**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended December 31, 2007**




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


**EXCHANGE
      ACT**




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




**333-110733**


(Commission
      File Number)




**CHINA-BIOTICS,
      INC.**


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





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





**No.
      999 Ningqiao Road**


**Jinqiao
      Export Processing Zone**


**Pudong,
      Shanghai 201206**


**People's
      Republic of China**


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


(Address
      of Principal Executive Offices)


(Issuer's
      Telephone Number, Including Area Code)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to the filing requirements for at least the past 90 days.


x Yes o
      No




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


o Yes  x
      No





As
      of
      December 31, 2007, 17,080,000 shares of the Issuer's common stock were
      outstanding.





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







*Table
        of Contents*




**TABLE
      OF CONTENTS**




Page**Part
                I - Financial Information**ITEM
                1.
            
            FINANCIAL
                STATEMENTS
            
            3ITEM
                2.
            
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS
            
            14ITEM
                3.
            
            CONTROLS
                AND PROCEDURES
            
            25**Part
                II - Other Information**ITEM
                1.
            
            LEGAL
              PROCEEDINGS
            
            26ITEM
                2.
            
            UNREGISTERED
              SALES
              OF EQUITY SECURITIES AND USE OF PROCEEDSITEM
                3.
            
            DEFAULTS
              UPON SENIOR
              SECURITIES
            
            26ITEM
                4.
            
            SUBMISSION
              OF
              MATTERS TO A VOTE OF SECURITY
              HOLDERSITEM
                5.
            
            OTHER
              INFORMATION
            
            26ITEM
                6.
            
            EXHIBITS
            
            26SIGNATURES
            
            27




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,
              
              December
                  31,2007
              
              2007**ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              $
              26,992,025
              
              $
              59,081,727Accounts
                  receivable
              
              
              14,309,818
              
              
              12,590,434Deposit
                  Paid
              
              
              216,236
              
              
              228,925Inventories
              
              
              203,054
              
              
              757,451Prepayment
              
              
              176,094
              
              
              1,840,407**Total
                  current assets**
              
              $
              41,897,227
              
              $
              74,498,944**Plant
                  and equipment, net**
              
              
              2,682,617
              
              
              10,821,963**Total
                  assets**
              
              $
              44,579,844
              
              $
              85,320,907**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              1,523,471
              
              $
              2,454,718Tax
                  payables
              
              
              18,019,721
              
              
              21,179,720Other
                  payables and accruals
              
              
              1,126,645
              
              
              1,254,370**Total
                  current liabilities**
              
              $
              20,669,837
              
              $
              24,888,808**Non-current
                  liabilities**Convertible
                  Note, at fair value
              
              
              -
              
              
              23,175,000**Commitments
                  and contingencies****Stockholders'
                  equity:**Common
                  stock, par value $0.0001, 100,000,000 shares authorized, 17,080,000
                  shares
                  issued and outstanding
              
              
              1,708
              
              
              1,708Additional
                  paid-in capital
              
              
              7,863,031
              
              
              7,863,031Retained
                  earnings
              
              
              12,284,900
              
              
              21,839,015Accumulated
                  other comprehensive income
              
              
              734,574
              
              
              2,702,551Capital
                  and statutory reserves
              
              
              3,025,794
              
              
              3,025,794**Total
                  stockholders' equity**
              
              $
              23,910,007
              
              $
              35,432,099**Total
                  liabilities and stockholders' equity**
              
              $
              44,579,844
              
              $
              85,320,907




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


3
 *Table
          of Contents*




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts
      expressed in US Dollars)


Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2006
              
              2007
              
              2006
              
              2007**Net
                  sales**
              
              $
              8,763,150
              
              $
              11,931,306
              
              $
              22,233,151
              
              $
              29,266,801Cost
                  of sales
              
              
              (2,510,544
              )
              
              (3,183,056
              )
              
              (6,519,647
              )
              
              (8,039,651
              )**Gross
                  profit**
              
              $
              6,252,606
              
              $
              8,748,250
              
              $
              15,713,504
              
              $
              21,227,150Operating
                  expenses:Selling
                  expenses
              
              $
              (1,044,175
              )
              $
              (1,752,637
              )
              $
              (3,266,162
              )
              $
              (4,630,916
              )General
                  and administrative expenses
              
              
              (584,020
              )
              
              (1,258,927
              )
              
              (1,374,744
              )
              
