UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A


AMENDMENT NO. 1




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


SECURITIES
EXCHANGE ACT OF 1934




For
the quarterly period ended December 31, 2008




o 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o




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o
            Accelerated
      fileroNon-accelerated
      filerþ (Do not
      check if a smaller reporting company)
            Smaller
      reporting companyo





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


Yeso Noþ





As
of March 20, 2009, 17,080,000 shares of the Issuer's common stock were
outstanding.  Explanatory
Note:
 
 China-Biotics,
Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2008 on February 13, 2009.




TABLE
OF CONTENTS




PagePart
      I - Financial InformationITEM
      1.
                          
                          FINANCIAL
      STATEMENTS
                          
                          3ITEM
      2.
                          
                          MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                          
                          17ITEM
      3.
                          
                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                          
                          26ITEM
      4.
                          
                          CONTROLS
      AND PROCEDURES
                          
                          26Part
      II - Other InformationITEM
      1.
                          
                          LEGAL
      PROCEEDINGS
                          
                          26ITEM
      1A.
                          
                          RISK
      FACTORS
                          
                          26ITEM
      2.
                          
                          UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                          
                          26ITEM
      3.
                          
                          DEFAULTS
      UPON SENIOR SECURITIES
                          
                          26ITEM
      4.
                          
                          SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                          
                          26ITEM
      5.
                          
                          OTHER
      INFORMATION
                          
                          26ITEM
      6.
                          
                          EXHIBITS
                          
                          27SIGNATURES
                          
                          29




2




PART
I - FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
expressed in US Dollars)




December 31,
                                              2008
                                            
                                            
                                            March 31,
                                              2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                            
                                            $
                                            66,424,118
                                            
                                            
                                            $
                                            64,310,448Accounts
      receivable
                                            
                                            
                                            14,319,107
                                            
                                            
                                            
                                            13,214,531Other
      receivables
                                            
                                            
                                            246,515
                                            
                                            
                                            
                                            238,835Inventories
                                            
                                            
                                            1,265,539
                                            
                                            
                                            
                                            408,358Prepayment
                                            
                                            
                                            1,634,695
                                            
                                            
                                            
                                            1,806,605Total
      current assets
                                            
                                            $
                                            83,889,974
                                            
                                            
                                            $
                                            79,978,777Property,
      plant and equipment and land use right
                                            
                                            
                                            31,621,007
                                            
                                            
                                            
                                            13,812,749Total
      assets
                                            
                                            $
                                            115,510,981
                                            
                                            
                                            $
                                            93,791,526LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                            
                                            $
                                            4,799,522
                                            
                                            
                                            $
                                            2,786,180Tax
      payables
                                            
                                            
                                            25,545,893
                                            
                                            
                                            
                                            22,317,982Other
      payables and accruals
                                            
                                            
                                            2,738,682
                                            
                                            
                                            
                                            1,792,156Total
      current liabilities
                                            
                                            $
                                            33,084,097
                                            
                                            
                                            $
                                            26,896,318Non-current
      liabilitiesConvertible
      note, with embedded derivatives of $3,679,000, net of discount of
      $6,688,163 as of December 31, 2008
                                            
                                            $
                                            21,990,837
                                            
                                            
                                            $
                                            22,197,635Interest
      payable
                                            
                                            
                                            1,058,499
                                            
                                            
                                            
                                            302,306Deferred
      tax liabilities
                                            
                                            
                                            500,167
                                            
                                            
                                            
                                            -Total
      non-current liabilities
                                            
                                            $
                                            23,549,503
                                            
                                            
                                            $
                                            22,499,941Commitments and
      contingenciesStockholders'
      equity:Common
      stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004
      shares issued and outstanding as of December 31, 2008)
                                            
                                            $
                                            4,146
                                            
                                            
                                            $
                                            4,146Additional
      paid-in capital
                                            
                                            
                                            7,863,031
                                            
                                            
                                            
                                            7,863,031Retained
      earnings
                                            
                                            
                                            43,204,901
                                            
                                            
                                            
                                            29,827,144Treasury
      stock at cost (24,381,004 shares)
                                            
                                            
                                            (2,438
                                            )
                                            
                                            
                                            (2,438
                                            )Accumulated
      other comprehensive income
                                            
                                            
                                            4,781,947
                                            
                                            
                                            
                                            3,677,590Capital
      and statutory reserves
                                            
                                            
                                            3,025,794
                                            
                                            
                                            
                                            3,025,794Total
      stockholders' equity
                                            
                                            $
                                            58,877,381
                                            
                                            
                                            $
                                            44,395,267Total
      liabilities and stockholders' equity
                                            
                                            $
                                            115,510,981
                                            
                                            
                                            $
                                            93,791,526




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


3




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
expressed in US Dollars)





Three months ended
                                                                                                              December 31,
                                                                                                            
                                                                                                            
                                                                                                            Nine months ended
                                                                                                              December 31,2008
                                                                                                            
                                                                                                            
                                                                                                            2007
                                                                                                            
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            
                                                                                                            2007Net
      sales
                                                                                                            
                                                                                                            $
                                                                                                            15,810,111
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            11,931,306
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            38,676,017
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            29,266,801Cost
      of sales
                                                                                                            
                                                                                                            
                                                                                                            (4,583,371
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,183,056
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (11,304,893
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (8,039,651
                                                                                                            )Gross
      profit
                                                                                                            
                                                                                                            $
                                                                                                            11,226,740
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            8,748,250
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            27,371,124
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            21,227,150Operating
      expenses:Selling
      expenses
                                                                                                            
                                                                                                            $
                                                                                                            (3,330,668
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (1,752,637
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (8,514,090
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (4,630,916
                                                                                                            )General
      and administrative expenses
                                                                                                            
                                                                                                            
                                                                                                            (1,353,561
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,258,927
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (4,218,494
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,155,544
                                                                                                            )Total
      operating expenses
                                                                                                            
                                                                                                            $
                                                                                                            (4,684,229
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (3,011,564
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (12,732,584
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (7,786,460
                                                                                                            )Income
      from operations
                                                                                                            
                                                                                                            $
                                                                                                            6,542,511
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            5,736,686
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            14,638,540
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            13,440,690Other
      income and expenses:Changes
      in the fair value of embedded derivatives
                                                                                                            
                                                                                                            $
                                                                                                            1,408,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2,073,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -Other
      income
                                                                                                            
                                                                                                            
                                                                                                            60,442
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            118,064
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,923,430
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            190,006Other
      expenses
                                                                                                            
                                                                                                            
                                                                                                            (42,718
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (384,212
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (260,297
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (404,147
                                                                                                            )Total
      other income (expenses)
                                                                                                            
                                                                                                            $
                                                                                                            1,425,724
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            (266,148
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            3,736,133
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            (214,141
                                                                                                            )Income
      before taxes
                                                                                                            
                                                                                                            $
                                                                                                            7,968,235
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            5,470,538
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            18,374,673
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            13,226,549Provision
      for income taxes
                                                                                                            
                                                                                                            
                                                                                                            (2,299,348
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,426,789
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (4,996,916
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,672,434
                                                                                                            )Net
      income
                                                                                                            
                                                                                                            $
                                                                                                            5,668,887
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            4,043,749
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            13,377,757
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            9,554,115Earnings
      per share:Basic
                                                                                                            
                                                                                                            $
                                                                                                            0.33
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.24
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.78
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.56Diluted
                                                                                                            
                                                                                                            $
                                                                                                            0.22
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.23
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.59
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            0.55Weighted
      average shares outstandingBasic
                                                                                                            
                                                                                                            
                                                                                                            17,080,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            17,080,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            17,080,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            17,080,000Diluted
                                                                                                            
                                                                                                            
                                                                                                            19,163,333
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            17,555,543
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            19,163,333
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            17,239,090




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


4




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(Amounts
expressed in US Dollars)





Common Stock
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            Accumulated
                                            
                                            
                                            Capital &Shares
                                            
                                            
                                            Par value
                                              $0.0001
                                            
                                            
                                            Additional
                                              Paid-in Capital
                                            
                                            
                                            Retained
                                              Earnings
                                            
                                            
                                            Treasury
                                              Stock
                                            
                                            
                                            Comprehensive
                                              Income
                                            
                                            
                                            Statutory
                                              Reserves
                                            
                                            
                                            TotalBalance-
      March 31, 2008
                                            
                                            
                                            41,461,004
                                            
                                            
                                            $
                                            4,146
                                            
                                            
                                            $
                                            7,863,031
                                            
                                            
                                            $
                                            29,827,144
                                            
                                            
                                            $
                                            (2,438
                                            )
                                            
