,000 in an escrow account, which is to be released
      from time to time to cover certain marketing and executive officer search
      expenses. Any amounts remaining in the escrow account on March 22, 2007 will
      automatically be released to SGI.





9


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





4.
            RESTRICTED
                CASH (continued)





The
      marketing expenses that are covered include payment for the creation of a
      website, the publication of company newsletters, the procurement of independent
      research coverage, and the preparation of press releases and presentations.
      The
      executive officer search expenses primarily cover the payment to consultants
      and
      search firms for the recruitment of senior management, such as a chief financial
      officer, and may also cover the appointment of independent directors, if
      applicable.





In
      May
      2006, the SGI entered into agreements with four unrelated parties for marketing
      and investor relation services, and a total of $84,660 was paid out of the
      escrow account. As of June 30, 2006, the balance in this escrow account was
      $668,118.





5.
            ACCOUNTS
                RECEIVABLE





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




June
                30,
                2006Trade
                receivables
            
            $
            13,517,664Less
                : Allowances for doubtful debt
            
            
            —$
            13,517,664





6.
            INVENTORIES





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




June
                30,
                2006Raw
                materials
            
            $
            81,257Work-in-progress
            
            
            17,732Finished
                goods
            
            
            64,760$
            163,749





10


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





7.
            PLANT
                AND EQUIPMENT





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




June
                30,
                2006Plant
                and machinery
            
            $
            3,345,828Office
                equipment
            
            
            1,122,913Motor
                vehicles
            
            
            28,809Leasehold
                improvements
            
            
            557,8915,055,441Less:
                Accumulated depreciation
            
            
            (2,737,595
            )$
            2,317,846




8.
            TAX
                PAYABLES





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




June
                30,
                2006Value
                added tax and other taxes
            
            $
            3,905,956Income
                tax
            
            
            3,330,991Surcharge
                tax
            
            
            5,383,107Dividends
                withholding tax
            
            
            3,370,472$
            15,990,526





11


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





9.
            COMMON
                STOCK





We
      are
      authorized to issue 100,000,000 shares of common stock, $0.0001 par value per
      share. The common stock as of June 30, 2006, as presented in these financial
      statements, comprise the following:





March
                31, 2006
            
            Changes
                from April 1, 2006 to
              June
                30, 2006
            
            June
                30, 2006Number
                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.
            INCOME
                TAXES





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


Three
                months ended
              June
                30,2005
            
            2006Loss
                in the British Virgin Islands before income taxes
            
            $
            (1,282
            )
            $
            (43,652
            )Income
                in the PRC before income taxes
            
            
            1,760,208
            
            
            4,044,019$
            1,758,926
            
            $
            4,000,367





12


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





10.
            INCOME
                TAXES (continued)





There
      is
      no income tax for companies domiciled in the British Virgin Islands.
      Accordingly, our financial statements do not present any income tax provisions
      or credits related to the British Virgin Islands tax jurisdiction. The provision
      for income tax relating to the PRC for the periods as presented in these
      financial statements are summarized as follows:





Three
                months ended
              June
                30,2005
            
            2006Current
            
            $
            879,136
            
            $
            1,124,711Deferred
            
            
            —
            
            
            —$
            879,136
            
            $
            1,124,711




As
      of
      June 30, 2006, we had no deferred tax assets and liabilities.





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




Three
                months ended
              June
                30,2005
            
            2006Computed
                tax at the local PRC statutory rate of 33%
            
            $
            870,984
            
            $
            1,334,526Non-deductible
                items
            
            
            39,606
            
            
            238,102Tax
                concession
            
            
            (496,685
            )
            
            (857,797
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            465,231
            
            
            409,880Total
                provision for income at effective rate
            
            $
            879,136
            
            $
            1,124,711





The
      Group
      has its principal operations in the People’s Republic of China (“PRC”). Business
      enterprises are subject to income taxes and value added taxes under PRC tax
      laws
      and regulations unless they have exemptions. It had been the belief of the
      Group’s management that its PRC operations were exempt from income taxes and
      value added taxes as these operations were recognized by the local government
      as
      an advanced technology enterprise. The Group, however, has never received a
      written confirmation from the appropriate tax authorities regarding the tax
      exempt status of its PRC operations. In January 2006, management of the Group’s
      PRC operations took initiative to make tax payments to the PRC tax authorities
      for the Calendar year 2005, and accrual for all applicable tax liabilities,
      plus
      surcharge, for all prior Calendar years were reflected in the Group’s financial
      statements. According to PRC tax regulations, the Group may be subject to
      potential penalties for the late payment of taxes calculated on the basis of
      0.5
      times to 5 times amount of taxes, which amounted from $4.9 million to $49
      million as of June 30, 2006. No provision for the potential tax penalties has
      been made in the Group’s financial statements as management of the Group
      believes that the Group did not cause the late payment of taxes, and that the
      possibility of having to pay such late payment penalties is highly
      unlikely.





