UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2010





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


EXCHANGE
ACT





For
the Transition Period from _______ to _________





001-34123


(Commission
File Number)





CHINA-BIOTICS,
INC.


(Exact
Name of registrant as specified in its charter)





Delaware
            98-0393071(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer Identification No.)





No. 999
Ningqiao Road


Jinqiao
Export Processing Zone


Pudong,
Shanghai 201206


People’s
Republic of China


(Address
of Principal Executive Offices)





Telephone
number: (86 21) 5834 9748





(Registrant’s
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  þ
   No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 
 ̈
  No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer
             ̈
            Accelerated
      filer
            þNon-accelerated
      filer
             ̈ (Do not check if
      a smaller
              reporting
      company)
            Smaller
      reporting company
             ̈





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


Yes 
 ̈ No þ





As
of August 3, 2010, 22,370,000 shares of the registrant’s common stock were
outstanding.





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
                FINANCIAL
      STATEMENTS
                
                1ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                14ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                28ITEM
      4.
                CONTROLS
      AND PROCEDURES
                
                29PART
      II - OTHER INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS
                
                30ITEM
      1A.
                RISK
      FACTORS
                
                30ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                
                30ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES
                
                30ITEM
      4.
                [REMOVED
      AND RESERVED.]
                
                30ITEM
      5.
                OTHER
      INFORMATION
                
                30ITEM
      6.
                EXHIBITS
                
                30SIGNATURES
                
                33





PART
I - FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
expressed in US Dollars)




Note
                      
                      
                      June 30,
                        2010
                      
                      
                      March 31,
                        2010ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      
                      
                      
                      $
                      159,753,695
                      
                      
                      $
                      155,579,371Accounts
      receivable, net
                      
                      
                      4
                      
                      
                      
                      25,122,632
                      
                      
                      
                      21,008,664Other
      receivables
                      
                      
                      
                      
                      
                      
                      566,028
                      
                      
                      
                      791,907Inventories
                      
                      
                      5
                      
                      
                      
                      1,063,379
                      
                      
                      
                      1,100,707Amount
      due from a director
                      
                      
                      6
                      
                      
                      
                      2,351,618
                      
                      
                      
                      2,367,892Prepayment
                      
                      
                      
                      
                      
                      
                      863,502
                      
                      
                      
                      1,104,149Total
      current assets
                      
                      
                      
                      
                      
                      $
                      189,720,854
                      
                      
                      $
                      181,952,690Land
      use right
                      
                      
                      7
                      
                      
                      
                      1,794,984
                      
                      
                      
                      1,797,082Property,
      plant and equipment, net
                      
                      
                      8
                      
                      
                      
                      52,911,209
                      
                      
                      
                      48,886,077Deferred
      tax assets
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      298,833Total
      assets
                      
                      
                      
                      
                      
                      $
                      244,427,047
                      
                      
                      $
                      232,934,682LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                      
                      
                      
                      
                      
                      $
                      4,455,795
                      
                      
                      $
                      5,850,988Tax
      payables
                      
                      
                      9
                      
                      
                      
                      29,779,492
                      
                      
                      
                      28,989,337Other
      payables and accruals
                      
                      
                      
                      
                      
                      
                      2,440,964
                      
                      
                      
                      1,815,487Convertible
      note, net of discount of $1,956,236 and 2,853,094 as of June 30, 2010 and
      March 31, 2010, respectively
                      
                      
                      11
                      
                      
                      
                      23,045,764
                      
                      
                      
                      22,146,906Embedded
      derivatives
                      
                      
                      11
                      
                      
                      
                      5,589,000
                      
                      
                      
                      14,797,000Interest
      payable
                      
                      
                      
                      
                      
                      
                      3,690,507
                      
                      
                      
                      3,156,035Total
      current liabilities
                      
                      
                      
                      
                      
                      $
                      69,001,522
                      
                      
                      $
                      76,755,753Commitments and
      contingenciesStockholders’
      equity:Common
      stock (par value of $0.0001, 100,000,000 shares authorized, 46,751,004
      shares issued and 22,370,000 outstanding as of June 30, 2010 and as of
      March 31, 2010)
                      
                      
                      
                      
                      
                      $
                      4,675
                      
                      
                      $
                      4,675Additional
      paid-in capital
                      
                      
                      
                      
                      
                      
                      82,769,074
                      
                      
                      
                      82,769,074Retained
      earnings
                      
                      
                      
                      
                      
                      
                      84,303,530
                      
                      
                      
                      65,441,994Treasury
      stock at cost (24,381,004 shares)
                      
                      
                      
                      
                      
                      
                      (2,438
                      )
                      
                      
                      (2,438
                      )Accumulated
      other comprehensive income
                      
                      
                      
                      
                      
                      
                      5,324,890
                      
                      
                      
                      4,939,830Capital
      and statutory reserves
                      
                      
                      
                      
                      
                      
                      3,025,794
                      
                      
                      
                      3,025,794Total
      stockholders’ equity
                      
                      
                      
                      
                      
                      $
                      175,425,525
                      
                      
                      $
                      156,178,929Total
      liabilities and stockholders’ equity
                      
                      
                      
                      
                      
                      $
                      244,427,047
                      
                      
                      $
                      232,934,682





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


1


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
expressed in US Dollars)





Note
                            
                            
                            Three months ended
                              June 30,2010
                            
                            
                            2009Net
      sales
                            
                            
                            
                            
                            $
                            24,935,719
                            
                            
                            $
                            15,412,462Cost
      of sales
                            
                            
                            
                            
                            
                            (7,818,475
                            )
                            
                            
                            (4,498,673
                            )Gross
      profit
                            
                            
                            
                            
                            $
                            17,117,244
                            
                            
                            $
                            10,913,789Operating
      expenses:Selling
      expenses
                            
                            
                            
                            
                            $
                            (3,058,378
                            )
                            
                            $
                            (2,347,592
                            )General
      and administrative expenses
                            
                            
                            
                            
                            
                            (1,202,538
                            )
                            
                            
                            (1,060,296
                            )Research
      and development costs
                            
                            
                            
                            
                            
                            (1,082,499
                            )
                            
                            
                            (674,369
                            )Other
      income/expense, net
                            
                            
                            
                            
                            
                            96,854
                            
                            
                            
                            36,448Total
      operating expenses
                            
                            
                            
                            
                            $
                            (5,246,561
                            )
                            
                            $
                            (4,045,809
                            )$
                            11,870,683
                            
                            
                            $
                            6,867,980Other
      income and expenses:Changes
      in the fair value of embedded derivatives
                            
                            
                            11
                            
                            
                            $
                            9,208,000
                            
                            
                            $
                            514,000Interest
      income
                            
                            
                            
                            
                            
                            
                            87,876
                            
                            
                            
                            67,088Total
      other  income
                            
                            
                            
                            
                            
                            $
                            9,295,876
                            
                            
                            $
                            581,088Income
      before taxes
                            
                            
                            
                            
                            
                            $
                            21,166,559
                            
                            
                            $
                            7,449,068Provision
      for income taxes
                            
                            
                            8
                            
                            
                            
                            (2,305,023
                            )
                            
                            
                            (1,681,319
                            )Net
      income
                            
                            
                            
                            
                            
                            $
                            18,861,536
                            
                            
                            $
                            5,767,749Earnings
      per share:Basic
                            
                            
                            2
                            
                            
                            $
                            0.84
                            
                            
                            $
                            0.34Diluted
                            
                            
                            2
                            
                            
                            $
                            0.39
                            
                            
                            $
                            0.34Shares
      used in computation of earnings per share:Basic
                            
                            
                            2
                            
                            
                            
                            22,370,000
                            
                            
                            
                            17,080,000Diluted
                            
                            
                            2
                            
                            
                            
                            24,453,333
                            
                            
                            
                            17,080,000





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


2


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


(Amounts
expressed in US Dollars)





Common Stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Accumulated
                      
                      
                      Capital &Shares
                      
                      
                      Par value
                        $0.0001
                      
                      
                      Additional
                        Paid-in Capital
                      
                      
                      Retained
                        Earnings
                      
                      
                      Treasury
                        Stock
                      
                      
                      Comprehensive
                        Income
                      
                      
                      Statutory
                        Reserves
                      
                      
                      TotalBalance-March
      31, 2010
                      
                      
                      46,751,004
                      
                      
                      
                      4,675
                      
                      
                      
                      82,769,074
                      
                      
                      
                      65,441,994
                      
                      
                      
                      (2,438)
                      
                      
                      
                      4,939,830
                      
                      
                      