                                            $
                                            3,677,590
                                            
                                            
                                            $
                                            3,025,794
                                            
                                            
                                            $
                                            44,395,267Comprehensive
      income:Net
      income
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,377,757
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,377,757Other
      comprehensive income:Foreign
      currency translation adjustments, net of taxes of $0
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,104,357
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,104,357Total
      comprehensive income
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            14,482,114Balance-
      December 31, 2008
                                            
                                            
                                            41,461,004
                                            
                                            
                                            $
                                            4,146
                                            
                                            
                                            $
                                            7,863,031
                                            
                                            
                                            $
                                            43,204,901
                                            
                                            
                                            $
                                            (2,438
                                            )
                                            
                                            $
                                            4,781,947
                                            
                                            
                                            $
                                            3,025,794
                                            
                                            
                                            $
                                            58,877,381




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




5




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
expressed in US Dollars)




Nine months ended
                                                                                                                December 31,2008
                                                                                                              
                                                                                                              
                                                                                                              2007CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                                                                                                              
                                                                                                              $
                                                                                                              13,377,757
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              9,554,115Adjustment
      for:Changes
      in the fair value of embedded derivatives
                                                                                                              
                                                                                                              
                                                                                                              (2,073,000
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -Loss
      on disposal of plant and equipment
                                                                                                              
                                                                                                              
                                                                                                              30,022
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -Depreciation
                                                                                                              
                                                                                                              
                                                                                                              1,298,953
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              625,357Change
      in deferred tax
                                                                                                              
                                                                                                              
                                                                                                              500,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -(Increase)/Decrease
      in accounts receivable
                                                                                                              
                                                                                                              
                                                                                                              (792,146
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              2,360,417(Increase)/Decrease
      in inventories
                                                                                                              
                                                                                                              
                                                                                                              (841,095
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (526,663
                                                                                                              )(Increase)/Decrease
      in prepayments
                                                                                                              
                                                                                                              
                                                                                                              216,069
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (1,596,989
                                                                                                              )Increase/(Decrease)
      in accounts payable
                                                                                                              
                                                                                                              
                                                                                                              1,926,337
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              812,003Increase/(Decrease)
      in income tax, surcharge and dividends withholding tax
                                                                                                              
                                                                                                              
                                                                                                              2,486,572
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,754,188Increase/(Decrease)
      in other payables and accruals, and value added tax
payable
                                                                                                              
                                                                                                              
                                                                                                              957,512
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              329,998NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                                                                                                              
                                                                                                              $
                                                                                                              17,086,981
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              13,312,426CASH
      FLOWS USED IN INVESTING ACTIVITIESPurchases
      of fixed assets
                                                                                                              
                                                                                                              $
                                                                                                              (15,144,845
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              (8,398,701
                                                                                                              )Capital
      expenditure
                                                                                                              
                                                                                                              
                                                                                                              (808,219
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -NET
      CASH USED IN INVESTING ACTIVITIES
                                                                                                              
                                                                                                              $
                                                                                                              (15,953,064
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              (8,398,701
                                                                                                              )CASH
      FLOWS PROVIDED BY FINANCING ACTIVITIESIssue
      of convertible notes
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              25,000,000Effect
      of exchange rate changes on cash
                                                                                                              
                                                                                                              $
                                                                                                              979,753
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              2,175,977NET
      INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
                                                                                                              
                                                                                                              $
                                                                                                              2,113,670
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              32,089,702CASH
      AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
                                                                                                              
                                                                                                              
                                                                                                              64,310,448
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              26,992,025CASH
      AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
                                                                                                              
                                                                                                              $
                                                                                                              66,424,118
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              59,081,727




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


6




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




1.
            BASIS
      OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION





The
accompanying unaudited 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 he the interim periods reported. Such adjustments are of a
normal, recurring nature. Our operating results for the three and nine month
periods ended December 31, 2008 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2009.




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-KSB for the year
ended March 31, 2008. There have been no material changes in the significant
accounting policies followed by us during the three and nine month periods ended
December 31, 2008.




7




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




2.
            EARNINGS
      PER SHARE




Basic
earnings per share is computed in accordance with SFAS No.128, “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.




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





Three months ended
                                                                          December 31,
                                                                        
                                                                        
                                                                        Nine months ended
                                                                          December 31,2008
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007Earnings
      per share - BasicIncome
      for the period
                                                                        
                                                                        $
                                                                        5,668,887
                                                                        
                                                                        
                                                                        $
                                                                        4,043,749
                                                                        
                                                                        
                                                                        $
                                                                        13,377,757
                                                                        
                                                                        
                                                                        $
                                                                        9,554,115Basic
      average common stock outstanding
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000Net
      earnings per share
                                                                        
                                                                        $
                                                                        0.33
                                                                        
                                                                        
                                                                        $
                                                                        0.24
                                                                        
                                                                        
                                                                        $
                                                                        0.78
                                                                        
                                                                        
                                                                        $
                                                                        0.56Earnings
      per share - DilutedIncome
      for the period
                                                                        
                                                                        $
                                                                        5,668,887
                                                                        
                                                                        
                                                                        $
                                                                        4,043,749
                                                                        
                                                                        
                                                                        $
                                                                        13,377,757
                                                                        
                                                                        
                                                                        $
                                                                        9,554,115Change
      in fair value of embedded derivatives
                                                                        
                                                                        
                                                                        (1,408,000
                                                                        )
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (2,073,000
                                                                        )
                                                                        
                                                                        
                                                                        -$
                                                                        4,260,887
                                                                        
                                                                        
                                                                        $
                                                                        4,043,749
                                                                        
                                                                        
                                                                        $
                                                                        11,304,757
                                                                        
                                                                        
                                                                        $
                                                                        9,554,115Basic
      average common stock outstanding
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000
                                                                        
                                                                        
                                                                        
                                                                        17,080,000Diluted
      effect from embedded derivatives
                                                                        
                                                                        
                                                                        2,083,333
                                                                        
                                                                        
                                                                        
                                                                        475,543
                                                                        
                                                                        
                                                                        
                                                                        2,083,333
                                                                        
                                                                        
                                                                        
                                                                        159,090Diluted
      average common stock
                                                                        
                                                                        
                                                                        19,163,333
                                                                        
                                                                        
                                                                        
                                                                        17,555,543
                                                                        
                                                                        
                                                                        
                                                                        19,163,333
                                                                        
                                                                        
                                                                        
                                                                        17,239,090Net
      earnings per share
                                                                        
                                                                        $
                                                                        0.22
                                                                        
                                                                        
                                                                        $
                                                                        0.23
                                                                        
                                                                        
                                                                        $
                                                                        0.59
                                                                        
                                                                        
                                                                        $
                                                                        0.55




8




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




3.
            RISKS,
      UNCERTAINTIES, AND CONCENTRATIONS




(a)  
Nature of Operations





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





(b)  
Concentration of Credit Risk





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





As of
December 31, 2008 the Group had cash deposits of $66.4 million placed with
several banks in the People's Republic of China (“PRC”), which includes the
Special Administrative Region of Hong Kong, where there is currently no rules or
regulations in place for obligatory insurance of bank accounts.





For the
three months and nine months ended December 31, 2007 and 2008, all of the
Group's sales arose in the PRC. In addition, all accounts receivable as at
December 31, 2008 also arose in the PRC.




(c)  
Concentration of Customers





For the
period ended December 31, 2008, there is a customer that accounted for 10% of
our sales revenue. For the period ended December 31, 2007, there is a customer
accounted for 11% of our total sales.


