**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended June 30, 2008**




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


**EXCHANGE
      ACT**




**For
      the Transition Period from _______ to _________**




**333-110733**


(Commission
      File Number)




**CHINA-BIOTICS,
      INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)





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





**No.
      999 Ningqiao Road**


**Jinqiao
      Export Processing Zone**


**Pudong,
      Shanghai 201206**


**People's
      Republic of China**


**** (Address
      of Principal Executive Offices)





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


(Issuer'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 x No ࿠




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


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


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


Yes ࿠ No x








**As
      of August 14, 2008, 17,080,000 shares of the Issuer's common stock were
      outstanding.**







**TABLE
      OF CONTENTS**





Page**Part
                I - Financial Information**ITEM
                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
            
            24ITEM
                4T.
            
            CONTROLS
                AND PROCEDURES
            
            25**Part
                II - Other Information**ITEM
                1.
            
            LEGAL
                PROCEEDINGS
            
            25ITEM
                2.
            
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            25ITEM
                3.
            
            DEFAULTS
                UPON SENIOR SECURITIES
            
            25ITEM
                4.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            25ITEM
                5.
            
            OTHER
                INFORMATION
            
            25ITEM
                6.
            
            EXHIBITS
            
            26SIGNATURES


2





**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
      expressed in US Dollars)





March
                31, 2008
            
            June
                30, 2008**ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            64,310,448
            
            $
            66,204,703Accounts
                receivable
            
            
            13,214,531
            
            
            10,669,699Other
                  receivables
            
            
            238,835
            
            
            241,083Inventories
            
            
            408,358
            
            
            617,260Prepayment
            
            
            1,806,605
            
            
            1,634,253**Total
                current assets**
            
            $
            79,978,777
            
            $
            79,366,998**Property,
                plant and equipment and land use right**
            
            
            13,812,749
            
            
            22,186,275**Total
                assets**
            
            $
            93,791,526
            
            $
            101,553,273**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            2,786,180
            
            $
            3,287,603Tax
                payables
            
            
            22,317,982
            
            
            23,321,183Other
                payables and accruals
            
            
            1,792,156
            
            
            2,012,365**Total
                current liabilities**
            
            $
            26,896,318
            
            $
            28,621,151**Non-current
                liabilities**Convertible
                note, with embedded
                derivatives of $6,991,000,net of discount of $7,963,557 as of June
                30, 2008
            
            $
            22,197,635
            
            $
            24,027,443Interest
                payable
            
            
            302,306
            
            
            446,763**Tot****al
                non-current liabilities**
            
            $
            22,499,941
            
            $
            24,474,206**Commitments and
                contingencies****Stockhold****ers'
                equity:**Common
                stock (par
                value of $0.0001, 100,000,000 shares authorized, 41,461,004 shares
                issued
                and outstanding as of June 30, 2008)
            
            $
            4,146
            
            $
            4,146Additional
                paid-in capital
            
            
            7,863,031
            
            
            7,863,031Retained
                earnings
            
            
            29,827,144
            
            
            33,063,894Treasury
                  stockat
                  cost (24,381,004 shares)
            
            
            (2,438
            )
            
            (2,438
            )Accumulated
                other comprehensive income
            
            
            3,677,590
            
            
            4,503,489Capital
                and statutory reserves
            
            
            3,025,794
            
            
            3,025,794**Total
                stockholders' equity**
            
            $
            44,395,267
            
            $
            48,457,916**Total
                liabilities and stockholders' equity**
            
            $
            93,791,526
            
            $
            101,553,273




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




3





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
      expressed in US Dollars)





Three
                months ended June 30,Note
            
            2007
            
            2008**Net
                sales**
            
            
            
            
            $
            9,515,333
            
            $
            11,370,657Cost
                of sales
            
            
            
            
            
            (2,650,972
            )
            
            (3,258,669
            )**Gross
                profit**
            
            
            
            
            $
            6,864,361
            
            $
            8,111,988Operating
                expenses:Selling
                expenses
            
            
            
            
            $
            (1,316,344
            )
            $
            (2,369,859
            )General
                and administrative expenses
            
            
            
            
            
            (809,564
            )
            
            (1,426,797
            )Total
                operating expenses
            
            
            
            
            $
            (2,125,908
            )
            $
            (3,796,656
            )**Income
                from operations**
            
            
            
            
            $
            4,738,453
            
            $
            4,315,332Other
                income and expenses:Changes
                in the fair value of embedded derivatives
            
            
            
            
            $
            -
            
            $
            (1,239,000
            )Other
                income
            
            
            
            
            
            71,660
            
            
            1,538,889Other
                expenses
            
            
            
            
            
            (6,924
            )
            
            -Total
                other income (expenses)
            
            
            
            
            $
            64,736
            
            $
            299,889**Income
                before taxes**
            
            
            
            
            $
            4,803,189
            
            $
            4,615,221Provision
                for income taxes
            
            
            
            
            
            (1,262,956
            )
            
            (1,378,471
            )**Net
                income**
            
            
            
            
            $
            3,540,233
            
            $
            3,236,750**Earnings
                per share:**Basic
            
            
            
            
            $
            0.21
            
            $
            0.19Diluted
            
            
            