              (3,155,544
              )Total
                  operating expenses
              
              $
              (1,628,195
              )
              $
              (3,011,564
              )
              $
              (4,640,906
              )
              $
              (7,786,460
              )**Income
                  from operations**
              
              $
              4,624,411
              
              $
              5,736,686
              
              $
              11,072,598
              
              $
              13,440,690Other
                  income and expenses:Other
                  income
              
              $
              37,864
              
              $
              118,064
              
              $
              142,242
              
              $
              190,006Other
                  expenses
              
              
              (50,731
              )
              
              (384,212
              )
              
              (89,476
              )
              
              (404,147
              )Total
                  other income (expenses)
              
              $
              (12,867
              )
              $
              (266,148
              )
              $
              52,766
              
              $
              (214,141
              )**Income
                  before taxes**
              
              $
              4,611,544
              
              $
              5,470,538
              
              $
              11,125,364
              
              $
              13,226,549Provision
                  for income taxes
              
              
              (1,009,310
              )
              
              (1,426,789
              )
              
              (3,066,112
              )
              
              (3,672,434
              )**Net
                  income**
              
              $
              3,602,234
              
              $
              4,043,749
              
              $
              8,059,252
              
              $
              9,554,115**Earnings
                  per share:**Basic
              
              $
              0.21
              
              $
              0.24
              
              $
              0.47
              
              $
              0.56Diluted
              
              $
              0.21
              
              $
              0.23
              
              $
              0.47
              
              $
              0.55**Weighted
                  average shares outstanding**Basic
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000
              
              
              17,080,000Diluted
              
              
              17,080,000
              
              
              17,555,543
              
              
              17,080,000
              
              
              17,239,090





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




4
 *Table
          of Contents*





CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(Amounts
      expressed in US Dollars)




Common
                  Stock
              
              Additional
                  Paid-in
              
              Retained
              
              Accumulated
                  Other Comprehensive
              
              Capital
                  & StatutoryShares
              
              Amount
              
              Capital
              
              Earnings
              
              Income
              
              Reserves
              
              TotalBalance-
                  March 31, 2007 (audited)
              
              
              17,080,000
              
              $
              1,708
              
              $
              7,863,031
              
              $
              12,284,900
              
              $
              734,574
              
              $
              3,025,794
              
              $
              23,910,007Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              9,554,115
              
              
              -
              
              
              -
              
              
              9,554,115Other
                  comprehensive income:Foreign
                  currency translation adjustments, net of taxes of $-0-
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,967,977
              
              
              -
              
              
              1,967,977Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,522,092Balance-
                  December 31, 2007
              
              
              17,080,000
              
              $
              1,708
              
              $
              7,863,031
              
              $
              21,839,015
              
              $
              2,702,551
              
              $
              3,025,794
              
              $
              35,432,099




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




5
 *Table
          of Contents*




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
      expressed in US Dollars)


Nine
                  months ended December 31,2006
              
              2007**CASH
                  FLOW FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              8,059,252
              
              $
              9,554,115Adjustment
                  for:Depreciation
              
              
              354,768
              
              
              625,357Gain
                  on disposal of plant and equipment
              
              
              (14,793
              )
              
              -(Increase)/Decrease
                  in restricted cash
              
              
              131,131
              
              
              -(Increase)/Decrease
                  in accounts receivable
              
              
              (3,392,961
              )
              
              2,360,417(Increase)/Decrease
                  in other receivables
              
              
              2,732
              
              
              -(Increase)/Decrease
                  in inventories
              
              
              (67,922
              )
              
              (526,663
              )(Increase)/Decrease
                  in prepayments
              
              
              (349,604
              )
              
              (1,596,989
              )Increase/(Decrease)
                  in accounts payable
              
              
              (89,781
              )
              
              812,003Increase/(Decrease)
                  in income tax, surcharge tax and dividends withholding tax
              
              
              2,056,802
              
              
              1,754,188Increase/(Decrease)
                  in other payables and accruals, and value added tax
                  payable
              
              
              (798,894
              )
              
              329,998**NET
                  CASH PROVIDED BY OPERATING ACTIVITIES**
              
              $
              5,890,730
              
              $
              13,312,426**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Sales
                  proceeds from disposal of plant and equipment
              
              
              14,793
              
              
              -Additions
                  of fixed assets
              
              
              (1,327,488
              )
              