9




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:




December 31,
                                2008
                              
                              March 31,
                                2008Trade
      receivables
                              
                              $
                              14,319,107
                              
                              
                              $
                              13,214,531Less
      : Allowances for doubtful debt
                              
                              
                              -
                              
                              
                              
                              -$
                              14,319,107
                              
                              
                              $
                              13,214,531




5.
            INVENTORIES




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




December 31,
                                    2008
                                  
                                  
                                  March 31,
                                    2008Raw
      materials
                                  
                                  $
                                  481,309
                                  
                                  
                                  $
                                  254,648Work-in-progress
                                  
                                  
                                  211,038
                                  
                                  
                                  
                                  9,943Finished
      goods
                                  
                                  
                                  573,192
                                  
                                  
                                  
                                  143,767$
                                  1,265,539
                                  
                                  
                                  $
                                  408,358




10




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




6.
            PROPERTY,
      PLANT AND EQUIPMENT AND LAND USE
RIGHT




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




December 31,
                                                2008
                                              
                                              
                                              March 31,
                                                2008Land
      use right
                                              
                                              $
                                              1,881,207
                                              
                                              
                                              $
                                              1,777,860Plant
      and machinery
                                              
                                              
                                              7,408,719
                                              
                                              
                                              
                                              6,493,190Office
      equipment
                                              
                                              
                                              3,384,943
                                              
                                              
                                              
                                              3,293,598Motor
      vehicles
                                              
                                              
                                              246,325
                                              
                                              
                                              
                                              109,186Leasehold
      improvements
                                              
                                              
                                              2,425,883
                                              
                                              
                                              
                                              1,817,62315,347,077
                                              
                                              
                                              
                                              13,491,457Less:
      Accumulated depreciation
                                              
                                              $
                                              (5,999,412
                                              )
                                              
                                              $
                                              (4,585,976
                                              )9,347,665
                                              
                                              
                                              
                                              8,905,481Construction
      in progress
                                              
                                              $
                                              22,273,342
                                              
                                              
                                              $
                                              4,907,268$
                                              31,621,007
                                              
                                              
                                              $
                                              13,812,749




7.
            TAX
      PAYABLES




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




December 31,
                                      2008
                                    
                                    
                                    March 31,
                                      2008Value
      added tax and other taxes
                                    
                                    $
                                    5,701,835
                                    
                                    
                                    $
                                    5,436,331Income
      tax
                                    
                                    
                                    4,890,714
                                    
                                    
                                    
                                    3,714,102Surcharge
                                    
                                    
                                    11,004,077
                                    
                                    
                                    
                                    9,323,273Dividends
      withholding tax
                                    
                                    
                                    3,949,267
                                    
                                    
                                    
                                    3,844,276$
                                    25,545,893
                                    
                                    
                                    $
                                    22,317,982




Pursuant
to the Provisional Regulation of PRC on Value Added Tax, or VAT, and their
implementing rules, all entities and individuals that are engaged in the sale of
goods are generally required to pay VAT at a rate of 17% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer.
  The Group
has its principal operations in the People’s Republic of China (“PRC”). Business
enterprises are subject to income taxes and value added taxes under PRC tax laws
and regulations unless they have exemptions. It has been the belief of the
Group’s management that its PRC operations were exempted from 1999 to 2004 from
income taxes and value added taxes as these operations were considered by
the local government as an advanced technology. The Group, however, has never
received a written confirmation from the appropriate tax authorities for the tax
exemption status of its PRC operations. In January 2006, management of the Group
took the initiative to make tax payments to the PRC tax authorities for the
calendar year 2005 and subsequent years, and accrued for all applicable tax
liabilities, plus surcharge, which is calculated as 0.05% per day on the overdue
tax liabilities in
accordance with PRC tax laws and regulations, for all prior fiscal years
were reflected in the Group’s financial statements.
  Provision
for the PRC enterprise income tax is calculated at the prevailing rate based on
the estimated assessable profits. On March
1, 2007, the Fifth Plenary Session of the Tenth National People's Congress
passed the Corporate Income Tax Law of the PRC ("new tax law") which will take
effect on January 1, 2008.  As a result of the new tax law, the
statutory income tax rate will change from 33% to 25% with effect from January
1, 2008.  The preferential tax rate currently enjoyed by the Company
will be gradually transitioned to the new standard rate of 25% over a five-year
transitional period.  In addition, article 28 of the new tax law
stated that the income tax rate of a "high technology" company will remain at
15%, and such "high technology" company could still enjoy the existing tax
holiday.  As most of the subsidiaries operating in the PRC are
currently recognized as "high technology" companies under the existing Income
Tax Law of the PRC, the management reasonably believed that these subsidiaries
can transit this status under the new tax law.




Dividends
withholding tax in the PRC is charged at a rate of 20% on the dividend payable
to the shareholders.




11




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




8.
            TREASURY
      STOCK




The Group
treated common stock repurchased but not yet canceled as treasury stock.
Treasury stock is reported in the balance sheets and statements of changes in
stockholders’ equity with its par value charged to common stock, and with the
excess of the purchase price over par, if any, first charged against any
available additional paid-in capital and the balance charged to retained
earnings.




9.
            INCOME
      TAXES




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




Three months ended December 31,
                                
                                
                                Nine months ended December 31,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Income
      in the United States before income taxes
                                
                                $
                                1,248,530
                                
                                
                                $
                                -
                                
                                
                                $
                                1,736,831
                                
                                
                                $
                                -(Loss)/
      Income in the British Virgin Islands before income taxes
                                
                                
                                (16,536
                                )
                                
                                
                                (297,477
                                )
                                
                                
                                451,382
                                
                                
                                
                                (799,436
                                )Income
      in the PRC before income taxes
                                
                                
                                6,736,241
                                
                                
                                
                                5,768,015
                                
                                
                                
                                16,186,460
                                
                                
                                
                                14,025,985$
                                7,968,235
                                
                                
                                $
                                5,470,538
                                
                                
                                $
                                18,374,673
                                
                                
                                $
                                13,226,549




Our
principal operations are carried out in the PRC.  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 (loss)/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.





Effective
April 1, 2007, the Group adopted the Financial Accounting Standards Board
(“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109”, (“FIN48”) which clarifies the
accounting for uncertainty income taxes recognized in an enterprise’s financial
statements. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides accounting guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Group
classifies interest and/or penalties related to unrecognized tax benefits as a
component of income tax provisions. There is no material impact of FIN 48 on the
Group’s consolidated financial statements.




12




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)




9.
            INCOME
      TAXES (continued)




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





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





Three months ended December 31,
                                
                                Nine months ended December 31,2008
                                
                                2007
                                
                                2008
                                
                                2007Current
                                
                                $
                                1,799,348
                                
                                
                                $
                                1,426,789
                                
                                
                                $
                                4,496,916
                                
                                
                                $
                                3,672,434Deferred
                                
                                
                                500,000
                                
                                
                                
                                -
                                
                                
                                
                                500,000
                                
                                
                                
                                -$
                                2,299,348
                                
                                
                                $
                                1,426,789
                                
                                
                                $
                                4,996,916
                                
                                
                                $
                                3,672,434


The Group
has its principal operations in the People’s Republic of China (“PRC”) and is
subject to a PRC Enterprise Income Tax rate of 33% in 2007 and 25% in
2008.
  However,
one of the PRC subsidiaries of the Group located in the Shanghai Jinqiao special
economic zone (“Jinqiao subsidiary”) is awarded the status of “high technology”
enterprise for the year 2007 till 2010.  Hence the Jinqiao subsidiary
enjoys a preferential income tax of 15%, which represents a tax concession of
18% and 10% in the year 2007 and 2008.  The benefit of the tax
concession on net income per share (diluted) was approximately $0.149 and $0.058
for the nine months ended December 31, 2007 and 2008.
  Another
newly set up subsidiary of the Group, which is located in Qingpu (“Qingpu
subsidiary”), will have the same business and operation as the Jinqiao
subsidiary but with a larger production scale, is believed by the management to
be qualified for the application for the status of being a “high technology”
enterprise once operation is commenced.  If the “high technology”
status is awarded, the Qingpu subsidiary would then be fully exempted from PRC
Enterprise Income Tax for two years starting from 2008, followed by 50% tax
exemption for the next three years, period from 2010 to 2012. There is no
financial effect from the tax holiday as the Qingpu subsidiary did not generate
any assessable profit in 2007 and 2008.
  On March
1, 2007, the Fifth Plenary Session of the Tenth National People's Congress
passed a new tax law which took effect on January 1, 2008. As a result of
the new tax law, the statutory income tax rate changed from 33% to 25%,
effective January 1, 2008. The preferential tax rate currently enjoyed by the
Company will gradually transition to the new standard rate of 25% over a
five-year transitional period. In addition, article 28 of the new tax law states
that the income tax rate of a "high technology" company will remain at 15%, and
such "high technology" company may continue to use any existing tax holiday. As
the subsidiaries operating in the PRC are currently recognized as "high
technology" companies under the existing Income Tax Law of the PRC, the
management reasonably believes that these subsidiaries may use this status under
the new tax law.