13


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
      expressed in US Dollars)





11.
            COMMITMENTS
                AND CONTINGENCIES





COMMITMENTS





In
      addition to the commitments as disclosed in the notes to the audited financial
      statements for fiscal years ended March 31, 2005 and 2006, the Group made
      additional commitments during the period from April to June 2006. In May, 2006,
      the Group entered into an agreement with an unrelated party for marketing and
      investor relation services for a period of one year. Under this agreement,
      a
      further $165,000 is due and payable ratably on a monthly basis over the period
      from June 2006 to May 2007, and an additional payment of $40,000 is due and
      payable upon the achievement of certain measurable targets.





CONTINGENCIES





As
      disclosed in Note 10, 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 has been the belief
      of
      the Group’s management that its PRC operations were exempted 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 for the
      tax
      exemption 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 fiscal years were reflected in the
      Group’s financial statements. According to PRC tax regulations, the Group’s
      outstanding tax payables for 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 5 times amount of taxes, which amounted from $4.9 million
      to $49 million as of June 30, 2006. Under the Statements of Financial Accounting
      Standard (“SFAS”) No. 5, Accounting for Contingencies, it is required to accrue
      a charge to income for an estimated loss from a loss contingency if two
      conditions are met: (a) information available prior to issuance of the financial
      statements indicates that it is probable that an asset had been impaired or
      a
      liability had been incurred at the date of the financial statements, and (b)
      the
      amount of loss can be reasonably estimated. SFAS defines the levels of
      probability as to whether or not future events will confirm the existence of
      a
      loss as follows: (1) probable - the future event or events are likely to occur,
      (2) reasonably possible - the chance of the future events occurring is more
      than
      remote but less than likely, and (3) remote - the chance of the future event
      or
      events occurring is slight. No provision for the potential tax penalties has
      been made in the Group’s financial statements as management of the Group
      believes the Group did not cause the late payment of taxes, and that the
      probability of having to pay such late payment penalties is
      remote.


14


**ITEM
      2.** **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**




**AND
      RESULTS OF OPERATIONS**





NOTE
      REGARDING FORWARD-LOOKING STATEMENTS




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





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





Except
      as
      otherwise indicated by the context, references in this Quarterly Report on
      Form
      10-QSB to “we,” “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”). 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 only 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. As a result, we have
      historically had a low cost of production. During the three months ended June
      30, 2005 and 2006, substantially all our sales revenue comprises amounts
      receivable from the distributors for the sale of these products. Typically,
      60
      to 90 days’ credits are given to the distributors.


15


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 four more stores were opened during this quarter.
      We intend to open over 300 stores over the next two years. 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. We expect
      that it will become mandatory for baby milk powders produced in China to have
      probiotics. 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 the new plant will commence
      production in the second half of 2007 and start to make a significant
      contribution to our earnings in 2008. The costs of business expansion, expected
      to be approximately $16 million for the first phase, with the capability to
      undertake a second phase for an additional $14 million, will be financed by
      our
      internal working capital. In connection with our plan to build the new plant,
      on
      March 21, 2006, our wholly-owned subsidiary, Growing State Limited, entered
      into
      an agreement with Shanghai Qingpu Industrial Park District Development (Group)
      Company Limited for the lease of 73,157 square meters of land in the Shanghai
      Qingpu Industrial Park District, on which we will construct a plant consisting
      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. As of
      June 30, 2006, we are still awaiting for the approval from the relevant
      government authorities on the leasing arrangement.





16




**Results
      of Operations**





**Quarter
      Ended June 30, 2005 Compared with the Quarter Ended June 30,
      2006**





We
      achieved a net income of $2.88 million in the quarter ended June 30, 2006,
      which
      was 63% above our net income of $1.76 million for the quarter ended June 30,
      2005. Our growth in net income primarily resulted from growth in our sales
      volume on our products. Shining Essence continued to be our best selling
      product, accounting for 62.06% of our sales revenue in the quarter ended June
      30, 2006 (70.48% in the quarter ended June 30, 2005). The growth rate on this
      product’s sales volume was 65% in the quarter ended June 30, 2006 (24% in the
      quarter ended June 30, 2005). Growth rates on three of our other products
      (Shining Signal, Shining Golden Shield and Shining Energy) ranged from 57%
      to
      187%. We launched several new products during the quarter ended March 31, 2006.
      These products contributed only 0.74% of our sales revenue in the quarter ended
      June 30, 2006.