              (8,398,701
              )**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              $
              (1,312,695
              )
              $
              (8,398,701
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Issue
                  of convertible notes
              
              
              -
              
              
              25,000,000**NET
                  CASH PROVIDED BY FINANCING ACTIVITIES**
              
              $
              -
              
              $
              25,000,000Effect
                  of exchange rate changes on cash
              
              $
              531,950
              
              $
              2,175,977**NET
                  INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
              
              $
              5,109,985
              
              $
              32,089,702**CASH
                  AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                  PERIOD**
              
              
              19,840,812
              
              
              26,992,025**CASH
                  AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
              
              $
              24,950,797
              
              $
              59,081,727




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




6
 *Table
          of Contents*




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, 2007 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, 2007, the share exchange between us and the shareholders of Sinosmart
      Group Inc. (“SGI”) had been accounted for in accordance with the accounting
      principles generally accepted in the United States of America. 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 December 31,
                2007
                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
                nine
                months ended December 31, 2007 and 2006 reflect the following: (i)
                result
                of operations of SGI, Shining, GSL and our company from April 1,
                2006 to
                December 31, 2006 and (ii) result of operations of SGI, Shining,
                GSL, GBS
                and our company from April 1, 2007 to December 31, 2007. 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,
                2007.(c)
            The
                Unaudited Condensed Consolidated Statement of Changes in Stockholders'
                Equity and the Unaudited Condensed Consolidated Statements of Cash
                Flow
                for the nine months ended December 31, 2007 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.





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





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




7




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





2. WEIGHTED
      AVERAGE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK





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 shares of common stock is determined by relating the portion
      of
      time within a reporting period that a particular number of shares of common
      stock has been outstanding to the total time in that period.





Detailed
      computations are set out as follows:


Date
                  of issue or purchase
                (as-if
                  basis
                for
                  the
                Company's
              
              No.
                  of
                SGI
              
              No.
                  of the
                Company's
                common
                  stock
                (Restated
                  for
                recapitalization
              
              No.
                  of days outstanding
                Three
                  months ended December 31,
              
              Weighted
                  average number of outstanding common stock
                Three
                  months ended December 31,common
                  stock)
              
              ordinary
                  shares
              
              Of
                  SGI)
              
              2006
              
              2007
              
              2006
              
              2007Number
                  of days in reporting period
              
              
              
              
              
              
              
              
              
              
              
              92
              
              
              92Basic
                  average common stock outstanding reverse acquisition
              
              
              
              
              
              
              
              
              17,080,000
              
              
              92
              
              
              92
              
              
              17,080,000
              
              
              17,080,000Convertible
                  note issued in exchange of common stock acquisition
              
              
              12/11/2007
              
              
              
              
              
              475,543
              
              
              -
              
              
              21
              
              
              -
              
              
              475,543Diluted
                  average common stock outstanding
              
              
              
              
              
              
              
              
              17,555,543
              
              
              
              
              
              
              
              
              17,080,000
              
              
              17,555,5430


Date
                  of issue or purchase
                (as-if
                  basis
                for
                  the
                Company's
                common
                  stock)
              
              No.
                  of SGI ordinary shares
              
              No. of the Company's common stock (Restated for recapitalization of
                  SGI)
              
              No.
                  of days outstanding
                Nine
                  months ended December 31,
              
              Weighted
                  average number of outstanding common stock
                Nine
                  months ended December 31,2006
              
              2007
              
              2006
              
              2007Number
                  of days in reporting period
              
              
              
              
              
              
              
              
              
              
              
              275
              
              
              275Basic
                  average common stock outstanding
              
              
              
              
              
              1
              
              
              17,080,000
              )
              
              275
              
              
              275
              
              
              17,080,000
              
              
              17,080,000Convertible
                  note issued in exchange of common stock
              
              
              12/11/2007
              
              
              
              
              
              159,090
              
              
              -
              
              
              21
              
              
              -
              
              
              159,090Diluted
                  average common stock outstanding
              
              
              
              
              
              
              
              
              17,239,090
              
              
              
              
              
              
              
              
              17,080,000
              
              
              17,239,090






8
 *Table
          of Contents*




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





(b) Concentration
      of Credit Risk





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





As
      of
      December 31, 2007, the Group had cash deposits of $59 million placed with
      several banks in the PRC, which includes the Special Administrative Region
      of
      Hong Kong, where there are currently no rules or regulations in place for
      obligatory insurance of bank accounts.