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 December 31,
                                                
                                                
                                                Nine months ended December 31,2008
                                                
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2007Computed
      tax at the local PRC statutory rate (2007:33%, 2008:25%)
                                                
                                                $
                                                1,992,058
                                                
                                                
                                                $
                                                1,805,277
                                                
                                                
                                                $
                                                4,593,667
                                                
                                                
                                                $
                                                4,364,761Non-deductible
      items
                                                
                                                
                                                41,976
                                                
                                                
                                                
                                                98,168
                                                
                                                
                                                
                                                486,643
                                                
                                                
                                                
                                                263,815Non-taxable
      items
                                                
                                                
                                                (462,342
                                                )
                                                
                                                
                                                (49,430
                                                )
                                                
                                                
                                                (1,390,962
                                                )
                                                
                                                
                                                (110,658
                                                )Effect
      of different tax rate in other jurisdiction
                                                
                                                
                                                112,368
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                156,315
                                                
                                                
                                                
                                                -Valuation
      allowance
                                                
                                                
                                                64,185
                                                
                                                
                                                
                                                127,866
                                                
                                                
                                                
                                                138,760
                                                
                                                
                                                
                                                154,584Tax
      concession
                                                
                                                
                                                (489,509
                                                )
                                                
                                                
                                                (1,107,986
                                                )
                                                
                                                
                                                (1,115,638
                                                )
                                                
                                                
                                                (2,575,598
                                                )Surcharge
      at 0.05% per day on accrued taxes
                                                
                                                
                                                540,612
                                                
                                                
                                                
                                                552,894
                                                
                                                
                                                
                                                1,628,131
                                                
                                                
                                                
                                                1,575,530Total
      provision for income at effective rate
                                                
                                                $
                                                1,799,348
                                                
                                                
                                                $
                                                1,426,789
                                                
                                                
                                                $
                                                4,496,916
                                                
                                                
                                                $
                                                3,672,434Temporary
      difference associated with investments in subsidiary
                                                
                                                
                                                500,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                500,000
                                                
                                                
                                                
                                                -$
                                                2,299,348
                                                
                                                
                                                $
                                                1,426,789
                                                
                                                
                                                $
                                                4,996,916
                                                
                                                
                                                $
                                                3,672,434




As at
December 31, 2008, one of the Company’s PRC subsidiary has incurred tax losses
which can be carried forward to a maximum of 5 years of approximately US$953,881
(2007: US$610,144).


Three
      months ended 31 December
                                                                    
                                                                    
                                                                    Nine
      months ended 31 December2008
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    2008
                                                                    
                                                                    
                                                                    2007Deferred
      tax assets:Net
      operating loss carryforward
                                                                    
                                                                    $
                                                                    64,185
                                                                    
                                                                    
                                                                    $
                                                                    127,866
                                                                    
                                                                    
                                                                    $
                                                                    138,760
                                                                    
                                                                    
                                                                    $
                                                                    154,584Less:
      Valuation allowance
                                                                    
                                                                    
                                                                    (64,185
                                                                    )
                                                                    
                                                                    
                                                                    (127,866
                                                                    )
                                                                    
                                                                    
                                                                    (138,760
                                                                    )
                                                                    
                                                                    
                                                                    (154,584
                                                                    )Net
      deferred tax assets
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
  Deferred
tax assets were primarily raised from the tax losses carry forwards, and a
valuation allowance has been established for the entire deferred tax assets, as
the management believes that the PRC subsidiary may not have fully utilized the
deferred tax assets because of the uncertainty regarding the tax deductibility
of expenses
incurred.




The Group
has its principal operations in the People's Republic of China (“PRC”). Business
enterprises are subject to income taxes and value added taxes under PRC tax laws
and regulations unless they have exemptions. It had been the belief of the
Group's management that its PRC operations were exempt from income taxes and
value added taxes as these operations were recognized by the local government as
an advanced technology enterprise. The Group, however, has never received a
written confirmation from the appropriate tax authorities regarding the tax
exempt status of its PRC operations. In January 2006, management of the Group's
PRC operations took initiative to make tax payments to the PRC tax authorities
for the Calendar year 2005, and has made accrual for all applicable tax
liabilities, plus surcharge, for all prior Calendar years were reflected in the
Group's financial statements.




According
to PRC tax regulations, 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. This amounts to $4.9
million (if calculated based on 0.5 times the taxes payable) to $49 million (if
calculated based on five times the amount of taxes payable) as of June 30, 2007
and 2008. 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, the Group has reserved for the surcharges payable for
this reporting period.  We consider it more likely than not that the
associated penalty will not need to be paid.


13


CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




10.
            COMMITMENTS




(a)  
Operating Leases




The Group
leases office space, warehouse facilities and retail outlets that expire at
various dates through 2008 to 2010. As of the balance sheet dates as presented
in these financial statements, the amount of future minimum lease payment under
the above-mentioned operating leases were as follows:




December
      31,
                      
                      
                      March 31,2008
                      
                      
                      2008Payable
      withinthe
      next twelve months
                      
                      $
                      479,454
                      
                      
                      $
                      556,907the
      next 13th to 24th months
                      
                      
                      -
                      
                      
                      
                      111,670the
      next 25th to 36th months
                      
                      
                      -
                      
                      
                      
                      -the
      next 37th to 48th months
                      
                      
                      -
                      
                      
                      
                      -the
      next 49th to 60th months
                      
                      
                      -
                      
                      
                      
                      -Thereafter
                      
                      
                      -
                      
                      
                      
                      -$
                      479,454
                      
                      
                      $
                      668,577




(b)
  Land lease





On March
21, 2006, the Company's wholly-owned subsidiary, GSL, entered into an agreement
with Shanghai Qingpu Industrial Park District Development (Group) Company
Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu
Industrial Park District on which the Company will construct a plant consisting
bulk manufacturing facilities that will have an initial capacity of 150 tons per
year of bulk product with room for expansion to 300 tons per
year.  This agreement contemplates a one-time leasing fee of
$2,100,828.  The leasing fee was later reduced to $1,777,860 because
the size of the leased land was reduced to 36,075 square meters.  10%
of the leasing fee was due and paid on April 5, 2006 as a
deposit.  This deposit is to be refunded upon payment in full of the
aggregate lease amount, which is due and payable immediately before the issue of
the approval documents for the land lease by the Shanghai Qingpu local
government authorities.  There are no future lease payments under the
land lease.


(c)  
Capital commitments





During
the period ended of December 31, 2008, GSL entered into the agreements with the
contractors to construct a plant consisting bulk manufacturing facilities in the
Shanghai Qingpu Industrial Park District. The amount of future payment is
$4,921,709 which was contracted, but not provided for as of December 31,
2008.





14





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




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 achieves a net income of $60 million in fiscal year 2010. 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.




Net
proceeds of the Note are expected to be used to fund the construction of a
proposed 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
January 1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements”,
(“SFAS 157”) which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. SFAS
157 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 SFAS 157 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 least annually). The Company
adopted the provisions of SFAS 157, except as it applies to those non-financial
assets and non-financial liabilities for which the effective date has been
delayed by one year.




SFAS 157
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.
  Level 3 -
Unobservable inputs that are supported by little or no market activity an 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
December 31, 2008, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, including its
derivative instruments related to its 2007 Notes. The fair value of these assets
and liabilities was determined using the following inputs in accordance with
SFAS 157 at December 31, 2008:


Fair
      Value Measurements as at December 31, 2008Balance
      atDecember 31, 2008
                              
                              Quoted
      Prices in Active Markets
                                (Level
      1)
                              
                              Significant
      Other Observable Inputs(Level 2)
                              
                              Significant
      UnobservableInputs(Level 3)Derivative
      liability - conversion rights (1)
                              
                              $
                              3,679,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              3,679,000
  (1)
              Represents
      the conversion rights included in the Company’s 2007 Notes. Included in
      non-current liabilities on the accompanying condensed consolidated balance
      sheet.
 