During
      the quarter ended June 30, 2006, we opened four additional retail stores. As
      of
      June 30, 2006, we had a total of five direct sales retail outlets. We also
      spent
      $0.8 million to improve our existing production and research
      facilities.




Our
      results for the quarters ended June 30, 2005 and 2006 are summarized
      below:





Three
                months ended June 30, 2005
            
            Three
                months ended June 30, 2006Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            4,312,847
            
            
            100.00
            %
            $
            8,002,964
            
            
            100.00
            %Cost
                of sales
            
            
            (1,282,030
            )
            
            -29.73
            %
            
            (2,358,739
            )
            
            -29.47
            %**Gross
                profit**
            
            $
            3,030,817
            
            
            70.27
            %
            $
            5,644,225
            
            
            70.53
            %Operating
                expenses:Selling
                expenses
            
            $
            (317,651
            )
            
            -7.37
            %
            $
            (1,269,532
            )
            
            -15.86
            %General
                and administrative expenses
            
            
            (92,423
            )
            
            -2.14
            %
            
            (405,990
            )
            
            -5.07
            %Total
                operating expenses
            
            $
            (410,074
            )
            
            -9.51
            %
            $
            (1,675,522
            )
            
            -20.94
            %**Income
                from operations**
            
            $
            2,620,743
            
            
            60.77
            %
            $
            3,968,703
            
            
            49.59
            %Other
                income and expenses:Other
                income
            
            $
            17,319
            
            
            0.40
            %
            $
            35,523
            
            
            0.44
            %Other
                expenses
            
            
            —
            
            
            0.00
            %
            
            (3,859
            )
            
            -0.05
            %Total
                other income (expenses)
            
            $
            17,319
            
            
            0.40
            %
            $
            31,664
            
            
            0.40
            %**Income
                before taxes**
            
            $
            2,638,062
            
            
            61.17
            %
            $
            4,000,367
            
            
            49.99
            %Provision
                for income taxes
            
            
            (879,136
            )
            
            -20.38
            %
            
            (1,124,711
            )
            
            -14.05
            %**Net
                income**
            
            $
            1,758,926
            
            
            40.78
            %
            $
            2,875,656
            
            
            35.93
            %




17


*Net
      sales*





Net
      sales
      in our financial statements are stated at invoiced value less sales tax. Our
      net
      sales for the quarters ended June 30, 2005 and 2006 comprised of the
      following:




Three
                months ended June 30,2005
            
            2006Invoiced
                value on sales
            
            
            4,335,650
            
            
            8,054,492Less
                : sales tax
            
            
            (22,803
            )
            
            (51,528
            )4,312,847
            
            
            8,002,964





Net
      sales
      of $8,002,964 for the quarter ended June 30, 2006 were 85.56% above the net
      sales of $4,312,847 for the quarter ended June 30, 2005. The increase was mainly
      because of increased sales volume.





The
      contributions of each product as a percentage of invoiced value on sales for
      the
      quarters ended June 30, 2005 and 2006 are summarized below:




Three
                months ended June 30,2005
            
            2006Shining
                Essence Capsules
            
            
            70.48
            %
            
            62.06
            %Shining
                Signal Capsules
            
            
            13.10
            %
            
            19.70
            %Shining
                Golden Shield Capsules
            
            
            10.10
            %
            
            8.93
            %Shining
                Energy Capsules
            
            
            6.32
            %
            
            8.57
            %Miscellaneous
            
            
            0.0
            %
            
            0.74
            %100.00
            %
            
            100.00
            %





Unit
      volume and unit prices comparatives (on the invoiced value of sales) for the
      quarters ended June 30, 2005 and 2006 are summarized below:




Percentages
                increase (decrease) from the prior yearThree
                months ended June 30,2005
            
            2006Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            24
            %
            