                      3,025,794
                      
                      
                      
                      156,178,929Comprehensive
      income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18,861,536
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18,861,536Other
      comprehensive income:Foreign
      currency translation adjustments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      385,060
                      
                      
                      
                      
                      
                      
                      
                      385,060Total
      comprehensive incomeBalance-June
      30, 2010
                      
                      
                      46,751,004
                      
                      
                      
                      4,675
                      
                      
                      
                      82,769,074
                      
                      
                      
                      84,303,530
                      
                      
                      
                      (2,438)
                      
                      
                      
                      5,324,890
                      
                      
                      
                      3,025,794
                      
                      
                      
                      175,425,525





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


3


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
expressed in US Dollars)




Three months ended
                  June 30,2010
                
                
                2009CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                
                $
                18,861,536
                
                
                $
                5,767,749Adjustment
      for:Changes
      in the fair value of embedded derivatives
                
                
                (9,208,000)
                
                
                
                (514,000)Loss
      on disposal of plant and equipment
                
                
                32,548
                
                
                
                -Change
      in deferred tax
                
                
                298,894
                
                
                
                -Depreciation
                
                
                606,782
                
                
                
                455,593Increase
      in accounts receivable
                
                
                (4,012,457)
                
                
                
                (1,554,722)Decrease
      in others receivable
                
                
                258,116
                
                
                
                -Decrease/(Increase)
      in inventories
                
                
                41,669
                
                
                
                (442,744)Decrease
      in prepayments
                
                
                214,208
                
                
                
                310,213Decrease/(Increase)
      in accounts payable
                
                
                (1,413,632)
                
                
                
                1,097,403Decrease
      in other payables and accruals
                
                
                (230,124)
                
                
                
                (515,764)Increase
      in tax payables
                
                
                668,991
                
                
                
                620,948NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                
                $
                6,118,531
                
                
                $
                5,224,676CASH
      FLOWS USED IN INVESTING ACTIVITIESPurchases
      of fixed assets
                
                $
                (2,212,428)
                
                
                $
                (881,407)NET
      CASH USED IN INVESTING ACTIVITIES
                
                $
                (2,212,428)
                
                
                $
                (881,407)CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      advance from a director
                
                
                -
                
                
                
                2,106,368NET
      CASH FROM FINANCING ACTIVITIES
                
                $
                -
                
                
                $
                2,106,368Effect
      of exchange rate changes on cash
                
                
                268,221
                
                
                
                133,043NET
      INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
                
                $
                4,174,324
                
                
                $
                6,582,680CASH
      AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
                
                
                155,579,371
                
                
                
                70,824,041CASH
      AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
                
                $
                159,753,695
                
                
                $
                77,406,721Supplemental
      disclosure cash flow information:Interest
      paid
                
                
                250,026
                
                
                
                505,833Income
      tax paid
                
                
                1,668,319
                
                
                
                1,303,396





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


4


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





1.
            BASIS
      OF PRESENTATION AND PRINCIPALS OF
CONSOLIDATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The accompanying condensed consolidated financial
statements do reflect all the adjustments that, in the opinion of management,
are necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods reported. Such adjustments are of a
normal, recurring nature. Our operating results for the three months ended June
30, 2010 are not necessarily indicative of the results that may be expected for
the year ending March 31, 2011.





These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes to consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended March 31, 2010. There has been no material change in the significant
accounting policies followed by us during the three months ended
June 30, 2010.





Recent
Accounting Pronouncements





In July
2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting
Standards Update (“ASU”) 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 amends
the existing disclosure guidance, thus requiring an entity to provide a greater
level of disaggregated information about the credit quality of its financing
receivables and its allowance for credit losses. ASU 2010-20 is effective for
fiscal and interim periods beginning after December 15, 2010. The Company will
review the requirements under the standard to determine what impacts, if any,
the adoption of the standard would have on our condensed consolidated financial
statements.





In
January 2010, the FASB issued ASU 2010-06, “Improving Disclosure about Fair
Value Measurements,” under Topic 820, “Fair Value Measurements and Disclosures,”
to improve and provide new disclosures for recurring and nonrecurring fair value
measurements under the three-level hierarchy of inputs for transfers in and out
of Levels 1 and 2, and activity in Level 3. This update also clarifies existing
disclosures of the level of disaggregation for the classes of assets and
liabilities and the disclosure about inputs and valuation techniques. ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for financial statements issued
for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. The adoption of ASU 2010-06 did not have a material
impact on our consolidated financial statements. The Company is currently
assessing the impact, if any, of ASU 2010-06 disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements on our consolidated financial statements.





2.
            EARNINGS
      PER SHARE





Basic
earnings per share is computed in accordance with SFAS No.128 (now known as ASC
260), “Earnings Per Share,” by dividing the net income by the weighted average
number of outstanding common stock during the period. The diluted earnings per
share calculation includes the impact of dilutive convertible securities, if
applicable. The weighted average number of outstanding common stock is
determined by relating the portion of time within a reporting period that a
particular number of common stock has been outstanding to the total time in that
period.


5


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





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





Three months ended
                    June 30,2010
                  
                  
                  2009Earnings
      per share - BasicIncome
      for the period
                  
                  $
                  18,861,536
                  
                  
                  $
                  5,767,749Basic
      average common stock outstanding
                  
                  
                  22,370,000
                  
                  
                  
                  17,080,000Earnings
      per share
                  
                  $
                  0.84
                  
                  
                  $
                  0.34Earnings
      per share - DilutedIncome
      for the period
                  
                  $
                  18,861,536
                  
                  
                  $
                  5,767,749Change
      in fair value of embedded derivatives
                  
                  
                  (9,208,000)
                  
                  
                  
                  (514,000)$
                  9,653,536
                  
                  
                  $
                  5,253,749Basic
      average common stock outstanding
                  
                  
                  22,370,000
                  
                  
                  
                  17,080,000Diluted
      effect from embedded derivatives
                  
                  
                  2,083,333
                  
                  
                  
                  -Diluted
      average common stock
                  
                  
                  24,453,333
                  
                  
                  
                  17,080,000Net
      earnings per share
                  
                  $
                  0.39
                  
                  
                  $
                  0.34





For the
quarter ended June 30, 2009, 2,083,333 potential shares of the Company’s common
stock related to the exercise of the convertible note at the exercise price of
$12 per share are excluded from the computation of diluted earnings per share,
as the exercise price of $12 per share was higher than the average market price
during the period.





3.
            RISKS,
      UNCERTAINTIES, AND CONCENTRATIONS





(a)           Nature
of Operations





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





(b)           Concentration
of Credit Risk





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





As of
June 30, 2010 and March 31, 2010, the Group had cash deposits of $159.75 million
and $155.58 million respectively, placed with several banks in the PRC, which
includes the Special Administration Region of Hong Kong where there are
currently no rules or regulations in place for obligatory insurance of bank
accounts.





For the
three months ended June 30, 2010 and 2009, all of the Group’s sales arose in the
PRC.  In addition, all accounts receivable as of June 30, 2010 and
2009 arose in the PRC.





(c)           Concentration
of Customers





A
substantial percentage of the Group’s sales are made to a small number of
customers that accounted for more than 10% of total gross sales.  During
the three months ended June 30, 2010, there were no customers that accounted for
more than 10% of our total sales revenue.  During the three month
ended June 30, 2009, there was one customer that accounted for 12% of our sales
revenue.  As of June 30, 2010, there was one customer that accounted
for 10% of our accounts receivable.  As of June 30, 2009, there was
one customer that accounted for 15% of our accounts receivable.


6


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





4.
            ACCOUNTS
      RECEIVABLE





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





June 30,
                      2010
                    
                    
                    March 31,
                      2010Trade
      receivables
                    
                    $
                    25,122,632
                    
                    
                    $
                    21,008,664Less
      : Allowances for doubtful debt
                    
                    
                    -
                    
                    
                    
                    -$
                    25,122,632
                    
                    
                    $
                    21,008,664





5.
            INVENTORIES





The
inventories consisted of the following:





June 30,
                    2010
                  
                  
                  March 31,
                    2010Raw
      materials
                  
                  $
                  672,300
                  
                  
                  $
                  513,554Work-in-progress
                  
                  
                  38,145
                  
                  
                  
                  22,580Finished
      goods
                  
                  
                  352,934
                  
                  
                  
                  564,573$
                  1,063,379
                  
                  
                  $
                  1,100,707





6.
            AMOUNT
      DUE FROM/TO A DIRECTOR





As of
June 30, 2010 and March 31, 2010, the amount due from a director, Mr. Song
Jinan, represented advances to him for the business interest of the Company. The
amount was unsecured, interest-free, and will be returned to the Company no
later than September 30, 2010.