 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 January 1, 2008 to December 31, 2008:
 
 Derivative
      Liability - Conversion RightsBalance
      at January 1, 2008
                              
                              $
                              9,118,000Adjustment
      to fair value included in earnings (1)
                              
                              
                              (5,439,000
                              )Balance
      at December 31, 2008
                              
                              $
                              3,679,000
  (1)
              The
      derivative conversion option is revalued at the end of each reporting
      period and the resulting difference is included in the results of
      operations. For the period ended December 31, 2008, the net adjustment to
      fair value resulted in a gain of $5.44 million and is included in “Changes
      in the fair value of embedded derivatives” on the accompanying condensed
      consolidated statement of
operations.


15





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
expressed in US Dollars)




The
estimated fair value of the embedded derivatives as of March 31, 2008 and
December 31, 2008 was $5,752,000 and $3,679,000 respectively. The change in the
fair value of the embedded derivatives amounted to $2,073,000 was charged to the
consolidated statement of operations.





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





March 31, 2008
                
                
                December 31, 2008Risk-free
      rate of return
                
                
                1.70
                %
                
                
                1.00
                %Time
      to expiration
                
                2.66
                years
                
                1.92
                yearsVolatility
      rate
                
                
                65
                %
                
                
                65
                %Dividend
      yield
                
                
                -
                
                
                
                -





At as
December 31, 2008, the Note interest amounted to $4,548,610 was capitalized
under construction in progress.





16




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”) and Growing State Limited (“GSL”), and SGI's wholly-owned subsidiary,
Shanghai Shining Biotechnology Co. Ltd. (“Shining”), and GSL's wholly-owned
subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“GBS”). References to
“China” or to the “PRC” are references to the People's Republic of China. All
references to “dollars” or “$” refers to United States dollars.





Overview





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





The
products are mainly sold to distributors, which then distribute them to various
retail outlets such as drug stores and supermarkets. During the three months and
nine months ended December 31, 2008, approximately 80% of our sales revenue
comprises amounts receivable from the distributors for the sale of these
products. Typically, 60 to 90 days' credits are given to the
distributors.





We intend
to expand our sales to other cities in China through a combination of
distributors and our outlets (training and logistics centers). Our management
believes that as China becomes more affluent, its citizens are becoming more
health conscious. This has led to higher demand for health and functional food
such as probiotics and yogurt.




In
addition, probiotics are increasingly used as additives in the production of
infant formula. According to statements made by the Nutrition Development Centre
of National Development and Reform Commission in China, effective April 1, 2007,
probiotics will be added to baby milk powders produced in China. Currently, the
probiotics used in China for such purposes are imported. To capitalize on what
we believe is a significant opportunity in this area, we are constructing a new
plant that will enable us to capture the anticipated demand for food
additives.




In recent
months, milk samples (including samples of infant formula) from several Chinese
dairy companies, including the three largest producers, were found to have been
tainted with melamine, an industrial chemical. In September 2008, China’s State
Council, officiated by Premier Wen Jiabao, elected to take steps to conduct
comprehensive testing of dairy products and carry out other industry reforms.
Although sales of Chinese dairy products have fallen significantly as a result
of the melamine scandal, there has not been a significant impact on our business
to date as our current sales to the dairy industry are minimal. We believe that
the strengthening of product quality and testing standards in the dairy industry
are a positive development for domestic suppliers that operate to high
international standards. We are engaged in discussion and qualification
processes with several large global suppliers of infant formula and dairy
products to the China market, and believe that we are well-positioned to benefit
as more stringent requirements are implemented in the industry. We are also in
discussions with a number of suppliers of bakery, dairy and pharmaceutical
products in preparation for the opening of our new plant. Therefore, although
the full scope of the melamine problem remains unknown, we do not foresee that
it will have a material negative effect on our business and results of
operations.





The
Company has experienced a delay in the construction of its new facility. The new
plant needs to be certified by two local government bureaus, which are State
Food and Drug Administration and Shanghai Municipal Bureau of Quality and
Technical Supervision, each of which requires a different certification standard
for our manufacturing facility. Management has been working closely with these
agencies to resolve which standard will be required for the new facility. As a
result of this delay, the Company has slowed down the installation process at
the new facility. The Company expects that a consensus will be reached shortly.
We will resume installation after the Chinese New Year, and plan to commence
trial production in April. The trial phase should be completed in approximately
three months. The cost of the new plant, which is expected to be approximately
$27.5 million for the first phase, will be funded by cash received from the
convertible promissory notes issued in December 2007 and internal sources
of funds. In this regard, we have leased 36,075 square meters of land in
the Shanghai Qingpu Industrial Park District, on which we will construct the new
bulk manufacturing facilities. The new plant will have an initial capacity of
150 tons per year with room for expansion to 300 tons per year.





17





In
preparation for the new plant commencing operations in the second quarter of
this year, we have been in discussions with a large number of potential
customers for our food additive products. As at December 31, 2008, we have
already included contracts with 11 customers for this food additives
business. In this regard, we have created formulations for testing by many
potential customers. We have established an array of business relationships with
commercial customers located in Beijing, Qinghai, Shanghai cities, Jiangsu,
Jiangxi, Shaanxi, Shandong and Zhejiang provinces. These growing companies are
among the leaders in the baked foods, dairy 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. With the delay in the commissioning of the new
plant, we have been carefully managing the use of our production capacity and
selectively increasing the price of our products to make sure that we strike a
balance between achieving current and future sales.





In
connection with the expansion of our retail business, we originally intended to
open 300 outlets by the end of fiscal year 2009. As at December 31, 2008, we
have opened 107 outlets in Shanghai and 12 other cities in China (as of December
31, 2007, we had 27 retail outlets in Shanghai and Changchun). In the last three
quarters, we have accelerated customer acquisition efforts and dedicated a
significant amount of management efforts and production capacity for this
purpose. With the limited production capacity that we have in our existing
production facility, management believes that it is prudent to slow the pace of
opening new retail outlets so that we can focus on completing the new plant on
time and signing on customers to take up the capacity of our new plant when it
is up and running. We now intend to open 300 outlets during fiscal year
2010.





18





Results
of Operations





Quarter
Ended December 31, 2007 Compared with the Quarter Ended December 31,
2008





Our net
income was $6.17 million in the quarter ended December 31, 2008. This included
$1.41 million surplus arising from the revaluation of the conversion feature
embedded in the convertible notes issued in December 2007 as required by FAS133.
Excluding this revaluation surplus, our net income was $4.76 million, which was
17.8% higher than our net income of $4.04 million for the quarter ended December
31, 2007. 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 41.6% of our sales revenue in the
quarter ended December 31, 2008 (47.5% in the quarter ended December 31,
2007).




Our
results for the three months and nine months ended December 31, 2007 and 2008
are summarized below:


Three months ended
                    December 31, 2008
                  
                  
                  Three months ended
                    December 31, 2007Amount
                  
                  
                  % of Net sales
                  
                  
                  Amount
                  
                  
                  % of Net salesNet
      sales
                  
                  $
                  15,810,111
                  
                  
                  
                  100.00
                  %
                  
                  $
                  11,931,306
                  
                  
                  
                  100.00
                  %Cost
      of sales
                  
                  
                  (4,583,371
                  )
                  
                  
                  (28.99
                  %)
                  
                  
                  (3,183,056
                  )
                  
                  
                  (26.68
                  %)Gross
      profit
                  
                  $
                  11,226,740
                  
                  
                  
                  71.01
                  %
                  
                  $
                  8,748,250
                  
                  
                  
                  73.32
                  %Operating
      expenses:Selling
      expenses
                  
                  $
                  (3,330,668
                  )
                  
                  
                  (21.07
                  %)
                  
                  $
                  (1,752,637
                  )
                  
                  
                  (14.69
                  %)General
      and administrative expenses
                  
                  
                  (1,353,561
                  )
                  
                  
                  (8.56
                  %)
                  
                  
                  (1,258,927
                  )
                  
                  
                  (10.55
                  %)Total
      operating expenses
                  
                  $
                  (4,684,229
                  )
                  
                  
                  (29.63
                  %)
                  