            
            $
            0.21
            
            $
            0.23**Weighted
                average shares outstanding**Basic
            
            
            
            
            
            17,080,000
            
            
            17,080,000Diluted
            
            
            
            
            
            17,080,000
            
            
            19,163,333




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
                    StockShares
                
                Par
                    value $0.0001
                
                Additional
                  Paid-in
                    Capital
                
                Retained
                  Earnings
                
                Treasury
                  Stock
                
                Accumulated
                  Comprehensive
                    Income
                
                Capital
                    &
                  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
                
                
                
                
                
                
                
                
                
                
                
                3,236,750
                
                
                
                
                
                
                
                
                
                
                
                3,236,750Other
                    comprehensive income:Foreign
                    currency translation adjustments, net of taxes of $-0-
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                825,899
                
                
                
                
                
                825,899Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,062,649Balance-
                    June 30, 2008
                
                
                41,461,004
                
                $
                4,146
                
                $
                7,863,031
                
                $
                33,063,894
                
                $
                (2,438
                )
                $
                4,503,489
                
                $
                3,025,794
                
                $
                48,457,916


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





5




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
      expressed in US Dollars)




Three
                months ended
              June
                30,2007
            
            2008**CASH
                FLOW FROM OPERATING ACTIVITIES**Net
                income
            
            $
            3,540,233
            
            $
            3,236,750Adjustment
                for:Changes
                in the fair value of embedded
                derivatives
            
            
            -
            
            
            1,239,000Depreciation
            
            
            142,310
            
            
            298,691(Increase)/Decrease
                in accounts receivable
            
            
            2,786,747
            
            
            2,793,079(Increase)/Decrease
                in inventories
            
            
            6,318
            
            
            (197,308
            )(Increase)/Decrease
                in prepayments
            
            
            (57,156
            )
            
            211,580Increase/(Decrease)
                in accounts payable
            
            
            590,026
            
            
            434,924Increase/(Decrease)
                in income tax, surcharge tax and dividends withholding tax
            
            
            622,305
            
            
            588,686Increase/(Decrease)
                in other payables and accruals, and value added tax
                payable
            
            
            130,688
            
            
            (136,326
            )Increase/(Decrease)
                in interest payables
            
            
            -
            
            
            (121,402
            )**NET
                CASH PROVIDED BY OPERATING ACTIVITIES**
            
            $
            7,761,471
            
            $
            8,347,674**CASH
                FLOWS USED IN INVESTING ACTIVITIES**Purchases
                of fixed assets
            
            
            (533,080
            )
            
            (7,193,855
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Effect
                of exchange rate changes on cash
            
            $
            474,448
            
            $
            740,436**NET
                INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
            
            $
            7,702,839
            
            $
            1,894,255**CASH
                AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                PERIOD**
            
            
            26,992,025
            
            
            64,310,448**CASH
                AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
            
            $
            34,694,864
            
            $
            66,204,703




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





6




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)




1.
                    BASIS
                          OF PRESENTATION AND PRINCIPLES OF
                          CONSOLIDATION


The
      accompanying unaudited interim financial statements of China-Biotics, Inc.
      (the
“Company” or “we”) have been prepared in accordance with accounting principles
      generally accepted in the United States of America and the rules of the
      Securities and Exchange Commission (“SEC”), and should be read in conjunction
      with the audited financial statements and notes thereto contained in our Annual
      Report filed with the SEC on Form 10-KSB. In the opinion of management, all
      adjustments, consisting of normal recurring adjustments, necessary for a fair
      presentation of financial position and the results of operations for the interim
      periods presented have been reflected herein. The results of operations for
      the
      interim periods are not necessarily indicative of the results to be expected
      for
      the full year. Notes to the financial statements which would substantially
      duplicate the disclosure contained in the audited financial statements for
      fiscal year ended March 31, 2008 as reported in the Form 10-KSB have been
      omitted.





As
      disclosed in Note 1 to our audited financial statements for fiscal year ended
      March 31, 2008, the share exchange between us and the shareholders of Sinosmart
      Group Inc. (“SGI”) had been accounted for in accordance with the accounting and
      financial reporting interpretations and guidance set out by the Securities
      and
      Exchange Commission (“SEC Interpretations and Guidance”) and accounting
      principles generally accepted in the United States of America (“US GAAP”). The
      share exchange was treated as a recapitalization of SGI, accompanied by a
      reverse acquisition of our company with SGI as the accounting acquirer. The
      unaudited interim financial statements presented herewith have been prepared
      on
      the following basis:





(a)
            The
                Unaudited Condensed Consolidated Balance Sheet as of June 30, 2008
                includes the accounts of SGI, Shining, Growing State Limited (“GSL”),
                Growing Bioengineering (Shanghai) Co. Limited (“GBS”) and our
                company.