            5
            %
            
            29
            %
            
            65
            %
            
            -7
            %
            
            58
            %Shining
                Signal Capsules
            
            
            14
            %
            
            14
            %
            
            28
            %
            
            187
            %
            
            -17
            %
            
            170
            %Shining
                Golden Shield Capsules
            
            
            17
            %
            
            4
            %
            
            21
            %
            
            57
            %
            
            2
            %
            
            59
            %Shining
                Energy Capsules
            
            
            66
            %
            
            -26
            %
            
            40
            %
            
            120
            %
            
            23
            %
            
            143
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %





18




*Cost
      of sales*





Cost
      of
      sales for the quarter ended June 30, 2006 was $2,358,739 compared with
      $1,282,030 for the quarter ended June 30, 2005. The increase in cost of sales
      was primarily caused by increased sales volume. The average unit cost of all
      products, in fact, decreased despite increases in the overall material costs
      of
      approximately 20% in the quarter ended June 30, 2006. Because of tight control
      over production overhead, the increase in production volume resulted in a much
      lower overhead on a per unit basis. As a result, the average unit cost of
      production in the quarter ended June 30, 2006 was approximately16% lower than
      in
      the quarter ended June 30, 2005.





Unit
      volume and unit costs comparatives for the quarters ended June 30, 2005 and
      2006
      are summarized below:





Percentages
                increase (decrease) from the prior yearThree
                months ended June 30,2005
            
            2006Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            24
            %
            
            -9
            %
            
            15
            %
            
            65
            %
            
            -9
            %
            
            56
            %Shining
                Signal Capsules
            
            
            14
            %
            
            20
            %
            
            34
            %
            
            187
            %
            
            -41
            %
            
            146
            %Shining
                Golden Shield Capsules
            
            
            17
            %
            
            8
            %
            
            25
            %
            
            57
            %
            
            -12
            %
            
            45
            %Shining
                Energy Capsules
            
            
            66
            %
            
            -18
            %
            
            48
            %
            
            120
            %
            
            2
            %
            
            122
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %




19


*Gross
      profit*





Gross
      profit for the quarter ended June 30, 2006 was $5,644,225 compared with
      $3,030,817 for the quarter ended June 30, 2005. The increase in gross profit
      was
      primarily due to an increase in sales volume.





The
      contributions of each product as a percentage of total gross profit for the
      quarters ended June 30, 2005 and 2006 are summarized below:




Three
                months ended June 30,2005
            
            2006%
            
            %Shining
                Essence Capsules
            
            
            76.58
            %
            
            67.38
            %Shining
                Signal Capsules
            
            
            9.48
            %
            
            15.45
            %Shining
                Golden Shield Capsules
            
            
            7.30
            %
            
            6.97
            %Shining
                Energy Capsules
            
            
            6.64
            %
            
            9.24
            %Miscellaneous
            
            
            0.00
            %
            
            0.96
            %100.00
            %
            
            100.00
            %




The
      average gross profit percentage for all of our product for the quarters ended
      June 30, 2005 and 2006 is summarized below:





Three
                months ended June 30,2005
            
            2006Average
                for all products
            
            
            70.43
            %
            
            70.72
            %





20




*Selling
      expenses*





Selling
      expenses were $1,269,532 or 15.86% of net sales for the quarter ended June
      30,
      2006 compared with $317,651 or 7.37% of net sales for the quarter ended June
      30,
      2005. The increase was mainly attributable to an increase in advertising
      expenses, which was the most significant item included in selling expenses.
      Advertising expenses accounted for 87% of total selling expenses for the quarter
      ended June 30, 2006 (73% for the quarter ended June 30, 2005). Management
      believes that the increase in advertising expenses was a significant reason
      for
      the 85% increase in sales revenue in the quarter ended June 30, 2006.





*General
      and administrative expenses*





General
      and administrative expenses were $405,990 or 5.07% of net sales for the quarter
      ended June 30, 2006 compared with 92,423 or 2.14% of net sales for the quarter
      ended June 30, 2005. The increase of $313,567 was primarily due to the
      additional administrative expenses incurred to support a large volume of
      business, and our commencement of an investor relations program. The following
      items, in total, accounted for 88% of the increase: (a) an increase in
      consulting fees incurred by our main production/sales unit in Shanghai of
      $164,955, (b) an increase in administrative personnel costs of $70,599, and
      (c)
      $41,619 of investor relations expenses.





*Provision
      for income taxes*





Provision
      for income taxes for the quarters ended June 30, 2005 and 2006 comprised the
      following items:





Three
                months ended June 30,2005
            
            2006Income
                taxes
            
            $
            413,905
            
            $
            714,831Surcharge
                at 0.5% per day on accrued taxes
            
            
            465,231
            
            
            409,880Total
                provision for income
            
            $
            879,136
            
            $
            1,124,711




The
      increase in income taxes was due to higher income before taxes which increased
      51.6%. The tax surcharge was accrued for unpaid taxes relating to calendar
      years
      prior to 2005.