                  $
                  (3,011,564
                  )
                  
                  
                  (25.24
                  %)Income
      from operations
                  
                  $
                  6,542,511
                  
                  
                  
                  41.38
                  %
                  
                  $
                  5,736,686
                  
                  
                  
                  48.08
                  %Other
      income and expenses:Change
      in the fair value of embedded derivatives
                  
                  $
                  1,408,000
                  
                  
                  
                  8.91
                  %
                  
                  $
                  -
                  
                  
                  
                  -
                  %Other
      income
                  
                  
                  60,442
                  
                  
                  
                  0.38
                  %
                  
                  
                  118,064
                  
                  
                  
                  0.99
                  %Other
      expenses
                  
                  
                  (42,718
                  )
                  
                  
                  (0.27
                  %)
                  
                  
                  (384,212
                  )
                  
                  
                  (3.22
                  %)Total
      other income (expenses)
                  
                  $
                  1,425,724
                  
                  
                  
                  9.02
                  %
                  
                  $
                  (266,148
                  )
                  
                  
                  (2.23
                  %)Income
      before taxes
                  
                  $
                  7,968,235
                  
                  
                  
                  50.40
                  %
                  
                  $
                  5,470,538
                  
                  
                  
                  45.85
                  %Provision
      for income taxes
                  
                  
                  (2,299,348
                  )
                  
                  
                  (14.54
                  %)
                  
                  
                  (1,426,789
                  )
                  
                  
                  (11.96
                  %)Net
      income
                  
                  $
                  5,668,887
                  
                  
                  
                  35.86
                  %
                  
                  $
                  4,043,749
                  
                  
                  
                  33.89
                  %
 
 Nine months ended
                    December 31, 2008
                  
                  
                  Nine months ended
                    December 31, 2007Amount
                  
                  
                  % of Net sales
                  
                  
                  Amount
                  
                  
                  % of Net salesNet
      sales
                  
                  $
                  38,676,017
                  
                  
                  
                  100.00
                  %
                  
                  $
                  29,266,801
                  
                  
                  
                  100.00
                  %Cost
      of sales
                  
                  
                  (11,304,893
                  )
                  
                  
                  (29.23
                  %)
                  
                  
                  (8,039,651
                  )
                  
                  
                  (27.47
                  %)Gross
      profit
                  
                  $
                  27,371,124
                  
                  
                  
                  70.77
                  %
                  
                  $
                  21,227,150
                  
                  
                  
                  72.53
                  %Operating
      expenses:Selling
      expenses
                  
                  $
                  (8,514,090
                  )
                  
                  
                  (22.01
                  %)
                  
                  $
                  (4,630,916
                  )
                  
                  
                  (15.82
                  %)General
      and administrative expenses
                  
                  
                  (4,218,494
                  )
                  
                  
                  (10.91
                  %)
                  
                  
                  (3,155,544
                  )
                  
                  
                  (10.78
                  %)Total
      operating expenses
                  
                  $
                  (12,732,584
                  )
                  
                  
                  (32.92
                  %)
                  
                  $
                  (7,786,460
                  )
                  
                  
                  (26.60
                  %)Income
      from operations
                  
                  $
                  14,638,540
                  
                  
                  
                  37.85
                  %
                  
                  $
                  13,440,690
                  
                  
                  
                  45.93
                  %Other
      income and expenses:Change
      in the fair value of embedded derivatives
                  
                  $
                  2,073,000
                  
                  
                  
                  5.36
                  %
                  
                  $
                  -
                  
                  
                  
                  -
                  %Other
      income
                  
                  
                  1,923,430
                  
                  
                  
                  4.97
                  %
                  
                  
                  190,006
                  
                  
                  
                  0.65
                  %Other
      expenses
                  
                  
                  (260,297
                  )
                  
                  
                  (0.67
                  %)
                  
                  
                  (404,147
                  )
                  
                  
                  (1.38
                  %)Total
      other income (expenses)
                  
                  $
                  3,736,133
                  
                  
                  
                  9.66
                  %
                  
                  $
                  (214,141
                  )
                  
                  
                  (0.73
                  %)Income
      before taxes
                  
                  $
                  18,374,673
                  
                  
                  
                  47.51
                  %
                  
                  $
                  13,226,549
                  
                  
                  
                  45.20
                  %Provision
      for income taxes
                  
                  
                  (4,996,916
                  )
                  
                  
                  (12.92
                  %)
                  
                  
                  (3,672,434
                  )
                  
                  
                  (12.55
                  %)Net
      income
                  
                  $
                  13,377,757
                  
                  
                  
                  34.59
                  %
                  
                  $
                  9,554,115
                  
                  
                  
                  32.65
                  %


19




Nine months ended December 31,2008
                          
                          
                          2007Net
      Income
                          
                          
                          13,377,757
                          
                          
                          
                          9,554,115AdjustmentsNon-cash
      surplus arising from change in the fair value of embedded
      derivatives
                          
                          
                          (2,073,000
                          )
                          
                          
                          -Amount
      per consolidated statement of operations
                          
                          
                          11,304,757
                          
                          
                          
                          9,554,115
 
 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 and nine months ended December 31,
2007 and 2008 comprised the following:
 
 Three months ended December 31,
                      
                      
                      Nine months ended December 31,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Invoiced
      value on sales
                      
                      $
                      16,444,448
                      
                      
                      
                      12,290,615
                      
                      
                      
                      40,218,563
                      
                      
                      
                      30,102,465Less:
      sales discount
                      
                      
                      (539,424
                      )
                      
                      
                      (279,998
                      )
                      
                      
                      (1,298,000
                      )
                      
                      
                      (644,819
                      )Less
      : sales tax
                      
                      
                      (94,913
                      )
                      
                      
                      (79,311
                      )
                      
                      
                      (244,546
                      )
                      
                      
                      (190,845
                      )$
                      15,810,111
                      
                      
                      $
                      11,931,306
                      
                      
                      $
                      38,676,017
                      
                      
                      $
                      29,266,801
 Net sales
of $15,810,111 for the quarter ended December 31, 2008 were 32.5% above the net
sales of $11,931,306 for the quarter ended December 31, 2007. Net sales of
$38,676,017 for the nine months ended December 31, 2008 were 32.1% above the net
sales of $29,266,801 for the nine months ended December 31, 2007. The increase
was mainly because of an increase in overall sales volume arising from new
product sales (offsetting decrease in sales volume of existing
products) and increases in the sales price of selected
products.
 
 The
contributions of each product as a percentage of the total value on sales for
the three months and nine months ended December 31, 2007 and 2008 are summarized
below:
 
 Three months ended December 31,
                        
                        
                        Nine months ended December 31,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Shining
      Essence Capsules
                        
                        
                        41.6
                        %
                        
                        
                        47.5
                        %
                        
                        
                        40.1
                        %
                        
                        
                        49.6
                        %Shining
      Signal Capsules
                        
                        
                        8.8
                        %
                        
                        
                        13.1
                        %
                        
                        
                        9.4
                        %
                        
                        
                        13.9
                        %Shining
      Golden Shield Capsules
                        
                        
                        12.1
                        %
                        
                        
                        14.1
                        %
                        
                        
                        13.1
                        %
                        
                        
                        14.1
                        %Shining
      Energy Capsules
                        
                        
                        10.8
                        %
                        
                        
                        11.0
                        %
                        
                        
                        10.9
                        %
                        
                        
                        11.6
                        %Shining
      Essence Stomach Protection Capsules
                        
                        
                        6.3
                        %
                        
                        
                        5.0
                        %
                        
                        
                        6.1
                        %
                        
                        
                        4.9
                        %Shining
      Probiotics Protein Powder
                        
                        
                        5.9
                        %
                        
                        
                        4.4
                        %
                        
                        
                        4.6
                        %
                        
                        
                        2.5
                        %Other
      products
                        
                        
                        7.4
                        %
                        
                        
                        3.7
                        %
                        
                        
                        6.7
                        %
                        
                        
                        2.9
                        %92.9
                        %
                        
                        
                        98.8
                        %
                        
                        
                        90.9
                        %
                        
                        
                        99.5
                        %Bulk
      additives
                        
                        
                        7.1
                        %
                        
                        
                        1.2
                        %
                        
                        
                        9.1
                        %
                        
                        
                        0.5
                        %100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
 