(b)
            The
                Unaudited Condensed Consolidated Statements of Operations for the
                three
                months ended June 30, 2008 and 2007 reflect the result of operations
                of
                SGI, Shining, GSL, GBS and our company. The earnings per share as
                shown on
                the Unaudited Condensed Consolidated Statements of Operations were
                computed based on the weighted average number of shares of our outstanding
                common stock after giving effect to the recapitalization and reverse
                acquisition accounting treatment as set out in Note 1 to our audited
                financial statements for fiscal year ended March 31,
                2008.(c)
            The
                Unaudited Condensed Consolidated Statement of Changes in Stockholders'
                Equity and the Unaudited Condensed Consolidated Statements of Cash
                Flow
                for the three months ended June 30, 2008 include the accounts of
                SGI,
                Shining, GSL, GBS and our company.(d)
            The
                Company adopted the provision of Financial Accounting Standards Board
                (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income
                Taxes - An Interpretation of FASB Statement No. 109”, (“FIN48”) as of
                the first day of the first quarter of fiscal 2008. The Company has
                not
                otherwise materially changed its significant accounting
                policies.




7





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)


1.
                  BASIS
                        OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
                        (continued)


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





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




2.
                    EARNINGS
                            PER SHARE


Basic
      earnings per share is computed by dividing the net income for each reporting
      period by the weighted average number of outstanding common stock for the same
      reporting period. The 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 June 30,****2007**
            
            **2008****Earnings
                per share - Basic**Income
                for the period
            
            $
            3,540,233
            
            $
            3,236,750Basic
                average common stock outstanding
            
            
            17,080,000
            
            
            17,080,000Net
                earnings per share
            
            $
            0.21
            
            $
            0.19**Earnings
                per share - Diluted**Income
                for the period
            
            $
            3,540,233
            
            $
            3,236,750Change
                in fair value of embedded derivatives
            
            
            -
            
            
            1,239,000$
            3,540,233
            
            $
            4,475,750Diluted
                average common stock
            
            
            17,080,000
            
            
            19,163,333Net
                earnings per share
            
            $
            0.21
            
            $
            0.23




8




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)




3.
                      RISKS,
                                UNCERTAINTIES, AND
                                CONCENTRATIONS


(a)  
      Nature of Operations





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





(b)  
      Concentration of Credit Risk





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





As
      of June 30, 2008 the Group had cash deposits of $66 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 ended June 30, 2007 and 2008, all of the Group's sales arose
      in
      the PRC. In addition, all accounts receivable as at June 30, 2008 also arose
      in
      the PRC.




(c)  
      Concentration of Customers





For
      the
      period ended June 30, 2008, there is a customer that accounted for 15.3% of
      our
      sales revenue. For the period ended June 30, 2007, no single customer accounted
      for more than 10% 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:




March
                31,
              2008
            
            June
                30,
              2008Trade
                receivables
            
            $
            13,214,531
            
            $
            10,669,699Less
                : Allowances for doubtful debt
            
            
            -
            
            
            -$
            13,214,531
            
            $
            10,669,699




5.
                          INVENTORIES


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




March
                31,
              2008
            
            June
                30,
              2008Raw
                materials
            
            $
            254,648
            
            $
            243,310Work-in-progress
            
            
            9,943
            
            
            48,893Finished
                goods
            
            
            143,767
            
            
            325,057$
            408,358
            
            $
            617,260





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 rightas of the balance sheet date as
      presented in these financial statements are summarized as follows:




March
                31,
              2008
            
            June
                30,
              2008Land
                use right
            
            $
            1,777,860
            
            $
            1,816,455Plant
                and machinery
            
            
            6,493,190
            
            
            7,363,649Office
                equipment
            
            
            3,293,598
            
            
            3,365,098Motor
                vehicles
            
            
            109,186
            
            
            201,284Leasehold
                improvements
            
            
            1,817,623
            
            
            2,126,48513,491,457
            
            
            14,872,971Less:
                Accumulated depreciation
            
            $
            (4,585,976
            )
            
            (4,988,352
            )8,905,481
            
            
            9,884,619Construction
                in progress
            
            $
            4,907,268
            
            $
            12,301,656$
            13,812,749
            
            $
            22,186,275




7.
                          TAX
                                        PAYABLES


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




March
                  31,
                2008
              
              June
                  30,
                2008Value
                  added tax and other taxes
              
              $
              5,436,331
              
              $
              5,476,227Income
                  tax
              
              
              3,714,102
              
              
              4,059,719Surcharge
                  tax
              
              
              9,323,273
              
              
              9,857,507Dividends
                  withholding tax
              
              
              3,844,276
              
              
              3,927,73022,317,982
              
              $
              23,321,183




11





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)






8.
                          TREASURYSTOCK
 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
              June
                30,2007
            
            2008Loss
                in the United States before income taxes
            
            $
            -
            
            $
            (1,271,879
            )(Loss)/income
                in the British Virgin Islands before income taxes
            
            
            (230,194
            )
            
            411,931Income
                in the PRC before income taxes
            
            
            5,033,383
            
            
            5,475,169$
            4,803,189
            
            $
            4,615,221




The
      Company, which is incorporated in the United States and subject to the U.S.
      tax
      law, is subject to a statutory tax rate is 34%.


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
              June
                30,2007
            
            2008Current
            
            $
            1,262,956
            
            $
            1,378,471Deferred
            
            
            -
            
            
            -$
            1,262,956
            
            $
            1,378,471




As
      of June 30, 2007 and 2008, the Group had no deferred tax assets
      and liabilities.





