**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 September 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
      November 13, 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
            
            13ITEM
                3.
            
            CONTROLS
                AND PROCEDURES
            
            24**Part
                II - Other Information**ITEM
                6.
            
            EXHIBITS
            
            25SIGNATURES
            
            26













2


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
      expressed in US Dollars)







March
                31,
              2006
            
            September
                30,
              2006**ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            19,840,812
            
            $
            23,934,174Restricted
                cash
            
            
            752,778
            
            
            635,993Accounts
                receivable
            
            
            10,941,595
            
            
            11,224,075Deposit
                Paid
            
            
            -
            
            
            210,614Inventories
            
            
            257,584
            
            
            302,492Prepayment
            
            
            31,200
            
            
            136,659Travel
                advances
            
            
            8,972
            
            
            8,935**Total
                current assets**
            
            $
            31,832,941
            
            $
            36,452,942**Plant
                and equipment, net**
            
            
            1,594,047
            
            
            2,721,253**Total
                assets**
            
            $
            33,426,988
            
            $
            39,174,195**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            1,826,441
            
            $
            1,406,428Tax
                payables
            
            
            15,316,318
            
            
            17,067,341Loan
                from stockholders
            
            
            2,290,230
            
            
            2,318,007Other
                payables and accruals
            
            
            1,656,987
            
            
            1,407,358**Total
                current liabilities**
            
            $
            21,089,976
            
            $
            22,199,134**Commitments
                and contingencies****Stockholders'
                equity:**Preferred
                stock-par value $0.01, 10,000,000 shares authorized,no
                shares issued and outstanding
            
            $
            -
            
            $
            -Common
                stock, par value $0.0001, 100,000,000 shares authorized, 17,080,000
                shares
                issued and outstanding
            
            
            1,708
            
            
            1,708Additional
                paid-in capital
            
            
            7,863,031
            
            
            7,863,031Retained
                earnings
            
            
            1,379,914
            
            
            5,836,933Accumulated
                  other comprehensiveincome (loss)
            
            
            66,565
            
            
            247,595Capital
                and statutory reserves
            
            
            3,025,794
            
            
            3,025,794**Total
                stockholders' equity**
            
            $
            12,337,012
            
            $
            16,975,061**Total
                liabilities and stockholders' equity**
            
            $
            33,426,988
            
            $
            39,174,195




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








3


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
      expressed in US Dollars)




Three
                months ended September 30,
            
            
            Six
                months ended September 30,2005
            
            
            2006
            
            
            2005
            
            
            2006**Net
                sales**
            
            $
            4,070,370
            
            $
            5,467,037
            
            $
            8,383,217
            
            $
            13,470,001Cost
                of sales
            
            
            (1,234,678
            )
            
            (1,650,364
            )
            
            (2,516,708
            )
            
            (4,009,103
            )**Gross
                profit**
            
            $
            2,835,692
            
            $
            3,816,673
            
            $
            5,866,509
            
            $
            9,460,898Operating
                expenses:Selling
                expenses
            
            $
            (581,992
            )
            $
            (952,454
            )
            $
            (899,643
            )
            $
            (2,221,986
            )General
                and administrative expenses
            
            
            (57,898
            )
            
            (384,734
            )
            
            (150,321
            )
            
            (790,724
            )Total
                operating expenses
            
            $
            (639,890
            )
            $
            (1,337,188
            )
            $
            (1,049,964
            )
            $
            (3,012,710
            )**Income
                from operations**
            
            $
            2,195,802
            
            $
            2,479,485
            
            $
            4,816,545
            
            $
            6,448,188Other
                income and expenses:Other
                income
            
            $
            10,878
            
            $
            68,855
            
            $
            28,197
            
            $
            104,378Other
                expenses
            
            
            -
            
            
            (34,886
            )
            
            -
            
            
            (38,745
            )Total
                other income (expenses)
            
            $
            10,878
            
            $
            33,969
            
            $
            28,197
            
            $
            65,633**Income
                before taxes**
            
            $
            2,206,680
            
            $
            2,513,454
            
            $
            4,844,742
            
            $
            6,513,821Provision
                for income taxes
            
            
            (818,615
            )
            
            (932,091
            )
            
            (1,697,751
            )
            
            (2,056,802
            )**Net
                income**
            
            $
            1,388,065
            
            $
            1,581,363
            
            $
            3,146,991
            
            $
            4,457,019**Earnings
                per share:**Basic
                and diluted
            
            $
            1.24
            
            $
            0.09
            
            $
            2.81
            
            $
            0.26**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            1,118,600
            
            
            17,080,000
            
            
            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 Comprehensive
            
            Capital
                & StatutoryShares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
            
            Reserves
            
            TotalBalance-
                March 31, 2006 (audited)
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            1,379,914
            
            $
            66,565
            
            $
            3,025,794
            
            $
            12,337,012Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,457,019
            
            
            -
            
            
            -
            
            
            4,457,019Other
                comprehensive income:Foreign
                currency translation adjustments, net of taxes of $-0-
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            181,030
            
            
            -
            
            
            181,030Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,638,049Balance-
                September 30, 2006
            
            
            17,080,000
            
            $
            1,708
            
            $
            7,863,031
            
            $
            5,836,933
            
            $
            247,595
            
            $
            3,025,794
            
            $
            16,975,061




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








5


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
      expressed in US Dollars)