7.
            LAND
      USE RIGHT





The
land use right consisted of the following:




June 30, 2010
                      
                      
                      March 31, 2010Land
      use right
                      
                      $
                      1,888,902
                      
                      
                      $
                      1,881,207Less:
      Accumulated amortization
                      
                      
                      (93,918)
                      
                      
                      
                      (84,125)$
                      1,794,984
                      
                      
                      $
                      1,797,082





A
subsidiary of the Company operating in Shanghai, the PRC owns factory buildings
on certain state-owned land in the PRC and has been assigned the land use right
for a period of 50 years commencing on January 15, 2008.





Amortization
expense amounted to $9,411 and $9,230 for the three months ended June 30, 2010
and 2009, respectively.





The land
use right was pledged to a bank as a credit guarantee for RMB30 million. 
It is primarily a performance bond for a significant event in
Shanghai.


7


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





8.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment, net, consisted of the following:




June 30,
                    2010
                  
                  
                  March 31,
                    2010Plant
      and machinery
                  
                  
                  19,398,586
                  
                  
                  
                  16,718,856Office
      equipment
                  
                  
                  3,890,821
                  
                  
                  
                  3,726,978Motor
      vehicles
                  
                  
                  343,170
                  
                  
                  
                  341,773Building
                  
                  
                  8,694,261
                  
                  
                  
                  -Leasehold
      improvements
                  
                  
                  2,804,306
                  
                  
                  
                  2,932,93735,131,144
                  
                  
                  
                  23,720,544Less:
      Accumulated depreciation
                  
                  $
                  (8,849,964)
                  
                  
                  $
                  (8,324,180)26,281,180
                  
                  
                  
                  15,396,364Construction
      in progress
                  
                  $
                  26,630,029
                  
                  
                  $
                  33,489,713$
                  52,911,209
                  
                  
                  $
                  48,886,077





Depreciation
expenses amounted to $597,371 and $446,363 for the three months ended
June 30, 2010 and 2009, respectively.





The
construction in progress consisted primarily of construction of a research and
development center and other ancillary facilities in Qingpu.





9.
            TAX
      PAYABLES





Tax
payables consisted of the following:




June 30,
                    2010
                  
                  
                  March 31,
                    2010Value
      added tax and other taxes
                  
                  $
                  7,314,312
                  
                  
                  $
                  6,946,939Income
      tax
                  
                  
                  4,207,413
                  
                  
                  
                  4,393,520Surcharge
                  
                  
                  14,292,348
                  
                  
                  
                  13,699,611Dividends
      withholding tax
                  
                  
                  3,965,419
                  
                  
                  
                  3,949,267$
                  29,779,492
                  
                  
                  $
                  28,989,337


8


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
income/(loss) generated in the United States, the British Virgin Islands and the
PRC before income taxes during the periods as presented in these financial
statements is summarized as follows:




Three months ended June 30,2010
                      
                      
                      2009Income
      in the United States before income taxes
                      
                      $
                      9,085,571
                      
                      
                      $
                      56,008Loss
      in the British Virgin Islands before income taxes
                      
                      
                      (205,222
                      )
                      
                      
                      (12,981
                      )Income
      in the PRC before income taxes
                      
                      
                      12,286,210
                      
                      
                      
                      7,406,041$
                      21,166,559
                      
                      
                      $
                      7,449,068





The
Company, which is incorporated in the United States, is subject to U.S. tax
law.  Other than legal and professional expenses for the daily
operations of the Company, the income generated from the United States is the
change in the fair value of the embedded derivatives of the 4% Senior
Convertible Promissory Note issued on December 11, 2007.





There is
no income tax for companies not carrying out business activities in the British
Virgin Islands. Accordingly, the Company’s financial statements do not present
any income tax provisions/credits related to the British Virgin Islands tax
jurisdiction.





The
provision for income tax relating to the periods as presented in these financial
statements is summarized as follows:





Three months ended June
      30,2010
                                        
                                        
                                        2009Current
                                        
                                        $
                                        2,006,190
                                        
                                        
                                        $
                                        1,681,319Deferred
                                        
                                        
                                        298,833
                                        
                                        
                                        
                                        -$
                                        2,305,023
                                        
                                        
                                        $
                                        1,681,319





The Group
has its principal operations in the PRC and is subject to a PRC Enterprise
Income Tax rate of 25% in calendar years 2010 and 2009.





However,
one of the PRC subsidiaries of the Group, Shining, located in the Shanghai
Jinqiao special economic zone, was awarded the status of “high technology”
enterprise for the calendar years 2007 to 2010. Hence, Shining enjoys a
preferential income tax of 15%, which represents a tax concession of 10% in the
year 2010 and 2009.


9


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Another
PRC subsidiary of the Group, GBS, is located in Qingpu, and has the same
business and operation as Shining, but with a larger production
scale.  GBS is exempted from PRC Enterprise Income Tax for two years
starting from calendar year 2008, followed by 50% tax exemption for the next
three calendar years, period from 2010 to 2012.





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





Three months ended of June 30,2010
                                                                    
                                                                    
                                                                    2009Computed
      tax at the local PRC statutory rate (25%)
                                                                    
                                                                    $
                                                                    5,291,640
                                                                    
                                                                    
                                                                    $
                                                                    1,862,267Fair
      value changes and expenses not deductible for tax purposes
                                                                    
                                                                    
                                                                    69,212
                                                                    
                                                                    
                                                                    
                                                                    4,126Revenue
      not subject to tax
                                                                    
                                                                    
                                                                    (3,148,25)
                                                                    
                                                                    
                                                                    
                                                                    (175,059)Effect
      of different tax rate in other jurisdiction
                                                                    
                                                                    
                                                                    817,701
                                                                    
                                                                    
                                                                    
                                                                    5,041Valuation
      allowance
                                                                    
                                                                    
                                                                    41,625
                                                                    
                                                                    
                                                                    
                                                                    221,037Tax
      concession
                                                                    
                                                                    
                                                                    (1,390,783)
                                                                    
                                                                    
                                                                    
                                                                    -Utilization
      of tax loss not previously recognized
                                                                    
                                                                    
                                                                    90,399
                                                                    
                                                                    
                                                                    
                                                                    (766,733)Surcharge
      at 0.05% per day on accrued taxes
                                                                    
                                                                    
                                                                    541,097
                                                                    
                                                                    
                                                                    
                                                                    530,640Temporary
      difference not recognized
                                                                    
                                                                    
                                                                    (7,243)
                                                                    
                                                                    
                                                                    
                                                                    -Total
      provision for income tax at effective rate
                                                                    
                                                                    $
                                                                    2,305,023
                                                                    
                                                                    
                                                                    $
                                                                    1,681,319





Deferred
tax assets arose primarily from the tax losses carry
forwards.  Deferred tax assets have been fully utilized during the
period.


10


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





10.
            COMMITMENTS





(a)  
Operating Leases





The Group
leases office space, warehouse facilities and retail outlets under various
operating leases, certain of which contain escalation clauses. Rental expenses
under operating leases included in the statement of income were $954,095 and
$880,828 for the quarters ended June 30, 2010 and 2009,
respectively.





As of
June 30, 2010, future minimum lease payments under non-cancellable operating
leases for office, warehouse and retail shops were as follows:




June 30,
                      2010Payable
      withinthe
      next 12 months
                    
                    $
                    385,798the
      next 13 to 24 months
                    
                    
                    22,636the
      next 25 to 36 months
                    
                    
                    -the
      next 37 to 48 months
                    
                    
                    -the
      next 49 to 60 months
                    
                    
                    -Thereafter
                    
                    
                    -$
                    408,434





(b)  
Capital commitments





GBS
entered into agreements with contractors to construct a plant consisting of bulk
manufacturing facilities in the Shanghai Qingpu Industrial Park District. The
amount of future payment is $3,772,245, which was contracted, but not provided,
for as of June 30, 2010.





(c)
Purchase obligations





The Group
entered into agreements with suppliers to purchase raw materials and packing
materials. The amount of future payment is $14,742,072, which was contracted,
but not provided, for as of June 30, 2010.





(d) Other
obligations





The Group
entered into an agreement with a university to perform research and development.
The amount of future payment is $3,177,998, which was contracted, but not
provided, for as of June 30, 2010.