The
      Group
      has its principal operations in the People’s Republic of China (“PRC”) in the
      Shanghai Jinqiao special economic zone and hence enjoys a preferential income
      tax rate of 15%. Pursuant to the new People’s Republic of China (“PRC”)
      Corporate Income Tax Law passed by the Tenth National People’s Congress on 16
      March 2007, the new Corporate Income Tax rates for almost all enterprises
      established in the PRC shall be subject to a unified rate of 25% over a five
      year transition period and will be effective from 1 January 2008. The State
      Council of the PRC issued an implementation guideline on 26 December 2007 and
      the Ministry of Finance and the State Administration of Taxation of the PRC
      further issued another implementation guideline on 20 February 2008
      (collectively, “Implementation Guidances”) which set out the details of how the
      existing preferential income tax rate will be adjusted to the standard rate
      of
      25%. According to the Implementation Guidances, foreign investment manufacturing
      enterprises which have not fully utilized their tax holiday and concession
      will
      be allowed to continue to receive the benefits of the full exemption and
      concession in the transitional income tax rate during the five-year transition
      period. The new rates were considered to measure the Group’s deferred tax assets
      and deferred tax liabilities as at 31 December 2007. The enactment of the new
      PRC Corporate Income Tax Law is not expected to have any financial effect on
      the
      amounts accrued in the balance sheet in respect of current tax
      payable.






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




Three
                months ended
              June
                30,2007
            
            2008Computed
                tax at the local PRC statutory rate (2007:33%, 2008:25%)
            
            $
            1,585,052
            
            $
            1,153,805Non-deductible
                items
            
            
            75,964
            
            
            432,439Non-taxable
                items
            
            
            -
            
            
            (102,983
            )Effect
                of different tax rate in other jurisdiction
            
            
            -
            
            
            (114,469
            )Valuation
                allowance
            
            
            9,014
            
            
            (200,951
            )Tax
                concession
            
            
            (910,925
            )
            
            (326,995
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            503,851
            
            
            537,625Total
                provision for income at effective rate
            
            $
            1,262,956
            
            $
            1,378,471




As
        at
        June 30, 2008, one of the Company’s PRC subsidiaries has incurred tax losses
        which can be carried forward to a maximum of 5 years of approximately
        US$1,001,698 (2007: US$143,863).
 
 The
        valuation allowance was primarily the result of the tax losses carry forwards
        that management believes may not be fully utilizable because of the uncertainty
        regarding the tax deductibility of expenses incurred by certain subsidiaries
        of
        the Company. There are no other material temporary
        differences.


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, the Group may
      be
      subject to potential penalties for the late payment of taxes calculated on
      the
      basis of 0.5 times to 5 times amount of taxes, which amounted from $4.9 million
      to $49 million as of June 30, 2007 and 2008. No provision for the potential
      tax
      penalties has been made in the Group’s financial statements as management of the
      Group believes that
      the
      probability of penalties being assessed is low because the Company’s
      PRC subsidiaryhas timely paid all taxes due.


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 shops under
      non-cancelable operating agreements that expire at various dates through 2007
      and 2008. As of the balance sheet dates as presented in these financial
      statements, the amount of future minimum lease payment under the above-mentioned
      operating leases were as follows:




March
                31,
            
            June
                30,2008
            
            2008Payable
                withinthe
                next twelve months
            
            $
            556,907
            
            $
            554,086the
                next 13th to 24th months
            
            
            111,670
            
            
            58,514the
                next 25th to 36th months
            
            
            -
            
            
            -the
                next 37th to 48th months
            
            
            -
            
            
            -the
                next 49th to 60th months
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -$
            668,577
            
            $
            612,600




(b)
        Land lease





On
      March 21, 2006, the Company's wholly-owned subsidiary, GSL, entered into an
      agreement with Shanghai Qingpu Industrial Park District Development (Group)
      Company Limited for the lease of 73,157 square meters of land in the Shanghai
      Qingpu Industrial Park District, on which the Company will construct a plant
      consisting bulk manufacturing facilities that will have an initial capacity
      of
      150 tons per year of bulk product with the room for expansion to 300 tons per
      year. This
      agreement contemplates a land deposit of $210,083 and was paid on April 5,
      2006.
      This deposit is to be refunded when both the land use right is fully paid
      and the approval documents are released by the Shanghai Qingpu local
      government authorities. There are no future lease payments under this land
      lease.





(c) Capital
          commitments





During
      the year ended of June 30, 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
      $9,634,101 which was contracted, but not provided for as of June 30, 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
        June 30, 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 June 30, 2008:
  **Fair
                  Value Measurements as at June 30, 2008****Balance
                    at****June
                  30, 2008**
              
              **Quoted
                  Prices in Active Markets (Level 1)**
              
              **Significant
                  Other Observable Inputs (Level 2)**
              
              **Significant
                  Unobservable Inputs (Level 3)**Cash
                  equivalents (1)
              
              $
              66,204,703
              
              $
              66,204,703
              
              $
              -
              
              $
              -Derivative
                  liability - conversion rights (2)
              
              $
              6,991,000
              
              $
              -
              
              $
              -
              
              $
              6,991,000
 
 (1)
              Included
                  in cash and cash equivalents on the accompanying condensed consolidated
                  balance sheet.
 
 (2)
              Represents
                  the conversion rights included in the Company’s 2007 Notes. Included in
                  non-current liabilities on the accompanying condensed consolidated
                  balance
                  sheet.
 