Six
                months ended September 30,2005
            
            
            2006**CASH
                FLOW FROM OPERATING ACTIVITIES**Net
                income
            
            $
            3,146,991
            
            $
            4,457,019Adjustment
                for:Depreciation
            
            
            296,018
            
            
            220,104Gain
                on disposal of plant and equipment
            
            
            -
            
            
            (14,793
            )(Increase)/Decrease
                in restricted cash
            
            
            -
            
            
            114,037(Increase)/Decrease
                in accounts receivable
            
            
            874,053
            
            
            (140,449
            )(Increase)/Decrease
                in other receivables
            
            
            482,834
            
            
            (209,030
            )(Increase)/Decrease
                in inventories
            
            
            237,818
            
            
            (41,775
            )(Increase)/Decrease
                in prepayments
            
            
            -
            
            
            (104,876
            )Increase/(Decrease)
                in accounts payable
            
            
            140,138
            
            
            (358,998
            )Increase/(Decrease)
                in income tax, surcharge tax and dividends withholding tax
            
            
            1,697,751
            
            
            2,056,803Increase/(Decrease)
                in other payables and accruals, and value added tax payable
            
            
            (1,008,008
            )
            
            (771,307
            )**NET
                CASH PROVIDED BY OPERATING ACTIVITIES**
            
            $
            7,883,611
            
            $
            5,206,735**CASH
                FLOWS USED IN INVESTING ACTIVITIES**Sales
                proceeds from disposal of plant and equipment
            
            
            -
            
            
            14,793Additions
                of fixed assets
            
            
            -
            
            
            (1,317,328
            )**NET
                CASH PROVIDED BY INVESTING ACTIVITIES**
            
            $
            -
            
            $
            (1,302,535
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Temporary
                advance from shareholders
            
            $
            1,500,609
            
            $
            -Repayment
                on temporary advance from shareholders
            
            
            (1,500,609
            )
            
            -Advances
                to related parties
            
            
            (1,712,646
            )
            
            -Distribution
                to previous owners of subsidiary
            
            
            (6,542,727
            )
            
            -**NET
                CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES**
            
            $
            (8,255,373
            )
            $
            -Effect
                of exchange rate changes on cash
            
            $
            125,733
            
            $
            189,162**NET
                INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
            
            $
            (246,029
            )
            $
            4,093,362**CASH
                AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                PERIOD**
            
            
            10,271,503
            
            
            19,840,812**CASH
                AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
            
            $
            10,025,474
            
            $
            23,934,174





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 September 30,
                2006
                includes the accounts of SGI, Shining, Growing State Limited (“GSL”),
                Growing Bioengineering (Shanghai) Co. Limited (“GBS”) and our company.




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





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





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








7





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)








2.  WEIGHTED
      AVERAGE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK





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





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








Date
                of issue or purchase
              (as-if
                basis
              for
                the
              Company's
            
            No.
                of
              SGI
            
            No.
                of the
              Company's
              common
                stock
              (Restated
                for
              recapitalization
            
            No.
                of days outstanding
              ThreemonthsendedSeptember30,
            
            Weighted
                average number of outstanding common stock
              ThreemonthsendedSeptember
                30,common
                stock)
            
            ordinary
                shares
            
            of
                SGI)
            
            2005
            
            2006
            
            2005
            
            2006Number
                of days in reporting period
            
            
            
            
            
            
            
            
            
            
            
            92
            
            
            92SGI
                existing shares as of March 31, 2004
            
            
            Pre-
                3/31/2004
            
            
            1,000
            
            
            1,118,600
            
            
            92
            
            
            92
            
            
            1,118,600
            
            
            1,118,600SGI
                issued new shares upon receipt of cash
            
            
            3/15/2006
            
            
            9,000
            
            
            10,067,400
            
            
            -
            
            
            92
            
            
            -
            
            
            10,067,400SGI
                issued new shares for convertible bond conversion
            
            
            3/22/2006
            
            
            1,429
            
            
            2,924,000
            
            
            -
            
            
            92
            
            
            -
            
            
            2,924,000SGI
                issued new shares for cash of $5M under private placement
            
            
            3/22/2006
            
            
            2,858
            
            
            1,870,000
            
            
            -
            
            
            92
            
            
            -
            
            
            1,870,00014,287Stock
                issued in exchange for 14,287 shares of SGI stock (100% equity in
                SGI)
            
            
            
            
            
            
            
            
            15,980,000The
                Company's stock at time of reverse acquisitionExisting
                stock in issue at time of reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            25,481,004
            
            
            -
            
            
            92
            
            
            -
            
            
            25,481,004Stock
                held in treasury prior to reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            (4,381,004
            )
            
            -
            
            
            92
            
            
            -
            
            
            (4,381,004
            )Repurchased
                stock from Stan Ford in conjunction with reverse
                acquisition
            
            
            3/22/2006
            
            
            
            
            
            (20,000,000
            )
            
            —
            
            
            92
            
            
            —
            
            
            (20,000,000
            )17,080,000
            
            
            
            
            
            
            
            
            1,118,600
            
            
            17,080,000






Date
                  of issue or purchase
                (as-if
                  basis
                for
                  the
                Company's
                common
                  stock)
              
              No.
                  of
                SGI
                ordinary
                  shares
              
              No.
                  of the
                Company's
                common
                  stock
                (Restated
                  for
                recapitalization
                  of SGI)
              