For
      the
      three months and nine months ended December 31, 2006 and 2007, all of the
      Group's sales arose in the PRC. In addition, all accounts receivable as at
      December 31, 2007 also arose in the PRC.





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,
              2007
            
            
            December
                31,
              2007Trade
                receivables
            
            $
            14,309,818
            
            $
            12,590,434Less
                : Allowances for doubtful debt
            
            
            -
            
            
            -$
            14,309,818
            
            $
            12,590,434




9
 *Table
          of Contents*




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)








5. INVENTORIES





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




March
                31,
              2007
            
            
            December
                31,
              2007Raw
                materials
            
            $
            165,337
            
            $
            399,365Work-in-progress
            
            
            12,385
            
            
            57,460Finished
                goods
            
            
            25,332
            
            
            300,626$
            203,054
            
            $
            757,451





6. PLANT
      AND EQUIPMENT





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




March
                31,
              2007
            
            
            December
                31,
              2007Plant
                and machinery
            
            $
            3,486,207
            
            $
            6,234,008Office
                equipment
            
            
            1,781,637
            
            
            3,021,380Motor
                vehicles
            
            
            40,793
            
            
            104,827Leasehold
                improvements
            
            
            577,052
            
            
            1,049,0895,885,689
            
            
            10,409,304Less:
                Accumulated depreciation
            
            
            (3,203,072
            )
            
            (4,036,236
            )2,682,617
            
            
            6,373,068Construction
                in progress
            
            
            -
            
            
            4,448,895$
            2,682,617
            
            $
            10,821,963




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,
              2007
            
            
            December
                31,
              2007Value
                added tax and other taxes
            
            $
            4,688,344
            
            $
            5,250,705Income
                tax
            
            
            3,338,947
            
            
            3,752,675Surcharge
                tax
            
            
            6,506,198
            
            
            8,485,512Dividends
                withholding tax
            
            
            3,486,232
            
            
            3,690,828$
            18,019,721
            
            $
            21,179,720





8. COMMON
      STOCK





We
      are
      authorized to issue 100,000,000 shares of common stock, $0.0001 par value per
      share. The common stock as of December 31, 2007, as presented in these financial
      statements, comprises the following:






March
                31, 2007
            
            
            Changes
                from April 1, 2007 to
              December
                31, 2007
            
            
            December
                31, 2007Number
                of shares
            
            
            Par
                value $0.0001
            
            
            Number
                of shares
            
            
            Par
                value $0.0001
            
            
            Number
                of shares
            
            
            Par
                value $0.0001In
                issue
            
            
            41,461,004
            
            $
            4,146
            
            
            -
            
            $
            -
            
            
            41,461,004
            
            $
            4,146Stock
                held in treasury (Treasury stock)
            
            
            (24,381,004
            )
            
            (2,438
            )
            
            -
            
            
            -
            
            
            (24,381,004
            )
            
            (2,438
            )Issued
                and outstanding
            
            
            17,080,000
            
            $
            1,708
            
            
            -
            
            $
            -
            
            
            17,080,000
            
            $
            1,708




10
 *Table
          of Contents*




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
      expressed in US Dollars)





9. INCOME
      TAXES





On
      April
      1, 2007, the Company adopted FIN48. As a result of the implementation of FIN48,
      the Company's tax assets and liabilities did not differ from the assets and
      liabilities before adoption, therefore, the Company did not record any
      adjustments as of the adoption date.





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






Three
                months ended December 31,
            
            Nine
                months ended December 31,2006
            
            2007
            
            2006
            
            2007Income/(Loss)
                in the British Virgin Islands before income taxes
            
            $
            (185,242
            )
            $
            (297,477
            )
            $
            (427,211
            )
            $
            (799,436
            )Income
                in the PRC before income taxes
            
            
            4,796,786
            
            
            5,768,015
            
            
            11,552,575
            
            
            14,025,985$
            4,611,544
            
            $
            5,470,538
            
            $
            11,125,364
            
            $
            13,226,549





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




Three
                months ended December 31,
            
            Nine
                months ended December 31,2006
            
            2007
            
            2006
            
            2007Current
            
            $
            1,009,310
            
            $
            1,426,789
            
            $
            3,066,112
            
            $
            3,672,434Deferred
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            1,009,310
            
            $
            1,426,789
            
            $
            3,066,112
            
            $
            3,672,434





As
      of
      December 31, 2007, we had no deferred tax assets and liabilities.