11.
            CONVERTIBLE
      NOTES





On
December 11, 2007, the Company sold a 4% Senior Convertible Promissory Note
in the amount of $25,000,000 (the “Note”) with a maturity date of
December 11, 2010 to Pope Investments II LLC, an affiliate of Pope
Investments, LLC, in a private placement. In connection with the sale, the
Company entered into an Investment Agreement and a Registration Rights
Agreement. In addition, Mr. Song Jinan, the Company’s Chief Executive Officer,
Chairman, and largest stockholder, entered into a Guaranty Agreement and a
Pledge Agreement pursuant to which Mr. Song agreed to guaranty the Company’s
obligations under the Note and to secure such guaranty with a pledge of
4,000,000 shares of China-Biotics’ common stock owned by Mr. Song. The principal
amount of the Note is convertible into shares of the Company’s common stock at
an exercise price of $12.00 per share at any time until the maturity date
subject to adjustment for subdivision or combination of the Company’s common
stock and similar events. If the Note is not converted at maturity, the Company
will redeem the Note to provide Pope Investments II LLC with a total yield of
10% per annum inclusive of the annual interest. The Note also provides for
mandatory conversion into the Company’s common stock if the Group achieved a net
income of $60 million in fiscal year 2010.  Because our net income in
fiscal year 2010 was below $60 million, the mandatory conversion will not be
implemented. Pope Investments II LLC may declare the outstanding principal
amount and any accrued but unpaid interest, calculated at a rate of 10% per
annum, to be immediately due and payable upon an event of default, including
non-payment of obligations under the Note, bankruptcy or insolvency, or failure
to perform any covenant set forth in the Note or Investment Agreement. Pursuant
to the Investment Agreement the Company has secured payment of obligations under
the Note with a pledge of 100% of the stock of SGI to Pope Investments
II LLC.


11


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Net
proceeds of the Note are being used to fund the construction of a
150-metric-ton-per-year manufacturing facility and for other capital
expenditures.





The
Company accounted for the net proceeds from the issuance of the Note as two
separate components; an embedded derivative component (conversion option with
mandatory conversion feature) and a debt component. The Company determined the
initial carrying value of the debt component by subtracting the fair value of
embedded derivatives amounted to US$9,118,000 from the net proceeds received
from the issuance of the Note. This resulted in US$15,882,000 initial carrying
amount of the debt component.





On April
1, 2008, the Company adopted ASC Topic 820, “Fair Value Measurements and
Disclosures” (formerly, SFAS No. 157 “Fair Value Measurements”), which defines
fair value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. ASC 820 does not require any
new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the
information. In February 2008, the FASB deferred the effective date of ASC 820
by one year for certain non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at lease annually).  The Company
adopted the provisions of ASC 820, except as it applies to those non-financial
assets and non-financial liabilities for which the effective date has been
delayed by one year.





ASC 820
establishes a three-level valuation hierarchy of valuation techniques based on
observable and unobservable inputs, which may be used to measure fair value and
include the following:





Level 1 -
Quoted prices in active markets for identical assets or
liabilities;





Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities; and





Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.





Classification
within the hierarchy is determined based on the lowest level of input that is
significant to the fair value measurement.





As of
June 30, 2010, the Company held certain assets and liabilities that are required
to be measured at fair value on a recurring basis, including the embedded
derivatives related to the Note issued in 2007. The fair value of the embedded
derivatives was determined using the following inputs in accordance with ASC 820
at June 30, 2010:




Fair Value MeasurementsBalance
                  
                  
                  Quoted
                    Prices in
                    Active
                    Markets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)Embedded
      derivatives - conversion rightAs
      of March 31, 2010
                  
                  $
                  14,797,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  14,797,000As
      of June 30, 2010
                  
                  $
                  5,589,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,589,000


12


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
following table presents a reconciliation of the assets and liabilities measured
at fair value on a recurring basis using significant unobservable inputs (Level
3) from April 1, 2010 to June 30, 2010:





Derivative Liability -
                    Conversion Rights2010
                  
                  
                  2009Balance
      on March 31
                  
                  $
                  14,797,000
                  
                  
                  $
                  2,660,000Adjustment
      to fair value included in earnings
                  
                  
                  (9,208,000)
                  
                  
                  
                  (514,000)Balance
      on June 30
                  
                  $
                  5,589,000
                  
                  
                  $
                  2,146,000





The
embedded derivatives are revalued at the end of each reporting period and the
resulting difference is included in the results of operations. The estimated
fair value of the embedded derivatives as of June 30, 2010 and March 31, 2010
was $5,589,000 and $14,797,000, respectively. The change in the fair value of
the embedded derivatives that amounted to $9,208,000 for the quarter ended June
30, 2010, and $514,000 for the quarter ended June 30, 2009 were charged to the
consolidated statement of operation.





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





June 30,
                    2010
                  
                  
                  March 31,
                    2010Risk-free
      rate of return
                  
                  
                  0.22
                  %
                  
                  
                  0.3
                  %Time
      to expiration
                  
                  0.5
      years
                  
                  
                  0.75
      yearsVolatility
      rate
                  
                  
                  61
                  %
                  
                  
                  68
                  %Dividend
      yield
                  
                  
                  -
                  
                  
                  
                  -





As of
June 30, 2010 and March 31, 2010, the Note interest amounting to
$13,410,434 and $11,727,789 was capitalized under construction in
progress.


13




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





NOTE
REGARDING FORWARD-LOOKING STATEMENTS





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





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





Except as
otherwise indicated by the context, references in this Quarterly Report on Form
10-Q to “we,” “us,” or “our” are to the combined business of China-Biotics, Inc.
(the “Company”) and its wholly-owned direct subsidiaries, Sinosmart Group Inc.
(“SGI”), Growing State Limited (“GSL”), and King Treasure Group Limited (“KTG”)
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 primarily sold in the Chinese domestic
market.





Our
retail products are mainly sold to distributors, who then distribute them to
various retail outlets such as drug stores and supermarkets. During the three
months ended June 30, 2010, approximately 87% of our sales revenue was comprised
of amounts receivable from the distributors for the sale of these products.
Typically, 60 to 90 days’ credit is given to the distributors.  Our
bulk additives products are primarily sold to institutional customers, such as
dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and
food companies.





We intend
to expand our retail products sales to other cities in China through our growing
distribution network. Our management believes that as China becomes more
affluent, its citizens are becoming more health conscious, which has led to
higher demand for health and functional food such as probiotics and
yogurt.





In
addition, probiotics are increasingly used as additives in a variety of
industries, including the dairy and animal feed industries. According to
statements made by the Nutrition Development Centre of National Development and
Reform Commission in China, effective April 1, 2007, probiotics will be
added to baby milk powders produced in China. Currently, the probiotics used in
China for such purposes are imported. To capitalize on what we believe is a
significant opportunity in those industries, our newly built plant enables us to
capture the anticipated demand for food additives.


14


The
Company’s construction of its new production facility has been on schedule since
the most recent year-end report. The Company commenced commercial production at
the new facility in February 2010. Phase 1 of the project involves constructing
a facility capable of producing 150 tons of probiotics per annum and costs
approximately $28 million, $25 million of which has been paid in 2010, and the
balance is scheduled to be paid by the end of the calendar year
2010.  Phase 2 of this project commenced in December 2009 and is
expected to cost $18 million, which is scheduled to be paid in fiscal year 2011.
The construction of Phase 1 of the plant was funded by cash received from
the sale of a convertible promissory note to Pope Investments II LLC on December
11, 2007.  The construction cost of Phase 2 of the plant was
funded by cash received from the public offering of our common stock in October
2009.  In this regard, we have leased 36,075 square meters of
land in the Shanghai Qingpu Industrial Park District, on which we are
constructing the new bulk manufacturing facilities. The plant will have an
initial capacity of 150 tons per year with room for expansion to 300 tons per
year.





As of
June 30, 2010, we have entered into contracts with 38 customers for the bulk
additives business. In this regard, we have created a number of formulations for
testing by many potential customers. We have established an array of business
relationships with commercial customers located in some major cities, including
Beijing and Shanghai, and several provinces including Jiangsu, Jiangxi, among
others. These growing companies are among the leaders in the dairy, animal feed,
baked foods, and pharmaceutical industries. The Company’s existing manufacturing
facility, with current annual manufacturing capacity of 12 metric tons of
probiotics for use as bulk additives and capsules, will supply the initial
orders for these customers. The need to create a large number of new products
for potential customers is pushing the capacity of our current production
facility. In late February 2010, we commenced commercial production at our new
facility in Qingpu, Shanghai, and we expect the volume of production to ramp up
gradually. We expect the production run-rate will reach 75 metric tons/year by
the end of 2010 calendar year. We have been carefully managing the use of our
production capacity and adjusting our products mix to make sure that we strike a
balance between achieving current and future sales.