              No.
                  of days outstanding
                ThreemonthsendedSeptember30,
              
              Weighted
                  average number of outstanding common stock
                ThreemonthsendedSeptember
                  30,2005
              
              2006
              
              2005
              
              2006


Number
                of days in reporting period
            
            
            
            
            
            
            
            
            
            
            
            183
            
            
            183SGI
                existing shares as of March 31, 2004
            
            
            Pre-
                3/31/2004
            
            
            1,000
            
            
            1,118,600
            
            
            183
            
            
            183
            
            
            1,118,600
            
            
            1,118,600SGI
                issued new shares upon receipt of cash
            
            
            3/15/2006
            
            
            9,000
            
            
            10,067,400
            
            
            -
            
            
            183
            
            
            -
            
            
            10,067,400SGI
                issued new shares for convertible bond conversion
            
            
            3/22/2006
            
            
            1,429
            
            
            2,924,000
            
            
            -
            
            
            183
            
            
            -
            
            
            2,924,000SGI
                issued new shares for cash of $5M under private placement
            
            
            3/22/2006
            
            
            2,858
            
            
            1,870,000
            
            
            -
            
            
            183
            
            
            -
            
            
            1,870,00014,287Stock
                issued in exchange for 14,287 shares of SGI stock (100% equity in
                SGI)
            
            
            
            
            
            
            
            
            15,980,000The
                Company's stock at time of reverse acquisitionExisting
                stock in issue at time of reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            25,481,004
            
            
            -
            
            
            183
            
            
            -
            
            
            25,481,004Stock
                held in treasury prior to reverse acquisition
            
            
            3/22/2006
            
            
            
            
            
            (4,381,004
            )
            
            -
            
            
            183
            
            
            -
            
            
            (4,381,004
            )Repurchased
                stock from Stan Ford in conjunction with reverse
                acquisition
            
            
            3/22/2006
            
            
            
            
            
            (20,000,000
            )
            
            -
            
            
            183
            
            
            -
            
            
            (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
      September 30, 2006, the Group had cash deposits of $23.9 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
      September 30, 2006, the Group had a cash deposit of $635,993 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. $535,993 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 and six months ended September 30, 2005 and 2006, all of the
      Group’s sales arose in the PRC. In addition, all accounts receivable as at
      September 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.





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 and may also cover the
      appointment of independent directors, if applicable.





As
      of
      September 30, 2006, the balance in this escrow account was
      $635,993.





5.  ACCOUNTS
      RECEIVABLE





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






March
                31,
              2006
            
            September
                30,
              2006Trade
                receivables
            
            $
            10,941,595
            
            $
            11,224,075Less
                : Allowances for doubtful debt
            
            
            -
            
            
            -$
            10,941,595
            
            $
            11,224,075





9


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)








6.  INVENTORIES





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




March
                    31,
                  2006
                
                September
                    30,
                  2006Raw
                    materials
                
                $
                188,112
                
                $
                124,819Work-in-progress
                
                
                50,362
                
                
                27,441Finished
                    goods
                
                
                19,110
                
                
                150,232$
                257,584
                
                $
                302,492





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:






March
                31,
              2006
            
            September
                30,
              2006Plant
                and machinery
            
            $
            3,093,152
            
            $
            3,375,599Office
                equipment
            
            
            1,101,779
            
            
            1,637,338Motor
                vehicles
            
            
            28,716-
            
            
            -Leasehold
                improvements
            
            
            -
            
            
            562,8404,223,647
            
            
            5,575,777Less:
                Accumulated depreciation
            
            
            (2,629,600
            )
            
            (2,854,524
            )$
            1,594,047
            
            $
            2,721,253




8.  TAX
      PAYABLES





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






March
                31,
              2006
            
            September
                30,
              2006Value
                added tax and other taxes
            
            $
            4,393,629
            
            $
            3,936,137Income
                tax
            
            
            3,169,773
            
            
            3,771,654Surcharge
                tax
            
            
            4,393,213
            
            
            5,959,089Dividends
                withholding tax
            
            
            3,359,703
            
            
            3,400,461$
            15,316,318
            
            $
            17,067,341





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 September 30, 2006, as presented in these
      financial statements, comprise the following:





March
                  31, 2006
              
              Changes
                  from April 1, 2006 to
                September
                  30, 2006
              
              September
                  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


CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)








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 endedSeptember
                30,
            
            Six
                months endedSeptember
                30,2005
            
            2006
            
            2005
            
            2006Income/(Loss)
                in the British Virgin Islands before income taxes
            
            $
            2,785
            
            $
            (198,315
            )
            $
            1,503
            
            $
            (241,967
            )Income
                in the PRC before income taxes
            
            
            2,203,895
            
            
            2,711,769
            
            
            3,964,103
            
            
            6,755,788$
            2,206,680
            
            $
            2,513,454
            
            $
            3,965,606
            
            $
            6,513,821





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 endedSeptember
                  30,
              
              Six
                  months endedSeptember
                  30,2005
              
              2006
              
              2005
              
              2006


Current
            
            $
            818,615
            
            $
            932,091
            
            $
            1,697,751
            
            $
            2,056,802Deferred
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            818,615
            
            $
            932,091
            
            $
            1,697,751
            
            $
            2,056,082





As
      of
      September 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 endedSeptember
                  30,
              
              Six
                  months endedSeptember
                  30,2005
              
              2006
              
              2005
              
              2006


Computed
                tax at the local PRC statutory rate of 33%
            
            $
            727,285
            
            $
            894,885
            
            $
            1,598,269
            
            $
            2,229,411Non-deductible
                items
            
            
            33,072
            
            
            2,567
            
            
            72,678
            
            
            240,669Tax
                concession
            
            
            (414,740
            )
            
            (489,519
            )
            
            (911,425
            )
            
            (1,347,316
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            472,998
            
            
            524,158
            
            
            938,229
            
            
            934,038Total
                provision for income at effective rate
            
            $
            818,615
            
            $
            932,091
            
            $
            1,697,751
            
            $
            2,056,802





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 September 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.