Our
      principal operations are in China. Business enterprises established in China
      are
      subject to income taxes and value added taxes under Chinese tax laws and
      regulations unless they have exemptions. We have made tax payments to the
      Chinese tax authorities for 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.










21


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, 2006. No provision for the potential tax
      penalties has been made in our financial statements as our management believes
      that the possibility of having to pay the penalties is remote.




*Segment
      reporting*





We
      have
      adopted the “products and services” approach for segment reporting. For the
      quarters ended June 30, 2005 and 2006, 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 $20.03 million and working capital of $12.93 million as of June 30,
      2006. We started to pay taxes in early 2006 in respect of the 2005 fiscal year.
      Prior to that, we did not pay taxes. As a result, during the quarter ended
      June
      30, 2005, cash generated from operations of $2.30 million was higher than the
      net income for the period of $1.78 million. Cash generated from operations
      for
      the quarter ended June 30, 2006 of $0.95 million was lower than net income
      for
      the period of $2.88 million reflecting the payment of taxes and higher working
      capital needs, mainly increases in accounts receivable.





We
      had
      capital expenditures totaling $0.8 million in the quarter ended June 30, 2006,
      primarily on improvements to production and research facilities. We did not
      spend any cash on acquisition of assets in fiscal year 2005. We plan to invest
      approximately $18 million in the coming two years for a new plant with a 150
      ton
      production capacity and to open over 300 direct sales outlets.





We
      did
      not have any cash flows from/used in financing activities for the quarter ended
      June 30, 2006. We used $8.56 million in financing activities during the quarter
      ended June 30, 2005. A summary of our financing activities cash flow is as
      follows:




Three
                months ended June 30,2005
            
            2006$'
                Million
            
            $'
                Million**CASH
                FLOWS FROM FINANCING ACTIVITIES**Advances
                to related parties
            
            
            (1.71
            )
            
            —Payment
                of liquidating dividends (in form of purchase consideration) to previous
                owners of the subsidiary in conjunction with acquisition of subsidiary
            
            
            (6.85
            )
            
            —**NET
                CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES**
            
            
            (8.56
            )
            
            —





22




Shining,
      our wholly-owned subsidiary, made advances to its equity holders (whom are
      referred to as related parties in the summary above) prior to the share exchange
      under which it became our wholly-owned subsidiary. The total amount of $1.71
      million of advances was fully repaid to us in March 2006, shortly after the
      share exchange.





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





**Inflation**





We
      believe that inflation has not had a material impact on our results of
      operations for the quarters ended June 30, 2005 and 2006.





**Seasonality**





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





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.





23




**Research
      and Development Expenditures**





We
      have a
      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 conducts research and development into complimentary
      technology, including genetically engineered drugs, drug delivery solutions
      and
      Chinese medicine, in an effort formulate solutions to address specific health
      problems and expand our product line. We incurred research and development
      costs
      of approximately RMB180,306 in the three months ended June 30, 2006 and 112,727
      in the three months ended June 30, 2005. Such research and development costs
      are
      mainly comprised of staff salaries in the research and development division,
      which were included as part of the production costs in the Company’s financial
      statements for such periods.




**Critical
      Accounting Policies**





Our
      critical accounting policies are described in the Notes to the Financial
      Statements included in our Annual Report filed with the SEC on Form 10-KSB
      for
      the fiscal year ended March 31, 2006, and this Form 10-QSB should be read in
      conjunction with that Annual Report. This MD&A discusses our consolidated
      financial statements for the three months ended June 30, 2005 and 2006. 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 $13,517,664 as of June 30, 2006, 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.





24


According
      to Chinese tax regulations, our outstanding tax payable in China for the
      calendar years prior to 2005 may be subject to potential penalties for the
      late
      payment of taxes which is calculated on the basis of 0.5 times to five times
      the
      amount of taxes payable. This amounts to $4.9 million (if calculated based
      on
      0.5 times of taxes payable) to $49 million (if calculated based on five times
      of
      the amount of taxes payable) as of June 30, 2006. Under the Statements of
      Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, it
      is required to accrue a charge to income for an estimated loss from a loss
      contingency if two conditions are met: (a) information available prior to
      issuance of the financial statements indicates that it is probable that an
      asset
      had been impaired or a liability had been incurred at the date of the financial
      statements, and (b) the amount of loss can be reasonably estimated. SFAS defines
      the levels of probability as to whether or not future events will confirm the
      existence of a loss as follows: (1) probable - the future event or events are
      likely to occur, (2) reasonably possible - the chance of the future events
      occurring is more than remote but less than likely, and (3) remote - the chance
      of the future event or events occurring is slight. No provision for the
      potential tax penalties has been made in our financial statements as we believe
      we did not cause the late payment of taxes, and that the probability of having
      to pay such late payment penalties is remote. We have reviewed our tax situation
      up to the date of this Form-10QSB, and concluded that the probability of having
      to pay such late payment penalties remains remote.