As of
June 30, 2010, we have 27 distributors for retail products, and we are operating
103 retail outlets in China (as of June 30, 2009, we had 107 retail
outlets).  During
the quarter ended June 30, 2010, we added 1 distributor for retail products and
closed 8 retail outlets, as we believe selling retail products through our
distribution network is a more efficient way to grow our retail market.We have been hiring consultants who have many years of experience in the
direct selling industry to facilitate the development of the Shining brand
outlets.  We are also creating a “Community Network” through which we
continuously provide training and seminars to educate the public about becoming
more health conscious and about the benefits of probiotics and the Shining
products.


15


Results
of Operations





Quarter
Ended June 30, 2010 Compared with the Quarter Ended June 30, 2009





Our net
profit was $18.86 million in the quarter ended June 30, 2010. This included
$9.21 million surplus arising from the revaluation of the conversion feature
embedded in the convertible notes issued in December 2007 as required by
FAS133 (now known as ASC 816). Excluding this revaluation surplus, our net
income was $9.65 million, which was 83.46% higher than our net income, excluding
revaluation surplus, of $5.26 million, for the quarter ended June 30,
2009.





Our
results for the three months and ended June 30, 2010 and 2009 are summarized
below:





Three months ended
                  June 30, 2010
                
                
                Three months ended
                  June 30, 2009Amount
                
                
                % of Net sales
                
                
                Amount
                
                
                % of Net salesNet
      sales
                
                $
                24,935,719
                
                
                
                100.00
                %
                
                $
                15,412,462
                
                
                
                100.00
                %Cost
      of sales
                
                
                (7,818,475)
                
                
                
                31.35
                %
                
                
                (4,498,673)
                
                
                
                29.19
                %Gross
      profit
                
                $
                17,117,244
                
                
                
                68.64
                %
                
                $
                10,913,789
                
                
                
                70.81
                %Operating
      expenses:Selling
      expenses
                
                $
                (3,058,378)
                
                
                
                12.26
                %
                
                $
                (2,347,592)
                
                
                
                15.23
                %General
      and administrative expenses
                
                
                (1,202,538)
                
                
                
                4.82
                %
                
                
                (1,060,296)
                
                
                
                6.87
                %Research
      and development costs
                
                
                (1,082,499)
                
                
                
                4.34
                %
                
                
                (674,369)
                
                
                
                4.38
                %Other
      income/expenses, net
                
                
                96,854
                
                
                
                0.39
                %
                
                
                36,448
                
                
                
                0.23
                %Total
      operating expenses
                
                $
                (5,246,561)
                
                
                
                21.03
                %
                
                $
                (4,045,809)
                
                
                
                26.25
                %$
                11,870,683
                
                
                
                47.61
                %
                
                $
                6,867,980
                
                
                
                44.56
                %Other
      income and expenses:Change
      in the fair value of embedded derivatives
                
                $
                9,208,000
                
                
                
                36.92
                %
                
                $
                514,000
                
                
                
                3.33
                %Interest
      income
                
                
                87,876
                
                
                
                0.35
                %
                
                
                67,088
                
                
                
                0.43
                %Total
      other income
                
                $
                9,295,876
                
                
                
                37.27
                %
                
                $
                581,088
                
                
                
                3.77
                %Income
      before taxes
                
                $
                21,166,559
                
                
                
                84.88
                %
                
                $
                7,449,068
                
                
                
                48.33
                %Provision
      for income taxes
                
                
                (2,305,023)
                
                
                
                9.24
                %
                
                
                (1,681,319)
                
                
                
                10.91
                %Net
      income
                
                $
                18,861,536
                
                
                
                75.64
                %
                
                $
                5,767,749
                
                
                
                37.42
                %


16


Net
sales





Net sales
in our financial statements are stated at invoiced value less sales discount and
sales tax. Our net sales for the three months ended June 30, 2010 and 2009
comprised the following:





Three months ended June 30,2010
                      
                      
                      2009Invoiced
      value on sales
                      
                      $
                      26,258,431
                      
                      
                      $
                      16,464,125Less:
      sales discount
                      
                      
                      (1,023,982
                      )
                      
                      
                      (787,069
                      )Less
      : sales tax
                      
                      
                      (298,730
                      )
                      
                      
                      (264,594
                      )$
                      24,935,719
                      
                      
                      $
                      15,412,462





Net sales
of $24,935,719 for the quarter ended June 30, 2010 were 61.8% above the net
sales of $15,412,462 for the quarter ended June 30, 2009. The increase was
primarily due to the volume increase in both our retail sales and bulk
additives sales.  Sales of bulk additives and retail products
increased 170% and 22%, respectively, compared with the same period last fiscal
year. The increase reflects our strategy to shift our focus towards the bulk
additives business, which is growing much faster than our retail
business.





The
contributions of the two business lines as a percentage of the total value on
sales for the three months ended June 30, 2010 and 2009 are summarized
below:





Three months ended June
      30,2010
                  
                  
                  2009Retails
                  
                  
                  60
                  %
                  
                  
                  77
                  %Bulk
      additives
                  
                  
                  40
                  %
                  
                  
                  23
                  %100
                  %
                  
                  
                  100
                  %





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





17




Unit
volume and unit price comparatives (on the invoiced value of sales) for the
three months ended June 30, 2010 and 2009 are summarized below:





Percentage increase/(decrease) from the prior yearThree months ended June 30,2010
                
                
                2009Unit
                  volume
                
                
                Selling
                  prices
                
                
                Overall
                  increase /
                  (decrease)
                
                
                Unit
                  volume
                
                
                Selling
                  prices
                
                
                Overall
                  increase /
                  (decrease)Retails
                
                
                13
                %
                
                
                8
                %
                
                
                22
                %
                
                
                6
                %
                
                
                11
                %
                
                
                17
                %Bulk
      additives
                
                
                120
                %
                
                
                23
                %
                
                
                170
                %
                
                
                482
                %
                
                
                (37
                )%
                
                
                266
                %





Cost
of sales





Cost of
sales for the three months ended June 30, 2010 was $7,818,475 compared with
$4,498,673 for the three months ended June 30, 2009. The increase in cost of
sales was primarily due to the overall sales volume increase.





Unit
volume and unit costs comparatives for the three months ended June 30, 2010 and
2009 are summarized below:




Percentage increase/(decrease) from the prior yearThree months ended June 30,2010
                
                
                2009Unit
                  volume
                
                
                Unit
                  costs
                
                
                Overall
                  increase /
                  (decrease)
                
                
                Unit
                  volume
                
                
                Unit
                  costs
                
                
                Overall
                  increase /
                  (decrease)Retails
                
                
                13
                %
                
                
                10
                %
                
                
                24
                %
                
                
                6
                %
                
                
                15
                %
                
                
                21
                %Bulk
      additives
                
                
                120
                %
                
                
                60
                %
                
                
                253
                %
                
                
                482
                %
                
                
                (48
                )%
                
                
                205
                %




18


Gross
profit





Gross
profit for the three months ended June 30, 2010 was $17,117,244 compared with
$10,913,789 for the three months ended June 30, 2009. The increase in gross
profit was primarily due to an increase in overall sales volume.





The
average gross profit percentage for all of our products for the three months
ended June 30, 2010 and 2009 are summarized below:





Three months ended June 30,2010
                  
                  
                  2009Average
      for all products
                  
                  
                  69
                  %
                  
                  
                  71
                  %




Although
our bulk sales ramped up quickly during the three months ended June 30, 2010,
the Company offered volume discounts to certain bulk customers. As a result,
even though there was an increase in gross profit, bulk sales revenue increased
somewhat less than product volume, accounting for the slight decline in gross
margin percentage.




Selling
expenses





Selling
expenses were $3,058,378 or 12.26% of net sales for the three months ended June
30, 2010, compared with $2,347,592 or 15.23% of net sales for the three
months ended June 30, 2009. The
increase in overall selling expenses is due to the increase of total sales. The
decrease in selling expenses as a percentage of sales is primarily due to our
closure of 8 retail outlets and an addition of 1 retail products distributor. We
believe that selling through our distribution network is a more efficient way in
which to market our retail products. With regard to our bulk additives business,
selling expenses as a percentage of sales were relatively low for the quarter
ended June 30, 2010, but we expect selling expenses as a percentage of sales in
bulk products will increase in the future as we intend to increase spending on
sales promotion.