11





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 September 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 September 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.





12


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





**NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**





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





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





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





**Overview**





We
      manufacture and sell probiotics products. Probiotics comprise mainly live
      bacteria, which we produce using advanced proprietary fermentation technology.
      Currently, our products are 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. During the year ended
      March
      31, 2006 and the quarter ended June 30, 2006, substantially all our sales
      revenue comprised amounts receivable from the distributors for the sale of
      these
      products. Typically, 60 to 90 days’ credits are given to the distributors.




Our
      first
      product, Shining Essence, which was launched in April 2001, remains our
      best-selling product. Sales of Shining Essence represented approximately 70%
      and
      68% of our total sales for the years ended March 31, 2005 and 2006,
      respectively, and 62.06% for the quarter ended June 30, 2006. In addition to
      Shining Essence, we have successfully created other new products, such as
      Shining Signal. As we release new products in the future, we expect the
      percentage contribution of Shining Essence to our total sales to decrease.
      As
      our products comprise mainly live bacteria, which are reproduced by
      fermentation, we have historically had a low cost of production.




We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores. In this regard, we opened our first pilot
      store
      in Shanghai in March 2006 and intend to open over 300 stores over the next
      two
      years. We expect that the additional demands from opening new stores will be
      met
      initially by increasing production from our existing plant, which currently
      has
      spare capacity, and in the longer term from our new plant by the end of 2007.
      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.





13


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. Based on
      informal discussions with officials from the Ministry of Health, 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 by the end of 2007 and start to make significant contribution to
      our
      earnings in 2008. The costs for business expansion, expected to be approximately
      $18 million for the first phase, will be financed by our internal working
      capital. In connection with our plan to build the new plant, on March 21, 2006,
      our wholly-owned subsidiary, Growing State Limited, entered into an agreement
      with Shanghai Qingpu Industrial Park District Development (Group) Company
      Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu
      Industrial Park District, on which we will construct a plant consisting bulk
      manufacturing facilities that will have an initial capacity of 150 tons per
      year
      of bulk product with the room for expansion to 300 tons per year. We have
      applied for a tax registration license for Growing Bioengineering (Shanghai)
      Co.
      Limited in connection with our new plant. In addition, we have made a
      construction application relating to the new plant. As of September 30, 2006,
      we
      are still awaiting these government approvals.




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





·
            **Increasing
                demand for functional food products.**As
                the discretionary income and health-consciousness of the average
                Chinese
                consumer increase, we expect the demand for functional foods and
                dietary
                supplements to increase.





·
            **Curtailment
                of the use of antibiotics and government support for
                probiotics.**China has the highest per capita consumption of antibiotics in the
                world.
                To curtail the overuse of antibiotics, the Chinese government has
                taken
                steps to limit the use of antibiotic drugs. Moreover, the Chinese
                State
                Food and Drug Administration has also acknowledged that probiotics
                are
                beneficial for human health.





·
            **Increasing
                demand for dairy product additives.**The
                demand for functional foods and foods that use probiotic supplements
                is
                growing at a significant rate and our management believes that it
                will
                continue to do so. Moreover, based on informal discussions with officials
                at the Chinese Ministry of Health, we expect that the Chinese Ministry
                of
                Health will make it mandatory for baby milk powders sold in China
                to
                contain live bacteria.





Our
      management expects to capitalize on the opportunities created by these trends
      to
      achieve significant growth through:





·
            **The
                introduction of bulk additives products.**We believe we are poised to achieve first-mover advantage into the
                bulk
                additive business for functional foods through the completion of
                our
                150-ton capacity plant, which is scheduled to commence production
                by the
                end of December 2007 and which we believe will start to make significant
                contribution to our earnings in 2008. Phase 1 of the project, which
                involves constructing a facility capable of producing 150 tons of
                probiotics per annum, is expected to cost $18 million, $16 million
                of
                which we anticipate will be paid in the fiscal year ending March 31,
                2007 and the balance by the year end of 2007. Subsequent phases of
                this
                project will only commence when demand for probiotics has exceeded
                the
                production capacity of the Phase 1 facility, and may increase the
                overall project costs to an estimated $30 million. The construction
                cost
                of the plant will be funded by cash at hand and cash inflow from
                operations. 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 September 30, 2006, we are still awaiting
                for
                the approval from the relevant government authorities on the leasing
                arrangement.