 15
 CHINA-BIOTICS,
          INC. AND SUBSIDIARIES
 NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amount
          expressed in US Dollars)
  The
        following table presents a reconciliation of the assets and liabilities measured
        at fair value on a recurring basis using significant unobservable inputs
        (Level
        3) from January 1, 2008 to June 30, 2008:
 
 **Derivative
                  Liability - Conversion Rights**Balance
                  at January 1, 2008
              
              $
              9,118,000Adjustment
                  to fair value included in earnings (1)
              
              
              (2,127,000
              )Balance
                  at June 30, 2008
              
              $
              6,991,000
 
 (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 six months ended June 30, 2008, the net adjustment
                  to
                  fair value resulted in a gain of $2.13 million and is included
                  in “Changes
                  in the fair value of embedded derivatives” on the accompanying condensed
                  consolidated statement of
                  operations.
 
 
 The
        estimated fair value of the embedded derivatives as of March 31, 2008 and
        June
        30, 2008 was $5,752,000 and $6,991,000 respectively. The change in the fair
        value of the embedded derivatives amounted to $1,239,000 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**
              
              **June
                  30, 2008**Risk-free
                  rate of return
              
              
              1.70
              %
              
              2.92
              %Time
                  to expiration
              
              
              2.66
              years
              
              2.45
              yearsVolatility
                  rate
              
              
              65
              %
              
              50
              %Dividend
                  yield
              
              
              -
              
              
              -
 
 At
        the
        period ended June 30, 2008, the Note interest amounted to $2,157,370 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
      ended June 30, 2008, over 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). In this regard,
      we intend to open over 300 outlets by the end of fiscal year 2009. As
      at
      June 30, 2008, we have opened 83 outlets in Shanghai and 8 other cities in
      China
      (as of June 30, 2007, we had 14 retail outlets).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.




We
      expect the new plant will commence production in the fourth quarter of calendar
      year 2008 and start to make contribution to our earnings in fiscal year 2009.
      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 73,157 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.




In
        preparation for the new plant commencing operations later this year, we have
        been in discussions with a large number of potential customers for our food
        additive products. As at June 30, 2008, we have already signed up 4 customers
        for this business, including Bright Dairy, one of the largest dairy product
        suppliers in China. During the last quarter, we have accelerated the pace
        of
        customer acquisition efforts. We have created formulations for testing by
        many
        potential customers. The need to create a large number of new products for
        potential customers is pushing the capacity of our current production facility.
        In this regard, 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.


17







**Results
      of Operations**





**Quarter
      Ended June 30, 2007 Compared with the Quarter Ended June 30,
      2008**


Our
        net
        income was $3.24 million in the quarter ended June 30, 2008. This
        included $1.24 million deficit arising from the revaluation of the conversion
        feature embedded in the convertible notes issued in December 2007 as required
        by
        FAS133. Excluding this revaluation deficit, our net income was $4.48 million,
        which was 26.55% above our net income of $3.54 million for the quarter ended
        June 30, 2007. The
        increase of net income before the revaluation deficit, resulted from a
        combination of volume and price increases. Shining Essence continued to be
        our
        best selling product, accounting for 40% of our sales revenue in the quarter
        ended June 30, 2008 (55% in the quarter ended June 30, 2007).




Our
      results for the quarters ended June 30, 2007 and 2008 are summarized
      below:





Three
                  months ended June 30, 2007
              
              Three
                  months ended June 30, 2008Amount
              
              %
                  of Net sales
              
              Amount
              
              %
                  of Net sales**Net
                  sales**
              
              $
              9,515,333
              
              
              100.00
              %
              $
              11,370,657
              
              
              100.00
              %Cost
                  of sales
              
              
              (2,650,972
              )
              
              -27.86
              %
              
              (3,258,669
              )
              
              -28.66
              %**Gross
                  profit**
              
              $
              6,864,361
              
              
              72.14
              %
              $
              8,111,988
              
              
              71.34
              %Operating
                  expenses:Selling
                  expenses
              
              $
              (1,316,344
              )
              
              -13.83
              %
              $
              (2,369,859
              )
              
              -20.84
              %General
                  and administrative expenses
              
              
              (809,564
              )
              
              -8.51
              %
              
              (1,426,797
              )
              
              -12.55
              %Total
                  operating expenses
              
              $
              (2,125,908
              )
              
              -22.34
              %
              $
              (3,796,656
              )
              
              -33.39
              %**Income
                  from operations**
              
              $
              4,738,453
              
              
              49.80
              %
              $
              4,315,332
              
              
              37.95
              %Other
                  income and expenses:Changes
                  in the fair value of embedded derivatives
              
              $
              **-**
              
              
              0.00
              %
              $
              (1,239,000
              )
              
              -10.90
              %Other
                  income
              
              
              71,660
              
              
              0.75
              %
              
              1,538,889
              
              
              13.53
              %Other
                  expenses
              
              
              (6,924
              )
              
              -0.07
              %
              
              -
              
              
              0.00
              %Total
                  other income (expenses)
              
              $
              64,736
              
              
              0.68
              %
              $
              299,889
              
              
              2.64
              %**Income
                  before taxes**
              
              $
              4,803,189
              
              
              50.48
              %
              $
              4,615,221
              
              
              40.59
              %Provision
                  for income taxes
              
              
              (1,262,956
              )
              