General
and administrative expenses





General
and administrative expenses were $1,202,538 or 4.82% of net sales for the three
months ended June 30, 2010, compared with $1,060,296 or 6.88% of net sales for
the three months ended June 30, 2009.  The increase of general and
administrative expenses was primarily due to the increase of legal and
professional fees and staff costs. As of June 30, 2010, we had a total of 513
employees, 87 of
whom were employed at the Qingpu facility,compared with 379 as of June
30, 2009.


19


Provision
for income taxes





Provision
for income taxes was $2.31 million and $1.68 million for the three months ended
June 30, 2010 and 2009, respectively.  Excluding the $9.21 million
(2009: $0.5 million) surplus on revaluation of the convertible note, income
before taxes was $11.96 million for the three months ended June 30, 2010,
compared with $6.94 million for the three months ended June 30,
2009.  The increase in income tax expense is attributable to an
increase in operating profit for the three months ended June 30, 2010, and there
was a tax effect from tax loss not previously recognized due to uncertainties in
the same quarter in the prior year.


Segment
reporting





We have
adopted the “products” approach for segment reporting. For the three months
ended June 30, 2010 and 2009, 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.





Quarter
Ended June 30, 2009 Compared with the Quarter Ended June 30,
2008





Our net
income was $5.77 million in the quarter ended June 30, 2009. This included
$0.51 million surplus arising from the revaluation of the conversion feature
embedded in the convertible notes issued in December 2007 as required by
FAS133 (now known as ASC 816). Excluding this revaluation surplus, our net
income was $5.26 million, which was 17.39% higher than our net income of $4.48
million for the quarter ended June 30, 2008. The increase of net income
before the revaluation surplus resulted from a combination of volume and price
increases. Shining Essence continued to be our best selling product, accounting
for 27.99% of our sales revenue in the quarter ended June 30, 2009 (40% in
the quarter ended June 30, 2008).





Our
results for the three months ended June 30, 2009 and 2008 are summarized
below:





Three months ended
                    June 30, 2009
                  
                  
                  Three months ended
                    June 30, 2008Amount
                  
                  
                  % of Net sales
                  
                  
                  Amount
                  
                  
                  % of Net salesNet
      sales
                  
                  $
                  15,412,462
                  
                  
                  
                  100
                  %
                  
                  $
                  11,370,657
                  
                  
                  
                  100.00
                  %Cost
      of sales
                  
                  
                  (4,498,673)
                  
                  
                  
                  (29.19)
                  %
                  
                  
                  (3,258,669)
                  
                  
                  
                  (28.66)
                  %Gross
      profit
                  
                  $
                  10,913,789
                  
                  
                  
                  70.81
                  %
                  
                  $
                  8,111,988
                  
                  
                  
                  71.34
                  %Operating
      expenses:Selling
      expenses
                  
                  $
                  (2,347,592)
                  
                  
                  
                  (15.23)
                  %
                  
                  $
                  (2,369,859)
                  
                  
                  
                  (20.84)
                  %General
      and administrative expenses
                  
                  
                  (1,734,665)
                  
                  
                  
                  (11.25)
                  %
                  
                  
                  (1,426,797)
                  
                  
                  
                  (12.55)
                  %Other
      income
                  
                  
                  36,448
                  
                  
                  
                  0.23
                  %
                  
                  
                  1,452,503
                  
                  
                  
                  12.77
                  %Total
      operating expenses
                  
                  $
                  (4,045,809)
                  
                  
                  
                  (26.25)
                  %
                  
                  $
                  (2,344,153)
                  
                  
                  
                  (20.61)
                  %Income
      from operations
                  
                  $
                  6,867,980
                  
                  
                  
                  44.56
                  %
                  
                  $
                  5,767,835
                  
                  
                  
                  50.73
                  %Other
      income and expenses:Change
      in the fair value of embedded derivatives
                  
                  $
                  514,000
                  
                  
                  
                  3.33
                  %
                  
                  $
                  (1,239,000)
                  
                  
                  
                  (10.90)
                  %Interest
      income
                  
                  
                  67,088
                  
                  
                  
                  0.43
                  %
                  
                  
                  86,386
                  
                  
                  
                  0.75
                  %Total
      other income (expenses)
                  
                  $
                  581,088
                  
                  
                  
                  3.77
                  %
                  
                  $
                  (1,152,614)
                  
                  
                  
                  (10.6)
                  %Income
      before taxes
                  
                  $
                  7,449,068
                  
                  
                  
                  48.33
                  %
                  
                  $
                  4,615,221
                  
                  
                  
                  40.59
                  %Provision
      for income taxes
                  
                  
                  (1,681,319)
                  
                  
                  
                  (10.91)
                  %
                  
                  
                  (1,378,471)
                  
                  
                  
                  (12.12)
                  %Net
      income
                  
                  $
                  5,767,749
                  
                  
                  
                  37.42
                  %
                  
                  $
                  3,236,750
                  
                  
                  
                  28.47
                  %





Net
sales





Net sales
in our financial statements are stated at invoiced value less sales discount and
sales tax. Our net sales for the three months ended June 30, 2009 and 2008
comprised the following:





Three months ended June 30,2009
                    
                    
                    2008Invoiced
      value on sales
                    
                    $
                    16,464,125
                    
                    
                    $
                    11,810,902Less:
      sales discount
                    
                    
                    (787,069)
                    
                    
                    
                    (365,489)Less
      : sales tax
                    
                    
                    (264,594)
                    
                    
                    
                    (74,756)$
                    15,412,462
                    
                    
                    $
                    11,370,657




20


Net sales
of $15,412,462 for the quarter ended June 30, 2009 were 35.55% above the
net sales of $11,370,657 for the quarter ended June 30, 2008. The increase
was mainly because of an increase in overall sales volume arising from new
product sales, particularly, bulk additives, (offsetting decrease in sales
volume of existing products) and increases in the sales price of selected
products.





The
contributions of the two business lines as a percentage of the total value on
sales for the three months ended June 30, 2009 and 2008 are summarized
below:





Three months ended June 30,2009
                    
                    
                    2008Retail
                    
                    
                    77
                    %
                    
                    
                    91
                    %Bulk
      additives
                    
                    
                    23
                    %
                    
                    
                    9
                    %100.0
                    %
                    
                    
                    100.0
                    %





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





Unit
volume and unit prices comparatives (on the invoiced value of sales) for the
three months ended June 30, 2009 and 2008 are summarized
below:





Percentage increase (decrease) from the prior yearThree months ended June 30,2009
                    
                    
                    2008Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)Retail
                    
                    
                    6
                    %
                    
                    
                    11
                    %
                    
                    
                    17
                    %
                    
                    
                    6
                    %
                    
                    
                    (4)
                    %
                    
                    
                    2
                    %Bulk
      additives
                    
                    
                    482
                    %
                    
                    
                    (37)
                    %
                    
                    
                    266
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





Cost
of sales





Cost of
sales for the three months ended June 30, 2009 was $4,498,673 compared with
$3,258,669 for the three months ended June 30, 2008. The increase in cost
of sales was primarily because of the overall sales volume increase and
increases in the cost of packaging materials.





Unit
volume and unit costs comparatives for the three months ended June 30, 2009
and 2008 are summarized below:




Percentage increase (decrease) from the prior yearThree months ended June 30,2009
                    
                    
                    2008Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)Retail
                    
                    
                    6
                    %
                    
                    
                    15
                    %
                    
                    
                    21
                    %
                    
                    
                    6
                    %
                    
                    
                    (5)
                    %
                    
                    
                    1
                    %Bulk
      additives
                    
                    
                    482
                    %
                    
                    
                    (48)
                    %
                    
                    
                    205
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





Gross
profit





Gross
profit for the three months ended June 30, 2009 was $10,913,789 compared
with $8,111,988 for the three months ended June 30, 2008. The increase in
gross profit was primarily due to an increase in overall sales
volume.





The
average gross profit percentage for all of our products for the three months
ended June 30, 2009 and 2008 are summarized below:





Three months ended June 30,2009
                    
                    
                    2008Average
      for all products
                    
                    
                    70.81
                    %
                    
                    
                    71.34
                    %


21


Gross
profit margin slightly decreased from 71.34% in the quarter ended June 30,
2008 to 70.81% this quarter as a result of increases in cost of packaging
materials and electricity largely offset by increase in sales prices. The 70.81%
gross profit margin remains solidly above our full year projection of
70%.