14


·
            **The
                geographical expansion of retail sales through direct sales and
                traditional sales channels.**We
                intend to expand our sales to other cities in China through a combination
                of distributors and our own stores. In this regard, we opened our
                first
                pilot store in Shanghai in March 2006 and intend to open over 300
                stores
                over the next two years. We expect that the additional demands from
                opening new stores will be met initially by increasing production
                from our
                existing plant, which currently has spare capacity, and in the longer
                term
                from our new plant that will have a capacity of 150-300 tons. The
                initial,
                150-ton phase of our new plant is scheduled to commence operations
                by the
                end of 2007. 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.





·
            **The
                development of new products.**We have introduced several new products which are sold exclusively
                in our
                stores. We plan to continue to develop new products aimed at improving
                the
                general health conditions of humans, enhancing their immune system
                and
                reducing health problems to strengthen our product pipeline so that
                we may
                offer a wider array of products for sale in the Shining
                stores.




Our
      operation is generally not labor-intensive. We employed 178 people as of
      September 30, 2006. Our general and administrative expenses, comprising mainly
      of salaries and audit expenses, were $0.8 million for the fiscal year ended
      March 31, 2006 and $.4 million for the quarter ended June 30, 2006. The
      construction of our new plant and the creation of the new direct sales network
      will result in significant increases in our number of employees as we expect
      to
      add over 1,000 staff and employees over the next two years. We also intend
      to
      recruit senior executives such as CFO to strengthen our management team.
      However, as wages in China are relatively inexpensive, we expect that labor
      costs will remain insignificant.





In
      addition, we engage in selective television advertising and promotional events.
      Our selling expenses, which comprise mainly advertising expenses, have averaged
      approximately 11% of our sales over the quarters ended June 30, 2006 and
      2005 **.**





Our
      principal operations are in China and we are subject to income taxes and value
      added taxes under Chinese tax laws and regulations unless there are exemptions.
      We have made tax payments to the Chinese tax authorities for 2005. We will
      make
      tax payments for subsequent periods as appropriate. Our management believes
      that
      our operations in China were exempted from income taxes and value added taxes
      for all prior years because we had been recognized by the local government
      as an
      advanced technology enterprise. However, we have never received a written
      confirmation from the appropriate tax authorities for the tax exemption status
      of our operations in China. As a result, there is no way to ascertain the
      position which may be taken by the relevant Chinese tax authorities in the
      future. We have made full provisions in our financial statements for all
      applicable tax liabilities, plus surcharge, for all prior calendar years. Such
      provisions for tax liabilities and surcharge will be reversed out of the
      financial statements at the appropriate point in the future. According to
      Chinese tax regulations, outstanding tax payable in China for the calendar
      years
      prior to 2005 may be subject to potential penalties for the late payment of
      taxes which is calculated on the basis of 0.5 times to five times the amount
      of
      taxes payable. 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.





**Results
      of Operations**





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





We
      achieved a net income of $1.58 million in the quarter ended September 30, 2006,
      which was 14% above our net income of $1.39 million for the quarter ended
      September 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 60.86% and 61.58% of our sales revenue for
      the
      three months and six months ended September 30, 2006, respectively (74.01%
      and
      72.18% for the three months and six months ended September 30, 2005,
      respectively). Shining Essence’s sales volume grew by was 4% and 34% for the
      three months and six months ended September 30, 2006, respectively (59% and
      40%
      for the three months and six months ended September 30, 2005, respectively).
      The
      growth in sales volume of three of our other products (Shining Signal, Shining
      Golden Shield and Shining Energy) ranged from 17% to143% and 38% to 167% for
      the
      three months and six months ended September 30, 2006 respectively. We launched
      several new products during the quarter ended March 31, 2006. These products
      contributed only 0.44% of our sales revenue for the six months ended September
      30, 2006.





15


During
      the quarter ended September 30, 2006, four additional retail stores were under
      construction and are expected to be opened in November 2006. As of September
      30,
      2006, we had a total of five direct sales retail outlets in operation. We also
      spent $1.3 million to improve our existing production and research facilities
      in
      the six months ended September 30, 2006.





Our
      results for the three months and six months ended September 30, 2005 and 2006
      are summarized below:





Three
                months ended September 30, 2005
            
            Three
                months ended September 30, 2006Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            4,070,370
            
            
            100.00
            %
            $
            5,467,037
            
            
            100.00
            %Cost
                of sales
            
            
            (1,234,678
            )
            
            -30.33
            %
            
            (1,650,364
            )
            
            -30.19
            %**Gross
                profit**
            
            $
            2,835,692
            
            
            69.67
            %
            $
            3,816,673
            
            
            69.81
            %Operating
                expenses:Selling
                expenses
            
            $
            (581,992
            )
            
            -14.30
            %
            $
            (952,454
            )
            
            -17.42
            %General
                and administrative expenses
            
            
            (57,898
            )
            
            -1.42
            %
            
            (384,734
            )
            
            -7.04
            %Total
                operating expenses
            
            $
            (639,890
            )
            
            -15.72
            %
            $
            (1,337,188
            )
            
            -24.46
            %**Income
                from operations**
            
            $
            2,195,802
            
            
            53.95
            %
            $
            2,479,485
            
            
            45.35
            %Other
                income and expenses:Other
                income
            
            $
            10,878
            
            
            0.27
            %
            $
            68,855
            
            
            1.26
            %Other
                expenses
            
            
            -
            
            
            0.00
            %
            
            (34,886
            )
            
            -0.64
            %Total
                other income (expenses)
            