              -13.27
              %
              
              (1,378,471
              )
              
              -12.12
              %**Net
                  income**
              
              $
              3,540,233
              
              
              37.21
              %
              $
              3,236,750
              
              
              28.47
              %


**Reconciliation
      of Non-GAAP Net Income**




Three
                  months ended June 30,2007
              
              2008Net
                  Income
              
              
              3,540,233
              
              
              4,475,750AdjustmentsNon-cash
                  deficit arising from change in the fair value of embedded
                  derivatives
              
              
              -
              
              
              (1,239,000
              )Amount
                  per consolidated statement of operations
              
              
              3,540,233
              
              
              3,236,750
 18





*Net
      sales*





Net
      sales in our financial statements are stated at invoiced value less sales
      discount and sales tax. Our net sales for the quarters ended June 30, 2007
      and
      2008 comprised of the following:




Three
                months ended June 30,2007
            
            2008Invoiced
                value on sales
            
            
            9,576,723
            
            
            11,810,902Less:
                sales discount
            
            
            -
            
            
            (365,489
            )Less
                : sales tax
            
            
            (61,390
            )
            
            (74,756
            )9,515,333
            
            
            11,370,657





Net
      sales of $11,370,657 for the quarter ended June 30, 2008 were 19.5% above the
      net sales of $9,515,333 for the quarter ended June 30, 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 invoiced value on sales for
      the
      quarters ended June 30, 2007 and 2008 are summarized below:




Three
                months ended June 30,2007
            
            2008Shining
                Essence Capsules
            
            
            54.53
            %
            
            40.45
            %Shining
                Signal Capsules
            
            
            14.35
            %
            
            10.34
            %Shining
                Golden Shield Capsules
            
            
            13.99
            %
            
            12.19
            %Shining
                Energy Capsules
            
            
            12.11
            %
            
            11.56
            %Shining
                Essence Stomach Protection Capsules
            
            
            -
            %
            
            3.82
            %Shining
                Probiotics Protein Powder
            
            
            -
            %
            
            5.86
            %Other
                products
            
            
            5.03
            %
            
            6.95
            %100.00
            %
            
            91.17
            %Bulk
                additives
            
            
            -
            %
            
            8.83
            %100.00
            %
            
            100.00
            %





Unit
      volume and unit prices comparatives (on the invoiced value of sales) for the
      quarters ended June 30, 2007 and 2008 are summarized below:




Percentages
                increase (decrease) from the prior yearThree
                months ended June 30,2007
            
            
            2008Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            2
            %
            
            -1
            %
            
            1
            %
            
            -22
            %
            
            6
            %
            
            -17
            %Shining
                Signal Capsules
            
            
            -14
            %
            
            -4
            %
            
            -17
            %
            
            -27
            %
            
            9
            %
            
            -20
            %Shining
                Golden Shield Capsules
            
            
            65
            %
            
            6
            %
            
            75
            %
            
            -15
            %
            
            18
            %
            
            0
            %Shining
                Energy Capsules
            
            
            52
            %
            
            6
            %
            
            61
            %
            
            -13
            %
            
            23
            %
            
            7
            %Shining
                Essence Stomach Protection Capsules
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %Shining
                Probiotics Protein Powder
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %Other
                products
            
            
            855
            %
            
            57
            %
            
            1,399
            %
            
            214
            %
            
            39
            %
            
            336
            %





Bulk
                additives
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %





19




*Cost
      of sales*





Cost
      of sales for the quarter ended June 30, 2008 was $3,258,669 compared with
      $2,650,972 for the quarter ended June 30, 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 quarters ended June 30, 2007 and
      2008
      are summarized below:




Percentages
                increase (decrease) from the prior yearThree
                months ended June 30,2007
            
            
            2008Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            2
            %
            
            -8
            %
            
            -6
            %
            
            -22
            %
            
            16
            %
            
            -10
            %Shining
                Signal Capsules
            
            
            -14
            %
            
            -6
            %
            
            -19
            %
            
            -27
            %
            
            5
            %
            
            -23
            %Shining
                Golden Shield Capsules
            
            
            65
            %
            
            -5
            %
            
            57
            %
            
            -15
            %
            
            11
            %
            
            -6
            %Shining
                Energy Capsules
            
            
            52
            %
            
            11
            %
            
            69
            %
            
            -13
            %
            
            34
            %
            
            16
            %Shining
                Essence Stomach Protection Capsules
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %Shining
                Probiotics Protein Powder
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %Other
                products
            
            
            855
            %
            
            241
            
            
            3,156
            %
            
            214
            %
            
            -95
            %
            
            -84
            %




Bulk
                additives
            
            
            N/A
            %
            
            N/A
            %
            
            N/A
            %
            
            100
            %
            
            100
            %
            
            100
            %


20




*Gross
      profit*





Gross
      profit for the quarter ended June 30, 2008 was $8,111,988 compared with
      $6,864,361 for the quarter ended June 30, 2007. The increase in gross profit
      was
      primarily due to an
      increase in overall sales volume and increases in sales price of selected
      products.