Selling
expenses





Selling
expenses were $2,347,592 or 15.23% of net sales for the three months ended
June 30, 2009 compared with $2,369,859 or 20.84% of net sales for the three
months ended June 30, 2008. The operating costs of the retail outlets are
included as selling expenses. With limited new retail outlet roll-out during the
quarter, selling expenses remained steady. As of June 30, 2009, we had a
total of 107 retail outlets in operation compared with 83 outlets as of
June 30, 2008.





General
and administrative expenses





General
and administrative expenses were $1,734,665 or 11.25% of net sales for the three
months ended June 30, 2009 compared with $1,426,797 or 12.55% of net sales
for the three months ended June 30, 2008. The increase of general and
administrative expenses was primarily due to the increase of legal and
professional fees. As of June 30, 2009, we had a total of 379 employees,
compared with 339 as of June 30, 2008.





Provision
for income taxes





Provision
for income taxes was $1.68 million and $1.38 million for the quarters ended
June 30, 2009 and 2008, respectively. Excluding the $0.51 million surplus
on revaluation of the convertible note, income before taxes was $6.94 million
for the first quarter of fiscal year 2010 compared with $5.85 million for 2009.
The increase in income tax payable is attributable to an increase in operating
profit.





Segment
reporting





We have
adopted the “products” approach for segment reporting. For the three months
ended June 30, 2009 and 2008, we had only one reporting segment—the
probiotic products as health supplement. We manufactured and sold the probiotic
products solely in China and delivered all shipments to destinations within
China, and all of our long-lived assets were physically located in China. We
made all sales to external customers.





Liquidity
and Capital Resources





We had
cash of $160 million and working capital of $121 million as of June
30, 2010. Cash generated from operations was $6.3 million in the three months
ended June 30, 2010.





We had
capital expenditures totaling $2.2 million in the three months ended June 30,
2010, mainly in connection with the construction of the new plant.





Our
current primary facility commenced operations in 2000. With the increases in
sales volume in the last couple of years, we are reaching our production
capacity. We are constructing a new plant with an overall project size of $46
million. Phase 1 of the project involves constructing a facility capable of
producing 150 tons of probiotics per annum and costs approximately $28 million,
$25 million of which has been paid in 2010, and the balance is scheduled to be
paid by the end of the calendar year 2010. Phase 2 of this project commenced in
December 2009 and is expected to cost $18 million, which is scheduled to be paid
in fiscal year 2011.





On
October 5, 2009, the Company closed an underwritten public offering of 4,600,000
shares of its common stock at a price of $15.00 per share. On October 26, 2009,
an additional 690,000 shares were sold pursuant to the exercise of an
over-allotment option at the same price. Net proceeds of the offering, including
the over-allotment, after deducting underwriting discounts, and offering
expenses, were approximately $74.9 million. The Company expects to use the net
proceeds from the offering for general corporate purposes, including expanding
its retail operations, expanding its products, acquiring additional retail
outlets, funding Phase 2 of our bulk manufacturing facility, and for general
working capital purposes.





The
offering was made pursuant to an Underwriting Agreement, dated September 29,
2009, by and between the Company and Roth Capital Partners, LLC, as sole manager
and representative of the underwriters named therein. The offering of the shares
was registered under the Securities Act of 1933, as amended, pursuant to the
Company’s shelf registration statement on Form S-3, as amended by Amendment No.
1 and Amendment No. 2 to Form S-3 (File No. 333-160519).





On
December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the
amount of $25,000,000 (the “Note”) with a maturity date of December 11,
2010. The principal amount of the Note is convertible into shares of our common
stock at an exercise price of $12.00 per share at any time until the maturity
date. If the Note is not converted at maturity, we will redeem the Note at a
price that gives a total yield of 10% per annum inclusive of the annual
interest. Net proceeds of the Note are being used to fund the construction of a
proposed 150-metric-ton-per-year manufacturing facility and for other capital
expenditures.





22




We had
cash of $77.41 million and working capital of $59.71 million as of
June 30, 2009. Cash generated from operations was $7.33 million in the
three months ended June 30, 2009 and $8.35 million in the three
months ended June 30, 2008. The cash generated from operations of $7.33
million was higher than the net income of $5.77million due to the non-cash
surplus of revaluation of convertible notes of $0.51 million and lower
working capital needs resulting from better working capital
management.




We had
capital expenditures totaling $0.88 million in the three months ended
June 30, 2009, mainly in connection with the construction of the new plant.
We spent $7.19 million on fixed assets in the three months ended June 30,
2008.




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


23


Inflation





During
the quarter ended June 30, 2010, there were small increases in pulp and paper
costs. However, overall we believe that inflation did not have a significant
impact on our results of operations for the quarter.





Seasonality





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





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Contractual
Obligations





The
following table summarizes our principal contractual obligations and commercial
commitments over various future periods as of
June 30, 2010.





Contractual
                  Obligations
                
                Total
                
                
                Less than 1 year
                
                
                1-3 years
                
                
                3-5 years
                
                
                More than 5 yearsCapital
      Lease Obligations(1)
                
                $
                3,772,245
                
                
                $
                3,772,245
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      Lease Obligations(1)
                
                $
                408,434
                
                
                $
                385,798
                
                
                
                22,636
                
                
                
                -
                
                
                
                -Purchase
      Obligations(2)
                
                $
                14,742,072
                
                
                $
                14,742,072
                
                
                
                -
                
                
                
                -
                
                
                
                -Long-term
      loan(3)
                
                $
                25,000,000
                
                
                
                25,000,000
                
                
                $
                -
                
                
                
                -
                
                
                
                -Other
      obligation(1)
                
                $
                3,177,998
                
                
                $
                3,152,220
                
                
                $
                25,778
                
                
                
                -
                
                
                
                -Total
                
                $
                47,100,749
                
                
                $
                47,052,335
                
                
                $
                48,414
                
                
                
                -
                
                
                
                -





(1) See
Note 10 to our consolidated financial statements in this Quarterly
Report.


(2)
Estimated contractual purchases with suppliers as of June 30, 2010.


(3) See
Note11 to our consolidated financial statements in this Quarterly
Report.





Research
and Development Expenditures





We have a
strong research and development team supported by a technical advisory board of
experts. In addition to having advanced technology in bacteria culturing and
protection, we also conduct research to develop products that address specific
health problems using our core technology and Chinese medicine to create
genetically engineered drugs and drug delivery solutions and expand our product
line. We incurred research and development costs of approximately $1,082,499 and
$674,369 in the three months ended June 30, 2010 and June 30, 2009,
respectively.





Recent
Developments





The
Company’s Board of Directors has approved a share repurchase program under which
the Company may purchase up to $20 million of the Company’s outstanding common
stock from time-to-time over the next 12 months.  Repurchases will be
made pursuant to Rule 10b5-1 or 10b-18 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and will be made on the open market at
prevailing market prices or in block trades, subject to the restrictions
relating to volume, price, and timing.  The Company plans to fund
repurchases from its available cash balance.




24




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-K for the
fiscal year ended March 31, 2010, and this Form 10-Q should be read in
conjunction with that Annual Report. This MD&A discusses our consolidated
financial statements for the three months ended June 30, 2010 and 2009. 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.


25


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. We had trade receivables totaling $25,122,632 as of June 30, 2010. We
have considered all relevant factors, including the financial conditions,
affecting the payment abilities of customers comprising these receivables up to
the date of this Form 10-Q and we believe these customers are able to make
required payments. We, however, cannot give assurance that these factors,
including the financial conditions of these customers, will not change adversely
in the future. We will continue to evaluate the ability of all our customers to
make required payments. Were the financial condition of a customer to
deteriorate, resulting in an impairment of its ability to make payments,
allowances may be required.





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





Our
principal operations are in the PRC. Business enterprises established
in the PRC are subject to income taxes and value added taxes
under PRC tax laws and regulations unless they have exemptions. We have
made tax payments to the PRC tax authorities since 2005. We believe that
our operations in the PRC were exempted from income taxes and value added taxes
for all prior years because we had been recognized by the local government as an
advanced technology enterprise. However, we have never received a written
confirmation from the appropriate tax authorities for the tax exemption status
of our operations in the PRC. As a result, there is no way to ascertain the
position which may be taken by the relevant PRC tax authorities in the
future. Accordingly, our financial statements contain full provisions for all
applicable tax liabilities for all prior calendar years. Such provisions for tax
liabilities will be reversed out of the financial statements at the appropriate
point in the future.