            $
            10,878
            
            
            0.27
            %
            $
            33,969
            
            
            0.62
            %**Income
                before taxes**
            
            $
            2,206,680
            
            
            54.21
            %
            $
            2,513,454
            
            
            45.97
            %Provision
                for income taxes
            
            
            (818,615
            )
            
            -20.11
            %
            
            (932,091
            )
            
            -17.05
            %**Net
                income**
            
            $
            1,388,065
            
            
            34.10
            %
            $
            1,581,363
            
            
            28.93
            %




Six
                months ended September 30, 2005
            
            Six
                months ended September 30, 2006Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            8,383,217
            
            
            100.00
            %
            $
            13,470,001
            
            
            100.00
            %Cost
                of sales
            
            
            (2,516,708
            )
            
            -30.02
            %
            
            (4,009,103
            )
            
            -29.76
            %**Gross
                profit**
            
            $
            5,866,509
            
            
            69.98
            %
            $
            9,460,898
            
            
            70.24
            %Operating
                expenses:Selling
                expenses
            
            $
            (899,643
            )
            
            -10.73
            %
            $
            (2,221,986
            )
            
            -16.50
            %General
                and administrative expenses
            
            
            (150,321
            )
            
            -1.79
            %
            
            (790,724
            )
            
            -5.87
            %Total
                operating expenses
            
            $
            (1,049,964
            )
            
            -12.52
            %
            $
            (3,012,710
            )
            
            -22.37
            %**Income
                from operations**
            
            $
            4,816,545
            
            
            57.46
            %
            $
            6,448,188
            
            
            47.87
            %Other
                income and expenses:Other
                income
            
            $
            28,197
            
            
            0.34
            %
            $
            104,378
            
            
            0.77
            %Other
                expenses
            
            
            -
            
            
            0.00
            %
            
            (38,745
            )
            
            -0.29
            %Total
                other income (expenses)
            
            $
            28,197
            
            
            0.34
            %
            $
            65,633
            
            
            0.48
            %**Income
                before taxes**
            
            $
            4,844,742
            
            
            57.80
            %
            $
            6,513,821
            
            
            48.35
            %Provision
                for income taxes
            
            
            (1,697,751
            )
            
            -20.25
            %
            
            (2,056,802
            )
            
            -15.27
            %**Net
                income**
            
            $
            3,146,991
            
            
            37.55
            %
            $
            4,457,019
            
            
            33.08
            %





16


*Net
      sales*





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




Three
                months ended September 30,
            
            Six
                months ended September 30,2005
            
            2006
            
            2005
            
            2006Invoiced
                value on sales
            
            $
            4,092,415
            
            $
            5,500,785
            
            $
            8,428,065
            
            $
            13,555,277Less
                : sales tax
            
            
            (22,045
            )
            
            (33,748
            )
            
            (44,848
            )
            
            (85,276
            )$
            4,070,370
            
            $
            5,467,037
            
            $
            8,383,217
            
            $
            13,470,001





Net
      sales
      of $5,467,037 for the quarter ended September 30, 2006 were 34.31% above the
      net
      sales of $4,070,370 for the quarter ended September 30, 2005. Net sales of
      $13,470,001 for the six months ended September 30, 2006 were 60.68% above the
      net sales of $8,383,217 for the six months ended September 30, 2005. The
      increase was mainly attributable to increased sales volume.





The
      contributions of each product as a percentage of invoiced value on sales for
      the
      three months and six months ended September 30, 2005 and 2006 respectively
      are
      summarized below:




Three
                months ended September 30,
            
            Six
                months ended September 30,2005
            
            2006
            
            2005
            
            2005Shining
                Essence Capsules
            
            
            74.01
            %
            
            60.86
            %
            
            72.18
            %
            
            61.58
            %Shining
                Signal Capsules
            
            
            11.50
            %
            
            22.21
            %
            
            12.33
            %
            
            20.71
            %Shining
                Golden Shield Capsules
            
            
            9.11
            %
            
            8.44
            %
            
            9.62
            %
            
            8.73
            %Shining
                Energy Capsules
            
            
            5.38
            %
            
            8.49
            %
            
            5.87
            %
            
            8.54
            %Miscellaneous
            
            
            0.0
            %
            
            -
            %
            
            0.0
            %
            
            0.44
            %100
            %
            
            100
            %
            
            100
            %
            
            100
            %





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




Percentages
                increase (decrease) from the prior yearThree
                months ended September 30,2005
            
            2006Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            59
            %
            
            -5
            %
            
            51
            %
            
            4
            %
            
            1
            %
            
            5
            %Shining
                Signal Capsules
            
            
            40
            %
            
            -7
            %
            
            30
            %
            
            143
            %
            
            2
            %
            
            148
            %Shining
                Golden Shield Capsules
            
            
            20
            %
            
            1
            %
            
            21
            %
            
            17
            %
            
            2
            %
            
            19
            %Shining
                Energy Capsules
            
            
            33
            %
            
            -1
            %
            
            32
            %
            
            75
            %
            
            15
            %
            
            101
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            %
            
            N/A
            
            
            N/A
            %





Percentages
                increase (decrease) from the prior yearSix
                months ended September 30,2005
            
            2006Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Selling
                prices
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            40
            %
            