**Recent
      Accounting Pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      replacement of APB Opinion No. 20, “Accounting Changes”, and Statement No. 3,
“Reporting Accounting Changes in Interim Financial Statements” (“SFAS 154”).
      SFAS 154 will require companies to account for and apply changes in accounting
      principles retrospectively to prior periods’ financial statements, instead of
      recording a cumulative effect adjustment within the period of the change, unless
      it is impracticable to determine the effects of the change to each period being
      presented. SFAS 154 is effective for accounting changes made in annual periods
      beginning after December 15, 2005, and accordingly, adoption of this statement
      for new accounting provisions is required for our fiscal year beginning April
      1,
      2006. The adoption of this statement is not expected to have any effect on
      our
      financial condition or results of operations.





In
      June
      2005, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus to
      amend EITF No. 96-16, “Investor’s Accounting for an Investee When the Investor
      Has a Majority of the Voting Interest but the Minority Shareholders Have Certain
      Approval or Veto Rights”. The EITF agreed to amend the Protective Rights section
      of this consensus, as well as Example of Exhibit 96-16A, to be consistent with
      the consensus reached in Issue No. 04-5, “Determining Whether a General Partner,
      or the General Partners as a Group, Controls a Limited Partnership or Similarly
      Entity When the Limited Partners Have Certain Rights.” The provisions of this
      amendment should be applied prospectively to new investments and to investment
      agreements that are modified after June 29, 2005. We believe the adoption of
      this pronouncement will not have a material effect on our consolidated financial
      statements. In June 2005, the EITF reached consensus on Issue No. 05-6,
      Determining the Amortization Period for Leasehold Improvements (“EITF 05-6.”)
      EITF 05-6 provides guidance on determining the amortization period for leasehold
      improvements acquired in a business combination or acquired subsequent to lease
      inception. The guidance in EITF 05-6 will be applied prospectively and is
      effective for periods beginning after June 29, 2005. EITF 05-6 is not expected
      to have a material effect on our consolidated financial position or results
      of
      operations.





In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      CHINA-BIOTICS, INC. AND SUBSIDIARIES qualifying special-purpose entity from
      holding a derivative financial instrument that pertains to a beneficial interest
      other than another derivative financial instrument. This statement is effective
      for all financial instruments acquired or issued after the beginning of our
      first fiscal year that begins after September 15, 2006. We have not evaluated
      the impact of this pronouncement on our financial statements.





In
      March
      2006, FASB issued SFAS 156 “Accounting for Servicing of Financial Assets” this
      Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities, with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This Statement:





25


1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.


2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if practicable.


3.
            Permits
                an entity to choose 'Amortization method' or Fair value measurement
                method' for each class of separately recognized servicing assets
                and
                servicing liabilities.


4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity's exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value.


5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities. An entity should adopt this Statement
                as of the
                beginning of its first fiscal year that begins after September 15,
                2006.





We
      believe that this statement will not have a significant impact on our financial
      statement.





In
      April
      2006, the FASB issued FASB Staff Position No. FIN 46(R)-6, “Determining the
      Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP
      FIN 46(R)-6”). FSP FIN 46(R)-6 requires that the determination of the
      variability to be considered in applying FIN 46R be based on an analysis of
      the
      design of the entity. In evaluating whether an interest with a variable interest
      entity creates or absorbs variability, FSP FIN 46(R)-6 focuses on the role
      of a
      contract or arrangement in the design of an entity, regardless of its legal
      form
      or accounting classification. The Company will adopt the guidance in FSP FIN
      46(R)-6 prospectively beginning September 1, 2006 to all entities that the
      Company first becomes involved with and to all entities previously required
      to
      be analyzed under FIN 46R when a reconsideration event has occurred under
      paragraph 7 of FIN 46R. We do not expect the adoption of FSP FIN 46(R)-6 to
      have
      a material impact on our financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109* (FIN
      48) *.* This Interpretation provides guidance for recognizing and measuring uncertain
      tax positions, as defined in SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      prescribes a threshold condition that a tax position must meet for any of the
      benefit of the uncertain tax position to be recognized in the financial
      statements. Guidance is also provided regarding derecognition, classification
      and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. We do not expect that this
      Interpretation will have a material impact on our financial position, results
      of
      operations or cash flows.