According
to PRC tax regulations, our overdue tax liabilities in the PRC
for the calendar years prior to 2005 may be subject to potential penalties for
the late payment of taxes which is calculated on the basis of 0.5 times to five
times the amount of overdue tax liabilities, which amounts to $4.9 million (if
calculated based on 0.5 times of taxes payable) to $49 million (if calculated
based on five times of the amount of taxes payable) as of June 30, 2010 and
2009. The Group has reserved for the payment of taxes that may be owed for
calendar years prior to 2005 and any associated interest surcharges (which are
calculated at 0.05% per day on the accrued tax liabilities) in its financial
statements until the matter is fully resolved. Following the adoption of FIN48
(now known as ASC 740), the Group has reserved for the surcharges payable for
this reporting period. We consider it is more likely than not that the
associated penalty will not need to be paid.





Embedded
derivatives





On
December 11, 2007, the Company issued a 4% Senior Convertible Promissory Note in
an amount of $25,000,000 (the “Note”) which is due on December 11, 2010.
Pursuant to SFAS No. 133 (now known as ASC 816) “Accounting For Derivatives
Instruments And Hedging Activities” and EITF Issue No. 00-19 (now known as ASC
815) “Accounting For Derivatives Financial Instruments Indexed To And
Potentially Settled In A Company’s Own Stock,” the Company bifurcates the
conversion options with a mandatory conversion feature (“embedded derivatives”)
from the Note as the embedded derivatives are determined to be not clearly and
closely related to the host contract. The embedded derivatives are recorded at
fair value, mark-to-market at each reporting period, and are carried on a
separate line in the balance sheet.


26


Recent
Accounting Pronouncements





See Note
1 of the June 30, 2010 Interim Financial Statements. Other new pronouncements
issued but not yet effective until after June 30, 2010, are not expected to have
a significant effect on the Company’s consolidated financial position or results
of operations.


27


ITEM 3.   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





We are
exposed to various market risks, including changes in foreign currency exchange
rates and fair value. We do not enter into derivatives or other financial
instruments for trading or speculative purposes in the normal course of
business.





Foreign
Currency Exchange Rate Risk





Our
operations are conducted mainly in the PRC. As such, our earnings are subject to
movements in foreign currency exchange rates when transactions are denominated
in RMB, which is our functional currency.





Therefore,
changes in the rate of exchange between the U.S. dollar and the RMB, in which
the financial statements of our operations are maintained, affect our results of
operations and financial position as reported in our consolidated financial
statements. We have consolidated the balance sheets of our RMB-denominated
operations into U.S. dollars at the exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at the average exchange rates
for the period.





These
changes result in cumulative translation adjustments, which are included in
“Accumulated other comprehensive income,” and potentially result in gains or
losses, which are included in our earnings.


28


Fair
Value Risk





We record
an adjustment on our convertible notes adjusting the fair value of the embedded
conversion options. The change in the value of these instruments is primarily
impacted by the price of our stock at the end of each reporting period. This
adjustment creates a non-cash effect on our statement of operations which may
have a significant impact.





ITEM 4.   CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The
Company maintains a system of disclosure controls and procedures that are
designed to provide reasonable assurance that information that is required to be
timely disclosed is accumulated and communicated to management in a timely
fashion. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control systems are met. An evaluation was performed under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on that evaluation, our management, including our principal
executive officer and principal financial officer, concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms and such information
is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.





Changes
in Internal Controls over Financial Reporting





The
Company’s internal control over financial reporting is designed to provide
reasonable assurances regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. There have been no changes in the
Company’s internal control over financial reporting identified in
connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under
the Exchange Act that occurred during the Company’s most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.  However,
because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues within the
Company have been detected.


29


PART
II - OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





None.





ITEM 1A.   RISK FACTORS





The
information set forth in this report should be read in conjunction with the risk
factors discussed in Item 1A of our Annual Report on Form 10-K for the year
ended March 31, 2010, which could materially impact our business, financial
condition or future results. The risks described in the Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known by the Company or that are currently deemed to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.





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





None.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





None.





ITEM 4.   [REMOVED AND
RESERVED.]





ITEM 5.   OTHER INFORMATION





None.





ITEM 6.   EXHIBITS




Number
            
            Exhibit3.1
            
            Amended
      and Restated Certificate of Incorporation (incorporated by reference to
      Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).3.2
            
            Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
      China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the
      Amendment to the Amended and Restated Bylaws (incorporated by reference to
      Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10,
      2008).10.1
            
            Securities
      Exchange Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.2
            
            Form
      of Lockup Agreement dated March 22, 2006 (incorporated by reference
      to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.3
            
            Put
      Agreement dated March 22, 2006 (incorporated by reference to Exhibit
      10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.4
            
            Registration
      Rights Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).




30





Number
            
            Exhibit10.5
            
            Investors’
      Rights Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.6
            
            Stan
      Ford Agreement dated March 22, 2006 (incorporated by reference to
      Exhibit 10.6 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).10.7
            
            Summary
      of English translation of Investment Agreement for lease of land dated
      March 21, 2006 (incorporated by reference to Exhibit 10.7 to
      China-Biotics, Inc.’s Form 8-K filed on March 23,
    2006).10.8
            
            Escrow
      Agreement dated March 22, 2006 (incorporated by reference to Exhibit
      10.8 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
      2006).10.9
            
            Stock
      Purchase Agreement with Fred Cooper dated February 6, 2006
      (incorporated by reference to Exhibit 10.9 to China-Biotics, Inc.’s Form
      10-KSB filed on June 30, 2006).10.10
            
            Loan
      agreement dated as of September 22, 2005 (incorporated by reference
      to Exhibit 10.10 to China-Biotics, Inc.’s Form 10-KSB filed on
      June 30, 2006).10.11
            
            Convertible
      Bond dated as of September 22, 2005 (incorporated by reference to
      Exhibit 10.11 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
      2006).10.12
            
            Subscription
      Agreement dated as of September 22, 2005 (incorporated by reference
      to Exhibit 10.12 to China-Biotics, Inc.’s Form 10-KSB filed on
      June 30, 2006).10.13
            
            English
      Translation of Equity Transfer Agreement dated August 11, 2005
      (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s
      Amendment No. 2 to Form SB-2 filed on November 13,
      2006).10.14
            
            English
      Translation of Subscription Agreement dated August 11, 2005
      (incorporated by reference to Exhibit 10.14 to China-Biotics, Inc.’s
      Amendment No. 2 to Form SB-2 filed on November 13,
      2006).10.15
            
            Investment
      Agreement dated December 11, 2007 (incorporated by reference to
      Exhibit 10.1 to China-Biotics, Inc’s Form 8-K filed on December 12,
      2007).10.16
            
            Registration
      Rights Agreement dated December 11, 2007 (incorporation by reference
      to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K on December 12,
      2007).10.17
            
            4%
      Senior Convertible Promissory Note dated December 11, 2007
      (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form
      8-K filed on December 12, 2007).10.18
            
            Guaranty
      by Song Jinan in favor of Pope Investments II LLC dated December 11,
      2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s
      Form 8-K filed on December 12, 2007).10.19
            
            Pledge
      Agreement between Song Jinan and Pope Investments II LLC dated
      December 11, 2007 (incorporated by reference to Exhibit 10.5 to
      China-Biotics, Inc.’s Form 8-K filed on December 12,
      2007).10.20
            
            Form
      of Purchase Agreement dated January 21, 2009 (incorporated by
      reference to Exhibit 10.15 to China-Biotics, Inc.’s Form 10-Q filed on
      February 13, 2009).10.21
            
            Form
      of Purchase Agreement dated May 19, 2009 (incorporated by reference
      to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on May 20,
      2009).10.22
            
            Share
      Charge dated September 21, 2009 (effective as of January 24, 2008)
      (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form
      10-Q filed on November 16, 2009).10.23
            
            Underwriting
      Agreement dated September 29, 2009 (incorporated by reference to Exhibit
      1.1 to China-Biotics, Inc.’s Form 8-K filed on September 30,
      2009).




31





Number
            
            Exhibit14.1
            
            Code
      of Ethics (incorporated by reference to Exhibit 14.1 to China-Biotics,
      Inc.’s Form 10-KSB for the year ended March 31,
  2006).21.1
            
            List
      of subsidiaries (incorporated by reference to Exhibit 21.1 to
      China-Biotics, Inc.’s Form SB-2 filed on March 24,
    2006).31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*32.1
            
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002**32.2
            
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002**





* Filed
herewith


**
Furnished herewith





* * * *
*


32


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





CHINA-BIOTICS,
      INC.(Registrant)/s/ Song JinanDate: August
      9, 2010
                      Song
      JinanChief Executive
      Officer/s/
      Travis CaiTravis
      CaiChief
      Financial
Officer




33