The
      average gross profit percentage for all of our products for the quarters ended
      June 30, 2007 and 2008 is summarized below:





Three
                months ended June 30,2007
            
            2008Average
                for all products
            
            
            72.14
            %
            
            71.34
            %




Gross
        profit margin increased from 66.6% in the quarter ended March 31, 2008 to
        71.3%
        this quarter as a result of increases in sales price of selected
        products.
 21




*Selling
      expenses*





Selling
      expenses were $2,369,859 or 20.84% of net sales for the quarter ended June
      30,
      2008 compared with $1,316,344 or 13.83% of net sales for the quarter ended
      June
      30, 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 June 30, 2008, we had a total of 83 retail outlets in operation
      compared with 14 outlets as of June 30, 2007.





*General
      and administrative expenses*





General
      and administrative expenses were $1,426,797 or 12.55% of net sales for the
      quarter ended June 30, 2008 compared with 809,564 or 8.51% of net sales for
      the
      quarter ended June 30, 2007. The increase of $617,233 was primarily due to
      the
      additional research cost of $401,607 related
      to the development and launching of new products, and staff and administrative
      costs incurred in connection with the construction of the new plant. As
      of
      June 30, 2008, we had a total of 339 employees, compared with 208 as of June
      30,
      2007.


*Other
        Income*
 
 Other
        income of $1.54 million for the quarter ended June 30, 2008, comprised foreign
        currency gains arising from the conversion of US dollars and Hong Kong dollars
        to Renminbi.
  *Provision
      for income taxes*





Provision
      for income taxes was $1.26 million and $1.38 million for the quarters
      ended June 30, 2007 and 2008 ,
      respectively. Excluding the $1.24 million deficit on revaluation of the
      convertible note, income before taxes was $5.85 million for the first quarter
      of
      fiscal year 2009 compared with $4.8 million for 2008. The increase in income
      tax
      payable is attributable to an increase in operating profit.




Income
        tax payable increased despite a decrease in operating profit because of
        pre-operating expenses incurred in connection with the construction of the
        new
        plant. The new plant is held by a PRC subsidiary set up for the purpose and
        the
        pre-operating expenses have given rise to tax losses in that subsidiary.
        These
        losses will offset income generated in that subsidiary when the new plant
        commences operations.




*Segment
      reporting*





We
      have adopted the “products” approach for segment reporting. For the quarters
      ended June 30, 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 $66.20 million and working capital of $50.75 million as of
      June 30, 2008, and cash of $34.69 million and working capital
      of $24.77 million as of June 30, 2007. Cash generated from operations was
      $8.35 million in the quarter ended June 30, 2008 and $7.76 million in
      the quarter ended June 30, 2007. The cash generated from operations of $8.35
      million was higher than the net income of $3.24 million due to the non-cash
      deficit of revaluation of convertible notes of $1.24 million and lower
      working capital needs resulting from better working capital
      management.





We
      had capital expenditures totaling $7.2 million in the quarter ended June 30,
      2008, mainly in connection with the construction of the new plant. We spent
      $0.5
      million on fixed assets in the quarter ended June 30, 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 fourth quarter
      of
      calendar year 2008 and the balance by the end of second quarter of calendar
      year
      2009. Subsequent phases of this project will only commence when demands for
      probiotics have exceeded the production capacity of the Phase 1
      facility.





We
      did not have any changes related to financing activities for the quarters ended
      June 30, 2007 and 2008.




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





**Inflation**


In
          the
          fourth quarter of 2008 fiscal year, there had been 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 in the quarter ended March 31, 2008.
          There
          had also been significant increases in steel costs which led to increases
          in the
          cost of construction of our new plant. These costs appear to have stabilized
          in
          the current quarter.
  22


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.





**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
      $709,919 and $308,312 in the three months ended June 30, 2008 and June 30,
      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 ended June 30, 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
      caste doubt on the ability of our customers to make required payments. The
      balance of our allowance for doubtful account has always been zero. We had
      trade
      receivables totaling $10,669,699 as of June 30, 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-10Q 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 China. Business enterprises established in China
      are
      subject to income taxes and value added taxes under Chinese tax laws and
      regulations unless they have exemptions. We have made tax payments to the
      Chinese tax authorities since 2005. We believe that our operations in China
      were
      exempted from income taxes and value added taxes for all prior years because
      we
      had been recognized by the local government as an advanced technology
      enterprise. However, we have never received a written confirmation from the
      appropriate tax authorities for the tax exemption status of our operations
      in
      China. As a result, there is no way to ascertain the position which may be
      taken
      by the relevant Chinese tax authorities in the future. Accordingly, our
      financial statements contain full provisions for all applicable tax liabilities
      for all prior calendar years. Such provisions for tax liabilities will be
      reversed out of the financial statements at the appropriate point in the
      future.




According
      to Chinese tax regulations, our outstanding tax payable in China for the
      calendar years prior to 2005 may be subject to potential penalties for the
      late
      payment of taxes which is calculated on the basis of 0.5 times to five times
      the
      amount of taxes payable, which amount 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. Following the
      adoption of FIN48, the Group has reserved for the surcharges payable for the
      fiscal year 2008. We consider it is more likely than not that the associated
      penalty will not need to be paid.