In
      June 2006, the EITF reached consensus on and ratified EITF Issue 06-03, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement* (EITF
      06-03). The scope of this Issue includes any tax assessed by a governmental
      authority that is directly imposed on a revenue-producing transaction between
      a
      seller and a customer and may include, but is not limited to, sales, use, value
      added, and some excise taxes. The Task Force concluded that the presentation
      of
      taxes within the scope of the Issue on either a gross (included in revenues
      and
      costs) or a net (excluded from revenues) basis is an accounting policy decision
      that should be disclosed pursuant to Opinion 22. In addition, for any such
      taxes
      that are reported on a gross basis, a company should disclose the amounts of
      those taxes in interim and annual financial statements for each period for
      which
      an income statement is presented if those amounts are significant. The
      disclosure of those taxes can be done on an aggregate basis. The consensus
      in
      this Issue should be applied to financial reports for interim and annual
      reporting periods beginning after December 15, 2006. We believe the
      adoption of EITF 06-03 will not have a material impact on our method for
      recording and reporting these type taxes in its consolidated financial
      statements, as the Company’s policy is to exclude all such taxes from
      revenue.




26


**Risk
      Factors**





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





**Risks
      Related to our Business**





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





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





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





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





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





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





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





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





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





We
      have
      derived the majority of our revenue from the sale of our Shining Essence
      product. Sales of this product represented approximately 68% of our total sales
      for the year ended March 31, 2006. We expect that Shining Essence will continue
      to account for a large portion of our revenues for the foreseeable future.
      Any
      factors adversely affecting the pricing of, demand for or market acceptance
      of
      Shining Essence, including increased competition, could cause our revenues
      to
      decline and our business and future operating results to suffer.





*Our
      failure to develop products that are compatible with market needs could have
      an
      adverse effect on our sales and earnings.*





Our
      business is particularly subject to changing consumer trends and preferences.
      Our continued success depends in part on our ability to anticipate and respond
      to these changes. We may not respond in a timely or commercially appropriate
      manner to such changes. Because markets for our products differentiate
      geographically, we must accurately assess demand in each specific market into
      which we wish to make sales. If we fail to invest in extensive market research
      on consumer health needs in each market we target, we may face limited market
      acceptance of our products, which could have a material adverse effect on our
      sales and revenues.





27


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





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





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





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





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





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





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





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




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





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




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





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





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





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





28


In
      addition, we have been selling through distributors since our first product,
      Shining Essence, was launched in the market in April 2001. We opened our first
      retail store in March 2006. We intend to expand our operations by opening new
      retail stores or introducing a franchise structure to facilitate direct sales
      of
      our products to customers. We have hired consultants who have many years of
      experience in the direct selling industry to develop this new line of
      business, but there is no assurance that we can successfully implement our
      direct selling model.





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





*We
      face potential tax exposure.*





Our
      principal operations are in China. Business enterprises established in China
      are
      subject to income taxes and value added taxes under Chinese tax laws and
      regulations unless they have exemptions. We have made tax payments to the
      Chinese tax authorities for 2005. Our management believes that our operations
      in
      China were exempted from income taxes and value added taxes for all prior years
      because we had been recognized by the local government as an advanced technology
      enterprise. However, we have never received a written confirmation from the
      appropriate tax authorities for the tax exemption status of our operations
      in
      China. As a result, there is no way to ascertain the position which may be
      taken
      by the relevant Chinese tax authorities in the future.  Accordingly, our
      financial statements contain full provisions for all applicable tax liabilities,
      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, which amount to $4.88 million (if calculated based on 0.5
      times of taxes payable) to $49 million (if calculated based on five times of
      the
      amount of taxes payable) as of March 31, 2006. No provision for the potential
      tax penalties has been made in our financial statements as our management
      believes that the possibility of having to pay the penalties is unlikely.




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





Although
      we have three registered Chinese patents in respect of the packaging processes
      and technologies we use in our production process and have applied for
      registration of a patent regarding the production of one of our products in
      June
      2004, we have not purchased or applied for any patents other than these as
      we
      are of the view that it would not be cost-effective to do so at this time.
      Except with respect to the processes and technologies for which we have been
      granted patents, we may have no legal recourse in the event that our processes
      and technologies are replicated by other parties. If our competitors are able
      to
      replicate our processes, technologies and systems at lower costs, we may lose
      our competitive advantage and our profitability will be adversely
      affected.