            -
            %
            
            40
            %
            
            34
            %
            
            -1
            %
            
            33
            %Shining
                Signal Capsules
            
            
            25
            %
            
            3
            %
            
            29
            %
            
            167
            %
            
            -2
            %
            
            162
            %Shining
                Golden Shield Capsules
            
            
            18
            %
            
            2
            %
            
            20
            %
            
            38
            %
            
            1
            %
            
            39
            %Shining
                Energy Capsules
            
            
            50
            %
            
            -9
            %
            
            36
            %
            
            100
            %
            
            13
            %
            
            126
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %





17


*Cost
      of sales*





Cost
      of
      sales for the three months ended September 30, 2006 was $1,650,364 compared
      with
      $1,234,678 for the three months ended September 30, 2005. Cost of sales for
      the
      six months ended September 30, 2006 was $4,009,103 compared with $2,516,708
      for
      the six months ended September 30, 2005. The increase in cost of sales was
      primarily caused by increased sales volume. The increase in production volume
      has resulted in slightly lower overhead on a per unit basis. As a result, the
      average unit cost of production in the three months and six months ended
      September 30, 2006 was approximately 3% and 11% respectively lower than the
      corresponding periods of last year.





Unit
      volume and unit costs comparatives for the three months and six months ended
      September 30, 2005 and 2006 are summarized below:





Percentages
                increase (decrease) from the prior yearThree
                months ended September 30,2005
            
            2006Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            59
            %
            
            -6
            %
            
            49
            %
            
            4
            %
            
            -4
            %
            
            -
            %Shining
                Signal Capsules
            
            
            40
            %
            
            -8
            %
            
            29
            %
            
            143
            %
            
            -4
            %
            
            133
            %Shining
                Golden Shield Capsules
            
            
            20
            %
            
            -1
            %
            
            19
            %
            
            17
            %
            
            -8
            %
            
            8
            %Shining
                Energy Capsules
            
            
            33
            %
            
            -3
            %
            
            29
            %
            
            75
            %
            
            9
            %
            
            91
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %





Percentages
                increase (decrease) from the prior yearSix
                months ended September 30,2005
            
            2006Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)
            
            Unit
                volume
            
            Unit
                costs
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            40
            %
            
            -7
            %
            
            30
            %
            
            34
            %
            
            -5
            %
            
            27
            %Shining
                Signal Capsules
            
            
            25
            %
            
            5
            %
            
            31
            %
            
            167
            %
            
            -10
            %
            
            140
            %Shining
                Golden Shield Capsules
            
            
            18
            %
            
            4
            %
            
            23
            %
            
            38
            %
            
            -8
            %
            
            27
            %Shining
                Energy Capsules
            
            
            50
            %
            
            -7
            %
            
            39
            %
            
            100
            %
            
            4
            %
            
            108
            %Miscellaneous
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            100
            %
            
            N/A
            
            
            100
            %





*Gross
      profit*





Gross
      profit for the three and six months ended September 30, 2006 were $3,816,673
      and
      $9,460,898 respectively, representing a growth of 35% and 61% as compared to
      the
      corresponding periods of last year. 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
      three months and six months ended September 30, 2005 and 2006 are summarized
      below:








Three
                months ended September 30,
            
            Six
                months ended September 30,2005
            
            2006
            
            2005
            
            2006%
            
            %
            
            %
            
            %Shining
                Essence Capsules
            
            
            79.56
            %
            
            67.11
            %
            
            78.01
            %
            
            67.28
            %Shining
                Signal Capsules
            
            
            8.38
            %
            
            17.12
            %
            
            8.95
            %
            
            16.11
            %Shining
                Golden Shield Capsules
            
            
            6.34
            %
            
            6.51
            %
            
            6.84
            %
            
            6.79
            %Shining
                Energy Capsules
            
            
            5.72
            %
            
            9.26
            %
            
            6.20
            %
            
            9.25
            %Miscellaneous
            
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %
            
            0.57
            %100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %




The
      average gross profit percentage for all of our product for the three months
      and
      six months ended September 30, 2005 and 2006 is summarized below:


Three
                  months ended September 30,
              
              Six
                  months ended September 30,2005
              
              2006
              
              2005
              
              2006


Average
                for all products
            
            
            69.67
            %
            
            69.81
            %
            
            69.98
            %
            
            70.24
            %





*Selling
      expenses*





Selling
      expenses were $952,454 or 17.42% of net sales for the quarter ended September
      30, 2006 compared with $581,992 or 14.30% of net sales for the quarter ended
      September 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 73% of total selling expenses
      for
      the quarter ended September 30, 2006 (84% for the quarter ended September 30,
      2005). Advertising expenses increased slightly to support the gradual roll
      out
      of retail stores.





*General
      and administrative expenses*





General
      and administrative expenses were $384,734 or 7.04% of net sales for the quarter
      ended September 30, 2006 compared with 57,898 or 1.42% of net sales for the
      quarter ended September 30, 2005. The increase of $326,836 was primarily due
      to
      additional legal and professional and investor relations fees. The following
      items, in total, accounted for 86% of the increase: (a) $130,809 of legal and
      professional fees, (b) an increase in administrative personnel costs of $99,293,
      and (c) $50,708 of investor relations expenses.