23


**Recent
      Accounting Pronouncements**




In
        June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
        Staff Position (“FSP”) No. Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions
        are
        Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that
        unvested share-based payment awards with nonforfeitable rights to dividends
        or
        dividend equivalents are considered participating securities and should be
        included in the calculation of earnings per share pursuant to the two-class
        method. FSP EITF 03-6-1 is effective for financial statements issued for
        periods
        beginning after December 15, 2008 with early adoption prohibited. FSP EITF
        03-6-1 requires that all prior-period earnings per share data be adjusted
        retrospectively to conform with the FSP provisions. The management is currently
        evaluating the impact of FSP EITF 03-6-1 on its consolidated results of
        operations and financial condition.




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 February 1, 2009. Management is currently evaluating the potential impact,
      if
      any, on the Company’s disclosures in its consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160
      amends ARB No. 51 to establish accounting and reporting standards for
      noncontrolling interests in subsidiaries and for the deconsolidation of
      subsidiaries. It clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest that should be reported as equity in the consolidated
      financial statements. The provisions of SFAS No. 160 are effective for fiscal
      years beginning on or after December 15, 2008, and interim periods within those
      fiscal years on a prospective basis except for the presentation and disclosure
      requirements which apply retrospectively. Earlier application of SFAS No. 160
      is
      prohibited. SFAS No. 160 is effective for the Company’s fiscal year that begins
      on November 1, 2009. Management is currently evaluating the potential impact,
      if
      any, on the Company’s consolidated financial statements.




In
      December 2007, the FASB amended SFAS No. 141 (revised 2007), “Business
      Combinations.” SFAS No. 141R, establishes principles and requirements for how an
      acquirer recognizes and measures in its financial statements the identifiable
      assets acquired, the liabilities assumed, and any noncontrolling interest in
      the
      acquiree. SFAS No. 141R applies prospectively to business combinations for
      which
      the acquisition date is on or after the beginning of the first reporting period
      for fiscal years beginning on or after December 15, 2008. Earlier application
      of
      SFAS 141R is prohibited. SFAS No. 141R is effective for the Company’s fiscal
      year that begins on November 1, 2009 and will be applied to future
      acquisitions.




In
      June
      2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
      (“EITF”) in EITF Issue No. 06-11, “Accounting for Income Tax Benefits of
      Dividends on Share-Based Payment Awards.” Under the provisions of EITF 06-11, a
      realized income tax benefit from dividends or dividend equivalents that are
      charged to retained earnings and are paid to employees for equity classified
      nonvested equity shares, nonvested equity share units, and outstanding equity
      share options should be recognized as an increase to additional paid-in capital.
      The amount recognized in additional paid-in capital for the realized income
      tax
      benefit from dividends on those awards should be included in the pool of excess
      tax benefits available to absorb tax deficiencies on share-based payment awards.
      EITF 06-11 should be applied prospectively to the income tax benefits that
      result from dividends on equity-classified employee share-based payment awards
      that are declared in fiscal years beginning after December 15, 2007, and interim
      periods within those fiscal years. EITF 06-11 is effective for the Company’s
      fiscal year that begins on November 1, 2008. Management is currently evaluating
      the potential impact of EITF 06-11, if any, on the Company’s consolidated
      financial statements.




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.




**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





As
      a smaller reporting company, we are not required to provide the information
      required by this Item.





24







**ITEM
      4T.**  **CONTROLS
      AND PROCEDURES**





*Management’s
      Annual Report on Internal Control over Financial Reporting*




The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting (as such term is defined in Rules
      13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control
      over financial reporting is designed to provide reasonable assurance regarding
      the reliability of its financial reporting and the preparation of published
      financial statements in accordance with generally accepted accounting
      principles.




However,
      because of its inherent limitations, internal control over financial reporting
      may not prevent or detect misstatements. Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or the degree
      of compliance with policies may deteriorate.




Management
      conducted its evaluation of the effectiveness of its internal control over
      financial reporting based on the framework in “Internal Control-Integrated
      Framework” issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (“COSO”) as of March 31, 2008.




Based
      on this assessment, the principal executive officer and principal financial
      officer believe that as of March 31, 2008, the Company’s internal control over
      financial reporting was effective based on criteria set forth by COSO in
“Internal Control-Integrated Framework.”




This
      quarterly report does not include an attestation report of the Company’s
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by the Company’s
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit the Company to provide only management’s
      report in this quarterly report.





The
      Company’s personnel did not possess the requisite knowledge in the application
      of derivative accounting in accordance with Financial Accounting Standard
      133-Accounting for Derivative Instruments and Hedging Activities. Management
      concluded that an outside expert is required to conduct the assessment with
      respect to the derivative accounting as at March 31, 2008.





Based
      on this evaluation, management concluded that the Company should engage an
      independent expert in relation to this issue in fiscal year 2009.





*Changes
      in Internal Controls over Financial Reporting*




There
      have been no significant changes in the Company’s internal control over
      financial reporting during the Company’s most recent fiscal quarter that have
      materially affected, or are reasonably likely to affect, the Company’s internal
      control over financial reporting.





**PART
      II - OTHER INFORMATION**





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





None.





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





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.


25




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


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





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





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





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




26




*
      * * * *





**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/
                Raymond Li*Date:
                August 14, 2008
            Raymond
                Li
              Chief
                Financial Officer




27