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





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





*Management
      by a sole officer and director may create corporate governance risks and impede
      the successful implementation of our growth plans.*





Mr.
      Song,
      as our sole officer and director, is responsible for all managerial functions
      and functions of our board of directors. Consequently, there may not be
      effective oversight and control with respect to corporate governance functions
      such as the approval of related party transactions, the compensation of the
      executive officer, the oversight of the accounting function and the segregation
      of duties. This concentration of management could be disadvantageous to
      stockholders with interests different from those of Mr. Song. In addition,
      without a more complete executive management team we may not be able to
      implement our growth plans, which could adversely affect our results of
      operations. We currently plan on hiring additional employees to complete our
      management team, but we cannot assure you that we will be able to successfully
      locate or hire suitable candidates.





29


**Risks
      Related to Government Regulations**





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





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





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





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





The
      costs
      of compliance with current or future legislation or regulatory requirements
      may
      be significant, and could force us to curtail our operations or otherwise have
      a
      material adverse effect on our financial condition, results of operations or
      cash flows. For example, we have obtained three licenses and permits which
      are
      required for us to operate our business in China. Management estimates that
      the
      cost of obtaining these licenses and permits was approximately RMB2 million
      for
      Shining Essence. If the regulations regarding these licenses and permits is
      changed, it may be materially burdensome for us to obtain or renew these
      licenses and permits or they may be otherwise unavailable.





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





We
      are
      subject to government regulations with respect to the retail prices we charge
      and our advertising methods. The market retail price of our products is subject
      to approval from the government pricing division. However, there are no
      restrictions on the sales price when we sell products to distributors in China.
      In addition, we are required to obtain approval from Chinese government
      authorities regarding the contents of advertisements related to our products
      before they can be published. If the Chinese government may require that we
      set
      our retail prices at undesirable prices or significantly limits our ability
      to
      advertise our products, it could have a material adverse effect on our results
      of operations.





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





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





30


**Risks
      Related to Doing Business in China**





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





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





l
            structure;





l
            extent
                of government involvement;





l
            level
                of development;





l
            growth
                rate;





l
            control
                of foreign exchange; and





l
            allocation
                of resources.





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





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





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





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





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




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





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





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





31


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





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





**Risks
      Related to our Common Stock**





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





We
      had
      17,080,000 shares outstanding as of June 14, 2006, including approximately
      230,000 shares which are free trading and may be sold immediately by our
      stockholders and 5,664,833 shares which are subject to a registration statement
      that we have filed with the SEC but has not yet been declared effective. If
      our
      stockholders sell substantial amounts of our common stock, or there is a
      perception in the market that such sales may occur, then the market price of
      our
      common stock could decrease.





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





As
      of
      June 14, 2006, Mr. Song, our sole officer and director, owned 29.8% of our
      outstanding common stock, and members of his family owned an additional 20.3%
      of
      our common stock. As a result, Mr. Song has the ability to exert substantial
      influence or absolute control over all matters requiring approval by our
      stockholders, including the election and removal of directors, any proposed
      merger, consolidation or sale of all or substantially all of our assets and
      other corporate transactions. This concentration of control could be
      disadvantageous to other stockholders with interests different from those of
      Mr.
      Song. For example, Mr. Song could delay or prevent an acquisition or merger
      even
      if the transaction would benefit other stockholders. In addition, this
      concentration of share ownership may adversely affect the trading price for
      our
      common stock because investors often perceive disadvantages in owning stock
      in
      companies with a significant concentration of ownership among a limited number
      of stockholders.





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





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





l
            the
                lack of readily available price
                quotations;





l
            the
                absence of consistent administrative supervision of "bid" and "ask"
                quotations;





l
            lower
                trading volume; and





l
            market
                conditions.





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





32


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





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





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





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





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





l
            current
                quotation prices and other relevant market data;
                and





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





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





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





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





*We
      do
      not anticipate paying dividends.*





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




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





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





33


There
      were no changes in our internal control over financial reporting during the
      quarter ended June 30, 2006 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 - Certification of Chief Executive Officer and Chief Financial Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002





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





*
      * * * *




34


**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: August 14, 2006
            
            /s/
              Song
              JinanSong,
              Chief Executive Officer, Chief Financial Officer,
              Controller, Director and Secretary




35