The
      Group
      has its principal operations in the PRC in the Shanghai Jinqiao special economic
      zone and hence enjoys a preferential income tax rate of 15%. From January 1,
      2008, the income tax rate is expected to gradually increase to the standard
      rate
      of 25% over a five-year transition period. However, the New Corporate Tax Law
      has not set out the details as to how the existing preferential tax rate will
      gradually increase to the standard rate of 25%.





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





Three
                months ended December 31,
            
            Nine
                months ended December 31,2006
            
            2007
            
            2006
            
            2007Computed
                tax at the local PRC statutory rate of 33%
            
            $
            1,582,946
            
            $
            1,794,701
            
            $
            3,812,357
            
            $
            4,458,440Non-deductible
                items
            
            
            -
            
            
            127,866
            
            
            240,669
            
            
            154,749Tax
                concession
            
            
            (863,425
            )
            
            (1,048,673
            )
            
            (2,210,741
            )
            
            (2,516,287
            )Surcharge
                at 0.5% per day on accrued taxes
            
            
            289,789
            
            
            552,895
            
            
            1,223,827
            
            
            1,575,532Total
                provision for income at effective rate
            
            $
            1,009,310
            
            $
            1,426,789
            
            $
            3,066,112
            
            $
            3,672,434





The
      Group
      has its principal operations in the PRC. Business enterprises are subject to
      income taxes and value added taxes under PRC tax laws and regulations unless
      they have exemptions. It had been the belief of the Group's management that
      its
      PRC operations were exempt from income taxes and value added taxes as these
      operations were recognized by the local government as an advanced technology
      enterprise. The Group, however, has never received a written confirmation from
      the appropriate tax authorities regarding the tax exempt status of its PRC
      operations. In January 2006, management of the Group's PRC operations took
      initiative to make tax payments to the PRC tax authorities for the calendar
      year
      2005, and accrual for all applicable tax liabilities, plus surcharge, for all
      prior calendar years were reflected in the Group's financial statements.
      According to PRC tax regulations, the Group may be subject to potential
      penalties for the late payment of taxes calculated on the basis of 0.5 times
      to
      5 times the amount of taxes, which amounts to $4.9 million to $49 million
      as of December 31, 2007. The Group has reserved for the paymant of taxes that
      may be owed for calendar years prior to 2005 and any associated interest
      surcharges in its financial statements until the matter is fully resolved.
      However, the Group has not reserved for any associated penalties as
      management believes that the probability of penalties being assessed is low
      because the Group has timely paid all taxes due and has informed the tax
      authorities of the matter.




11
 *Table
          of Contents*




On
      December 26, 2007, The State Council issued a Circular Guofa [2007] No.39
      regarding the transitional preferential policies. The Circular states
      that:





Foreign
      Investment Enterprises ("FIEs") which are established in special zones and
      taxed
      at 15% under the old tax law will enjoy a 5-year transitions period for
      increasing from 15% to 25% as follows:


2008:
              
              
              18
              %2009:
              
              
              20
              %2010:
              
              
              22
              %2011:
              
              
              24
              %2012
                  onwards:
              
              
              25
              %




10.
CONVERTIBLE
        NOTES


On
      December 11, 2007, the Group 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 Group 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
      our
      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 our common
      stock and similar events. If the Note is not converted at maturity, the Group
      will redeem the Note to provide Pope with a total yield of 10% per annum
      inclusive of the annual interest. The Note also provides for mandatory
      conversion into common stock if the Group 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 Group has secured payment
      of
      our obligations under the Note with a  pledge of 100% of the stock
      of our subsidiary, 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.




12
 *Table
          of Contents*




CHINA-BIOTICS,
      INC. AND SUBSIDIARIES


NOTES
      TO
      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amount
      expressed in US Dollars)





11.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. 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,
            
            December
                31,2007
            
            2007Payable
                withinthe
                next twelve months
            
            $
            375,395
            
            $
            896,748the
                next 13th to 24th months
            
            
            274,792
            
            
            564,751the
                next 25th to 36th months
            
            
            63,714
            
            
            227,158the
                next 37th to 48th months
            
            
            -
            
            
            -the
                next 49th to 60th months
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -$
            713,901
            
            $
            1,688,657




(b)Land
                lease





On
      March
      21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai
      Qingpu Industrial Park District Development (Group) Company Limited for the
      lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park
      District on which we will construct this plant. The agreement provides for
      the
      payment of leasing fees of approximately $2 million, 10% of which we paid on
      April 11, 2006 as a deposit, to be refunded upon payment in full of the
      aggregate lease amount. The Qingpu People’s Republic Government issued
      formal confirmation of the land use right necessary for the plant construction
      on November 30, 2007. The formal land use right certificate will be issued
      upon
      payment of the $2,100,920 leasing fee which is due on or before March 4,
      2008. If we fail to timely make this payment, the agreement will be
      terminated.