18


*Provision
      for income taxes*





Provision
      for income taxes for the three months and six months ended September 30, 2005
      and 2006 comprised the following items:




Three
                months ended September 30,
            
            Six
                months ended September 30,2005
            
            2006
            
            2005
            
            2006Income
                taxes
            
            $
            345,617
            
            $
            407,933
            
            $
            759,522
            
            $
            1,122,764Surcharge
                at 0.5% per day on accrued taxes
            
            
            472,998
            
            
            524,158
            
            
            938,229
            
            
            934,038Total
                provision for income
            
            $
            818,615
            
            $
            932,091
            
            $
            1,697,751
            
            $
            2,056,802





The
      increase in income taxes for the three months ended September 30,2006 was due
      to
      higher income before taxes which increased 14%. 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.





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 September 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.





19


*Segment
      reporting*





We
      have
      adopted the “products and services” approach for segment reporting. For the
      three months and six months ended September 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 $23.93 million and working capital of $14.25 million as of September
      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 six months ended
      September 30, 2005, cash generated from operations of $7.88 million was higher
      than the net income for the period of $3.15 million. Cash generated from
      operations for the six months ended September 30, 2006 of $5.20 million was
      more
      in line with the net income for the period of $4.47 million.





We
      had
      capital expenditures totaling $1.3 million in the six months ended September
      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 did not
      have
      any cash flows from/used in financing activities for the quarter ended September
      30, 2006.





Our
      current facility commenced operations in 2000. Despite the increases in sales
      volume in the last couple of years, we still have spare production capacity.
      We
      have started our plan to construct a new plant with an overall project size
      of
      $30 million. Phase 1 of the project involves constructing a facility capable
      of
      producing 150 tons of probiotics per annum and is estimated to cost $18 million,
      $16 million of which is expected to be paid in the fiscal year ending
      March 31, 2007 and the balance by the end of 2007.  Subsequent phases
      of this project will only commence when demands for probiotics have exceeded
      the
      production capacity of the Phase 1 facility.





We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores. In this regard, we opened our first pilot
      store
      in Shanghai in March 2006 and intend to open over 300 stores over the next
      two years at an anticipated cost of approximately $11.25 million. In preparation
      for the opening of our retail stores, we have repackaged a number of our
      existing products for sale in our stores, and have introduced several new
      products which are available exclusively in our stores. The costs of repackaging
      the existing products and releasing the new products are minimal and have been
      included in our cost of sales and selling and administrative expenses. We intend
      to continue to develop new products to strengthen our product pipeline and
      add
      to our retail store offerings. As our development costs mainly comprise staff
      costs, we do not expect that such costs will be significant.





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.





20


**Inflation**





We
      believe that inflation has not had a material impact on our results of
      operations for the three months and six months ended September 30, 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.





**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 RMB379,937 and RMB560,243 in the three months and six months
      ended September 30, 2006 respectively and RMB 89,370 and RMB202,097 in the
      three
      months and six months ended September 30, 2005 respectively. 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 September 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 $11,224,075 as of September 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.





21


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





As
      disclosed in our financial statements for the fiscal years ended March 31,
      2005
      and 2006, we have made tax payments to the Chinese tax authorities for 2005.
      We
      believe that our operations in China were exempted from income taxes and value
      added taxes for all prior years because we had been recognized by the local
      government as an advanced technology enterprise. However, we have never received
      a written confirmation from the appropriate tax authorities for the tax
      exemption status of our operations in China. As a result, there is no way to
      ascertain the position which may be taken by the relevant Chinese tax
      authorities in the future. Accordingly, our financial statements contain full
      provisions for all applicable tax liabilities, plus surcharge, for all prior
      calendar years. Such provisions for tax liabilities and surcharge will be
      reversed out of the financial statements at the appropriate point in the future.





According
      to Chinese tax regulations, our outstanding tax payable in China for the
      calendar years prior to 2005 may be subject to potential penalties for the
      late
      payment of taxes which is calculated on the basis of 0.5 times to five times
      the
      amount of taxes payable. This amounts to $4.9 million (if calculated based
      on
      0.5 times of taxes payable) to $49 million (if calculated based on five times
      of
      the amount of taxes payable) as of September 30, 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.





22


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:





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.





23


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.




In
      September 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin (SAB) 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements.* SAB
      108
      provides guidance on how prior year misstatements should be taken into
      consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. SAB 108 is effective for fiscal years
      ending on or after November 15, 2006. The adoption of SAB 108 is not
      expected to have a material impact on our financial statements.





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





In
      September 2006, the FASB issued FAS 158, Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires
      employers to fully recognize the obligations associated with single-employer
      defined benefit pension, retiree healthcare and other postretirement plans
      in
      their financial statements. The requirement by FAS 158 to recognize the funded
      status of a benefit plan and the disclosure requirements of FAS 158 are
      effective as of the end of the fiscal year ending after December 15, 2006
      for entities with publicly traded equity securities. The requirement to measure
      plan assets and benefit obligations as of the date of the employer’s fiscal
      year-end statement of financial position is effective for fiscal years ending
      after December 15, 2008. We are currently evaluating the impact of the
      provisions of FAS 158.








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





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





There
      were no changes in our internal control over financial reporting during the
      quarter ended September 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





24


**PART
      II - OTHER INFORMATION**





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





None.





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





None.





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





None.





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





None.





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





None.





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





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


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


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


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





*
      * * * *







25


**SIGNATURES**





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




**CHINA-BIOTICS,
                INC.**
              (Registrant)Date:
                November 14, 2006
            
            /s/
                Li Chi YuenLi
                Chi Yuen, Chief Financial Officer




26