 Certain
comparative figures have been reclassified to conform with current year’s
presentation.
  20
  Unit
volume and unit prices comparatives (on the invoiced value of sales) for the
three months and nine months ended December 31, 2007 and 2008 are summarized
below:
 
 Percentage increase (decrease) from the prior yearThree months ended December
      31,2008
                    
                    
                    2007Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)Shining
      Essence Capsules
                    
                    
                    9
                    %
                    
                    
                    (1
                    %)
                    
                    
                    8
                    %
                    
                    
                    (9
                    %)
                    
                    
                    12
                    %
                    
                    
                    2
                    %Shining
      Signal Capsules
                    
                    
                    (27
                    %)
                    
                    
                    13
                    %
                    
                    
                    (17
                    %)
                    
                    
                    (2
                    %)
                    
                    
                    1
                    %
                    
                    
                    (1
                    %)Shining
      Golden Shield Capsules
                    
                    
                    (9
                    %)
                    
                    
                    17
                    %
                    
                    
                    6
                    %
                    
                    
                    17
                    %
                    
                    
                    51
                    %
                    
                    
                    77
                    %Shining
      Energy Capsules
                    
                    
                    19
                    %
                    
                    
                    0
                    %
                    
                    
                    19
                    %
                    
                    
                    19
                    %
                    
                    
                    36
                    %
                    
                    
                    62
                    %Shining
      Essence Stomach Protection Capsules
                    
                    
                    21
                    %
                    
                    
                    28
                    %
                    
                    
                    55
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Shining
      Probiotics Protein Powder
                    
                    
                    121
                    %
                    
                    
                    (27
                    %)
                    
                    
                    61
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Other
      products
                    
                    
                    150
                    %
                    
                    
                    0
                    %
                    
                    
                    150
                    %
                    
                    
                    456
                    %
                    
                    
                    97
                    %
                    
                    
                    995
                    %Bulk
      additives
                    
                    
                    620
                    %
                    
                    
                    0
                    %
                    
                    
                    620
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
 
 
 Percentage increase (decrease) from the prior yearNine months ended December 31,2008
                    
                    
                    2007Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Selling
                      prices
                    
                    
                    Overall
                      increase /
                      (decrease)Shining
      Essence Capsules
                    
                    
                    (2
                    %)
                    
                    
                    0
                    %
                    
                    
                    (2
                    %)
                    
                    
                    (11
                    %)
                    
                    
                    17
                    %
                    
                    
                    4
                    %Shining
      Signal Capsules
                    
                    
                    (27
                    %)
                    
                    
                    12
                    %
                    
                    
                    (18
                    %)
                    
                    
                    (10
                    %)
                    
                    
                    1
                    %
                    
                    
                    (9
                    %)Shining
      Golden Shield Capsules
                    
                    
                    (3
                    %)
                    
                    
                    17
                    %
                    
                    
                    13
                    %
                    
                    
                    25
                    %
                    
                    
                    48
                    %
                    
                    
                    85
                    %Shining
      Energy Capsules
                    
                    
                    9
                    %
                    
                    
                    5
                    %
                    
                    
                    14
                    %
                    
                    
                    26
                    %
                    
                    
                    35
                    %
                    
                    
                    70
                    %Shining
      Essence Stomach Protection Capsules
                    
                    
                    31
                    %
                    
                    
                    14
                    %
                    
                    
                    49
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Shining
      Probiotics Protein Powder
                    
                    
                    161
                    %
                    
                    
                    (16
                    %)
                    
                    
                    119
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Other
      products
                    
                    
                    186
                    %
                    
                    
                    (1
                    %)
                    
                    
                    183
                    %
                    
                    
                    423
                    %
                    
                    
                    104
                    
                    
                    
                    967
                    %Bulk
      additives
                    
                    
                    2174
                    %
                    
                    
                    0
                    %
                    
                    
                    2174
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
  21
  Cost
of sales
 
 Cost of
sales for the three months ended December 31, 2008 was $4,583,371 compared with
$3,183,056 for the three months ended December 31, 2007. Cost of sales for the
nine months ended December 31, 2008 was $11,304,893 compared with $8,039,651 for
the nine months ended December 31, 2007. The increase in cost of sales was
primarily because of increases in the cost of packaging materials and the
overall sales volume.
  Unit
volume and unit costs comparatives for the three months and nine months ended
December 31, 2007 and 2008 are summarized below:
 
 Percentage increase (decrease) from the prior yearThree months ended December
      31,2008
                    
                    
                    2007Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)Shining
      Essence Capsules
                    
                    
                    9
                    %
                    
                    
                    16
                    %
                    
                    
                    26
                    %
                    
                    
                    (9
                    %)
                    
                    
                    3
                    %
                    
                    
                    (6
                    %)Shining
      Signal Capsules
                    
                    
                    (27
                    %)
                    
                    
                    11
                    %
                    
                    
                    (19
                    %)
                    
                    
                    (2
                    %)
                    
                    
                    (12
                    %)
                    
                    
                    (4
                    %)Shining
      Golden Shield Capsules
                    
                    
                    (9
                    %)
                    
                    
                    13
                    %
                    
                    
                    3
                    %
                    
                    
                    17
                    %
                    
                    
                    32
                    %
                    
                    
                    54
                    %Shining
      Energy Capsules
                    
                    
                    19
                    %
                    
                    
                    17
                    %
                    
                    
                    39
                    %
                    
                    
                    19
                    %
                    
                    
                    49
                    %
                    
                    
                    77
                    %Shining
      Essence Stomach Protection Capsules
                    
                    
                    21
                    %
                    
                    
                    12
                    %
                    
                    
                    35
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Shining
      Probiotics Protein Powder
                    
                    
                    121
                    %
                    
                    
                    17
                    %
                    
                    
                    158
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Other
      products
                    
                    
                    150
                    %
                    
                    
                    18
                    %
                    
                    
                    195
                    %
                    
                    
                    456
                    %
                    
                    
                    %
                    
                    
                    %Bulk
      additives
                    
                    
                    620
                    %
                    
                    
                    21
                    %
                    
                    
                    771
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
 
 
 Percentage increase (decrease) from the prior yearNine months ended December
      31,2008
                    
                    
                    2007Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)Shining
      Essence Capsules
                    
                    
                    (2
                    %)
                    
                    
                    17
                    %
                    
                    
                    15
                    %
                    
                    
                    (11
                    %)
                    
                    
                    8
                    %
                    
                    
                    (4
                    %)Shining
      Signal Capsules
                    
                    
                    (27
                    %)
                    
                    
                    12
                    %
                    
                    
                    (18
                    %)
                    
                    
                    (10
                    %)
                    
                    
                    (1
                    %)
                    
                    
                    (11
                    %)Shining
      Golden Shield Capsules
                    
                    
                    (3
                    %)
                    
                    
                    9
                    %
                    
                    
                    6
                    %
                    
                    
                    25
                    %
                    
                    
                    32
                    %
                    
                    
                    65
                    %Shining
      Energy Capsules
                    
                    
                    9
                    %
                    
                    
                    21
                    %
                    
                    
                    32
                    %
                    
                    
                    26
                    %
                    
                    
                    47
                    %
                    
                    
                    85
                    %Shining
      Essence Stomach Protection Capsules
                    
                    
                    31
                    %
                    
                    
                    3
                    %
                    
                    
                    35
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Shining
      Probiotics Protein Powder
                    
                    
                    161
                    %
                    
                    
                    24
                    %
                    
                    
                    224
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %Other
      products
                    
                    
                    186
                    %
                    
                    
                    12
                    %
                    
                    
                    220
                    %
                    
                    
                    423
                    %
                    
                    
                    0
                    %
                    
                    
                    423
                    %Bulk
      additives
                    
                    
                    2174
                    %
                    
                    
                    2
                    %
                    
                    
                    2219
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
                    
                    
                    N/A
                    %
 
 Gross
profit
 
 Gross
profit for the three months ended December 31, 2008 was $11,226,740 compared
with $8,748,250 for the three months ended December 31, 2007. Gross profit for
the nine months ended December 31, 2008 was $27,371,124 compared with
$21,227,150 for the nine months ended December 31, 2007. 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 and
nine months ended December 31, 2007 and 2008 are summarized below:
 22
 
 Three months ended December 31,
                        
                        
                        Nine months ended December 31,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Average
      for all products
                        
                        
                        71
                        %
                        
                        
                        73
                        %
                        
                        
                        71
                        %
                        
                        
                        73
                        %
  Gross
profit margin slightly decreased from 73% in the quarter ended December 31, 2007
to 71% this quarter as a result of increases in cost of packaging materials and
electricity largely offset by increase in sales prices.
 