13




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





**NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**





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





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





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





**Overview**





We
      manufacture and sell probiotics products. Probiotics comprise mainly live
      bacteria, which we produce using advanced proprietary fermentation technology.
      Currently, our products are 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 year ended
      March
      31, 2007 and the quarter ended December 31, 2007, substantially all our sales
      revenue comprised amounts receivable from the distributors for the sale of
      these
      products. Typically, 90 to 120 days' credits are given to the
      distributors.




Our
      first
      product, Shining Essence, which was launched in April 2001, remains our
      best-selling product. Sales of Shining Essence represented approximately 68%
      and
      61% of our total sales for the years ended March 31, 2006 and 2007,
      respectively, and 62% and 48% for the three months ended December 31, 2006
      and
      2007, respectively. In addition to Shining Essence, we have successfully created
      other new products, such as Shining Stomach Protection, Shining Beauty Essence,
      Shining Sicanel and Shining Bifidus Factor. In September 2007, we created and
      released our new Shining Probiotics Protein Powder product in the market. As
      we
      release new products, the percentage contribution of Shining Essence has
      decreased. As our products comprise mainly live bacteria, which are reproduced
      by fermentation, we have historically had a low cost of production.




We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores, which we also refer to as training and
      logistics centers. In this regard, we opened our first pilot store in Shanghai
      in March 2006 and intend to open over 300 stores over the next two years. We
      expect that the additional demands from opening new stores will be met initially
      by increasing production from our existing plant, which currently has the
      necessary capacity, and in the longer term from our new plant. We expect that
      our stores will have a combination of full time staff and part time agents
      who
      will receive sales commissions. With our direct sales network, we will be
      selling to the end users, thereby capturing the margin previously made by our
      distributors and retail outlets. However, with more staff and agents there
      will
      be more selling and general and administrative expenses, with the result that
      we
      do not expect significant changes to our overall profit margins.





Our
      management believes that as China becomes more affluent, its citizens are
      becoming more health conscious. This has led to higher demand for health and
      functional food such as probiotics and yogurt. In addition, probiotics are
      increasingly used as additives in the production of infant formula. According
      to
      statements made by the Nutrition Development Centre of National Development
      and
      Reform Commission in China on April 1, 2007, probiotics will need to 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 have started a plan to construct a plant that
      will
      enable us to capture the anticipated demand for food additives. We expect that
      the new plant will commence production in the fourth quarter
      of 2008 and
      start to make contributions to our earnings in the fiscal year ending March
      2009. The cost of this plant is expected to be approximately $18 million
      including working capital for the first phase. Please refer to “The introduction
      of bulk additives products” below for further information on this new
      plant.




14
 *Table
          of Contents*







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




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


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




**Increasing
        demand for dairy product additives.** The
        demand for functional foods and foods that use probiotic supplements is growing
        at a significant rate and our management believes that it will continue to
        do
        so. According to statements made by the Nutrition Development Centre of National
        Development and Reform Commission in China on April 1, 2007, probiotics will
        need to be added to baby milk powders produced in
        China.




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


**The
        introduction of bulk additives products.** We
        believe we are poised to achieve first-mover advantage in the bulk additive
        business for functional foods through the completion of our 150-ton capacity
        plant, which is scheduled to commence production in the fourth quarter of
        2008.
        Management estimates that Phase 1 of the project, which involves constructing
        a
        facility capable of producing 150 tons of probiotics per annum, will cost
        $18
        million, $16 million of which is expected to be paid by the third quarter
        of
        calendar year 2008 and the balance in by the end of 2008. Phase 2 of this
        project will only commence when demand for probiotics has exceeded the
        production capacity of the Phase 1 facility. Phase 2 of this project is expected
        to cost $12 million. The
        construction cost of Phase 1 of the plant will be funded by cash received
        from
        the sale of convertible promissory notes on December 11, 2007. Management
        believes that when completed, this new production plant may be the only
        probiotics plant in China that will be able to meet the demands for the domestic
        bulk additive market.





On
      March
      21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai
      Qingpu Industrial Park District Development (Group) Company Limited for the
      lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park
      District on which we will construct this plant. The agreement provides for
      the
      payment of leasing fees of approximately $2 million, 10% of which we paid on
      April 11, 2006 as a deposit, to be refunded upon payment in full of the
      aggregate lease amount. The Qingpu People’s Republic Government issued
      formal confirmation of the land use right necessary for the plant construction
      on November 30, 2007. The formal land use right certificate will be issued
      upon
      payment of the $2,100,920 leasing fee which is due on or before March 4,
      2008. If we fail to timely make this payment, the agreement will be
      terminated.




**The
        geographical expansion of retail sales through direct sales and traditional
        sales channels**. We
        intend to expand our sales to other cities in China through a combination
        of
        distributors and our own stores. In this regard, we opened our first pilot
        store
        in Shanghai in March 2006 and intend to open over 300 stores over the next
        two
        years. We expect that the additional demands from opening new stores will
        be met
        initially by increasing production from our existing plant, which currently
        has
        the necessary capacity, and in the longer term from our new plant that will
        have
        a capacity of 150-300 tons. The initial, 150-ton phase of our new plant is
        scheduled to commence operations in the fourth quarter of 2008.




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




Our
      operation is generally not labor-intensive. We employed 266 people as of
      December 31, 2007. The construction of our new plant and the creation of the
      new
      direct sales network will result in significant increases in our number of
      employees as we expect to add over 1,000 staff and employees over the next
      two
      years. We also intend to recruit senior executives to strengthen our management
      team. However, as wages in China are relatively inexpensive, we expect that
      labor costs will remain insignificant.




15




Our
      principal operations are in China and we are subject to income taxes and value
      added taxes under Chinese tax laws and regulations unless there are exemptions.
      We have made regular tax payments to the Chinese tax authorities since 2005.
      Our
      management believes that our operations in China were exempted from income
      taxes
      and value added taxes for all prior years because we had been recognized by
      the
      local government as an advanced technology enterprise. However, we have never
      received a written confirmation from the appropriate tax authorities for the
      tax
      exemption status of our operations in China. As a result, there is no way to
      ascertain the position which may be taken by the relevant Chinese tax
      authorities in the future. We have made full provisions in our financial
      statements for all applicable tax liabilities, plus surcharge, for all prior
      calendar years. Such provisions for tax liabilities and surcharge will be
      reversed out of the financial statements at the appropriate point in the future.
      According to Chinese tax regulations, outstanding tax payable in China for
      the
      calendar years prior to 2005 may be subject to potential penalties for the
      late
      payment of taxes which is calculated on the basis of 0.5 times to five times
      the
      amount of taxes payable. The Group has reserved for the paymant of taxes that
      may be owed for calendar years prior to 2005 and any associated interest
      surcharges in financial statements until the matter is fully resolved. However,
      the Group has not reserved for any associated penalties as management
      believes that the probability of penalties being assessed is low because the
      Group has timely paid all taxes due and has informed the tax authorities of
      the
      matter.





**Results
      of Operations**





**Quarter
      Ended December 31, 2007 Compared with the Quarter Ended December 31,
      2006**





We
      achieved a net sales of $11.93 million and $29.27 million in the three months
      and nine months ended December 31, 2007, respectively, which was 36.15% and
      31.64% above our net sales of $8.76 million and $22.23 million for the three
      months and nine months ended December 31, 2006, respectively. Our growth in
      net
      sales primarily resulted from growth in the sales volume of our
      products. **** Shining
      Essence continued to be our best selling product. New product sales now account
      for 15% of our sales revenue during the quarter ended December 31, 2007
      (negligible in the quarter ended December 31, 2006). Accordingly, the percentage
      of sales revenue attributable to Shining Essence has been diluted to only 48%
      of
      our total sales revenue in the quarter ended December 31, 2007 (62% in the
      quarter ended December 31, 2006).





As
      of
      December 31, 2007, we had a total of 27 direct sales retail outlets, 23 in
      Shanghai and 4 in Changchun. We intend to expand our sales to other cities
      in
      China through a combination of distributors and our own stores. In this regard,
      we intend to open over 300 stores over the next two years at an anticipated
      cost
      of approximately $11 million, which comprise mainly store fit out cost, rental
      deposits and working capital. Our existing retail stores show that they have
      an
      average pay back period of less than one year.