 Selling
expenses
 
 Selling
expenses were $3,330,668 or 21.1% of net sales for the three months ended
December 31, 2008 compared with $1,752,637 or 14.7% of net sales for the three
months ended December 31, 2007. The operating costs of the retail outlets are
included as selling expenses. The increase in selling expenses was primarily
caused by the roll out of retail outlets. As of December 31, 2008, we had a
total of 107 retail outlets in operation compared with 27 outlets as of December
31, 2007.
 
 General
and administrative expenses
 
 General
and administrative expenses were $1,353,561 or 8.6% of net sales for the three
months ended December 31, 2008 compared with $1,258,927 or 10.6% of net sales
for the three months ended December 31, 2007. The increase of $94,634 was
primarily due to the additional research cost of $80,390 related to the
development and launching of new products.
 
 Provision
for income taxes
 
 Provision
for income taxes was $2.3 million and $1.4 million for the quarters ended
December 31, 2008 and 2007, respectively. Excluding the $1.4 million surplus on
revaluation of the convertible note, income before taxes was $6.6 million for
the third quarter of fiscal year 2009 compared with $5.5 million for 2008. 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 and nine
months ended December 31, 2007 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 $66.4 million and working capital of $50.8 million as of
December 31, 2008. Cash generated from operations was $17.1 million in the nine
months ended December 31, 2008 and $13.3 million in the nine months
ended December 31, 2007. The cash generated from operations of $17.1 million was
higher than the net income of $13.4 million due to the non-cash surplus of
revaluation of convertible notes of $2.0 million and lower working capital
needs resulting from better working capital management.
 
 We had
capital expenditures totaling $15.1 million in the nine months ended December
31, 2008, mainly in connection with the construction of the new plant. We spent
$8.4 million on fixed assets in the nine months ended December 31,
2007.
 
 Our
current facility commenced operations in 2000. With the increases in sales
volume in the last couple of years, we are reaching our production capacity. We
have started to construct a new plant with an overall project size of $45.5
million. Phase 1 of the project involves constructing a facility capable of
producing 150 tons of probiotics per annum and is estimated to cost $27.50
million, $25 million of which is expected to be paid in the first quarter of
calendar year 2009 and the balance by the end of third quarter of calendar year
2009. Subsequent phases of this project will only commence when expected demands
for probiotics exceed the production capacity of the Phase 1
facility.
 
 We did
not have any changes related to financing activities for the nine months ended
December 31, 2008. 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. The Note also provides for mandatory conversion into
common stock if the Group achieve a net income of $60 million in fiscal
year 2010. Net proceeds of the Note are expected to be used to fund the
construction of a proposed 150-metric-ton-per-year manufacturing facility and
for other capital expenditures.
  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





In the
fourth quarter of 2008 fiscal year, there were significant increases in pulp and
paper costs. As a result, our cost of production increased which led to a
decrease in our gross profit margin. There also were significant increases in
steel costs which led to increases in the cost of construction of our new plant.
These costs appear to have stabilized.





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 December 31,
2008.




Contractual
                    
                    Payment due by period (as of December
      31, 2008)Obligations
                    
                    Total
                    
                    
                    Less than 1 year
                    
                    
                    1-3 years
                    
                    
                    3-5 years
                    
                    
                    More than 5 yearsCapital Lease Obligations
                    
                    $
                    4,921,709
                    
                    
                    $
                    4,921,709
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Lease Obligations
                    
                    $
                    479,454
                    
                    
                    $
                    479,454
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    5,401,163
                    
                    
                    $
                    5,401,163
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -


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 $740,175 and
$659,785 in the three months ended December 31, 2008 and December 31, 2007,
respectively.




Critical
Accounting Policies





Our
critical accounting policies are described in the Notes to the Financial
Statements included in our Annual Report filed with the SEC on Form 10-KSB for
the fiscal year ended March 31, 2008, 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 and nine months ended December 31,
2007 and 2008. These financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. In preparing
these financial statements, we are required to make estimates and assumptions
affecting the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.




We
consider accounting policies related to (a) allowance for doubtful accounts, and
(b) use of estimates as applied to potential penalties for the late payment of
taxes, to be critical accounting policies due to the estimation process involved
in each.





Allowance
for doubtful accounts





We
maintain an allowance for doubtful accounts for estimated losses that may result
from the inability of our customers to make required payments. Such allowances
are based upon several factors including, but not limited to, historical
experience and the current and projected financial condition of specific
customers. Since our inception of business, we have never experienced any
unrecoverable receivables. We have not experienced situations causing us to cast
doubt on the ability of our customers to make required payments. The balance of
our allowance for doubtful account has always been zero. We had trade
receivables totaling $14,319,107 as of December 31, 2008, and a zero balance for
allowance for doubtful accounts. We have considered all relevant factors,
including the financial conditions, affecting the payment abilities of customers
comprising these receivables up to the date of this Form 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.


24





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, 2007 and
2008. 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, 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.





Recent
Accounting Pronouncements





In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active.” This
FSP clarifies the application of SFAS No. 157 in a market for that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. This FSP was effective for the Company upon issuance, including prior
periods for which financial statements have not been issued; and, therefore was
effective for the Company’s financial statements as of and for the three and
nine month periods ended December 31, 2008. Adoption of FSP No. FAS 157-3 did
not have a significant impact on the Company’s financial position, results of
operations or cash flows.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (“GAAP”) for
nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board Auditing amendments to
AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. Management does not anticipate that the
provisions of SFAS No. 162 will have an impact on the Company’s consolidated
results of operations or consolidated financial position.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133.” SFAS No. 161
requires enhanced disclosures about an entity’s derivative and hedging
activities to improve the transparency of financial reporting. SFAS No. 161 is
effective for financial statements issued for periods beginning after November
15, 2008. SFAS No. 161 is effective for the Company’s fiscal quarter that begins
on January 1, 2009. Management is currently evaluating the potential
impact, if any, on the Company’s disclosures in its consolidated financial
statements.




25




On
February 15, 2007 the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to
measure many financial instruments and certain other items at fair value with
changes in fair value reported in earnings. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007, with
earlier adoption permitted. The Company does not anticipate that the adoption of
this statement will have a material effect on the Company’s financial condition
and result of operations. The Company does not believe that any of the other
recently issued and adopted, but yet effective, accounting standards would have
a material effect on the accompanying financial statements.





Recent
Developments





On
January 21, 2009, Ms. Yan Li, the spouse of Mr. Song Jinan, sold 250,000 shares
of common stock of the Company at a price of $6.60 per share in a private sale
transaction.  In connection with the transaction, the Company agreed
to use its reasonable best efforts to file a registration statement within
30 days of the closing of the transaction to register the resale of the common
stock by such stockholders.  A copy of the Purchase Agreement with
respect to the transaction has been filed with the SEC as an exhibit to the 10-Q
for the the quarterly
period ended December 31, 2008 filed on February 13, 2009.




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 People’s Republic of China. 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 transaction
gains or losses, which are included in our earnings.
 
 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
Securities Exchange Act of 1934) 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 Securities Exchange Act of 1934 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.




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 1 of our Annual Report on Form 10-KSB for the year
ended March 31, 2008, which could materially impact our business, financial
condition or future results. The risks described in the Annual Report on Form
10-KSB 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





Please
refer to the Current Report on Form 8-K filed on December 12, 2007.




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES





None.




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





None.




ITEM 5. OTHER INFORMATION





None.


26




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 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, 20066 (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).10.5
                    
                    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).14.1
                    
                    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).16.1
                    
                    Letter
      dated April 13, 2006 from Malone & Bailey PC to the United States
      Securities and Exchange Commission (incorporated by reference to Exhibit
      16.1 to China-Biotics, Inc.’s Form 8-K filed on May 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).




27




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




* * * *
*


28




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: March
      20, 2009
            Song
      JinanChief Executive
      Officer




29