We
      have
      started to construct a new plant with an overall project cost of $30 million.
      Phase 1 of the project involves construction of a facility capable of producing
      150 tons of probiotics per year and is estimated to cost $18 million, $16
      million of which is expected to be paid by the third quarter of the 2008
      calendar year and the balance by the end of the 2008 calendar year. We expect
      that the first phase of the new plant will be completed by the end of the third
      quarter of 2008. Subsequent phases of this project will only commence when
      demand for probiotics has exceeded the production capacity of the Phase 1
      facility.





As
      of
      December 31, 2007, we had no debt and $59.08 million in cash. Management
      believes that we have sufficient internal resources to fund the expansion of
      our
      retail stores and the new bulk additives plant.





Our
      business is not capital or labor intensive. Typically, 60% of our sales take
      place in the second half of our 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 additives sales will not be as seasonal because the bulk products
      are purchased by food manufacturers consistently throughout the
      year.





Our
      results for the three months and nine months ended December 31, 2006 and 2007
      are summarized below:





Three
                months ended December 31, 2006
            
            Three
                months ended December 31, 2007Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            8,763,150
            
            
            100.00
            %
            $
            11,931,306
            
            
            100.00
            %Cost
                of sales
            
            
            (2,510,544
            )
            
            -28.65
            %
            
            (3,183,056
            )
            
            -26.68
            %**Gross
                profit**
            
            $
            6,252,606
            
            
            71.35
            %
            $
            8,748,250
            
            
            73.32
            %Operating
                expenses:Selling
                expenses
            
            $
            (1,044,175
            )
            
            -11.92
            %
            $
            (1,752,637
            )
            
            -14.69
            %General
                and administrative expenses
            
            
            (584,020
            )
            
            -6.66
            %
            
            (1,258,927
            )
            
            -10.55
            %Total
                operating expenses
            
            $
            (1,628,195
            )
            
            -18.58
            %
            $
            (3,011,564
            )
            
            -25.24
            %**Income
                from operations**
            
            $
            4,624,411
            
            
            52.77
            %
            $
            5,736,686
            
            
            48.08
            %Other
                income and expenses:Other
                income
            
            $
            37,864
            
            
            0.43
            %
            $
            118,064
            
            
            0.99
            %Other
                expenses
            
            
            (50,731
            )
            
            -0.58
            %
            
            (384,212
            )
            
            -3.22
            %Total
                other income (expenses)
            
            $
            (12,867
            )
            
            -0.15
            %
            $
            (266,148
            )
            
            -2.23
            %**Income
                before taxes**
            
            $
            4,611,544
            
            
            52.62
            %
            $
            5,470,538
            
            
            45.85
            %Provision
                for income taxes
            
            
            (1,009,310
            )
            
            -11.52
            %
            
            (1,426,789
            )
            
            -11.96
            %**Net
                income**
            
            $
            3,602,234
            
            
            41.10
            %
            $
            4,043,749
            
            
            33.89
            %




16
 *Table
          of Contents*




Nine
                months ended December 31, 2006
            
            Nine
                months ended December 31, 2007Amount
            
            %
                of Net sales
            
            Amount
            
            %
                of Net sales**Net
                sales**
            
            $
            22,233,151
            
            
            100.00
            %
            $
            29,266,801
            
            
            100.00
            %Cost
                of sales
            
            
            (6,519,647
            )
            
            -29.32
            %
            
            (8,039,651
            )
            
            -27.47
            %**Gross
                profit**
            
            $
            15,713,504
            
            
            70.68
            %
            $
            21,227,150
            
            
            72.53
            %Operating
                expenses:Selling
                expenses
            
            $
            (3,266,162
            )
            
            -14.69
            %
            $
            (4,630,916
            )
            
            -15.82
            %General
                and administrative expenses
            
            
            (1,374,744
            )
            
            -6.18
            %
            
            (3,155,544
            )
            
            -10.78
            %Total
                operating expenses
            
            $
            (4,640,906
            )
            
            -20.87
            %
            $
            (7,786,460
            )
            
            -26.60
            %**Income
                from operations**
            
            $
            11,072,598
            
            
            49.81
            %
            $
            13,440,690
            
            
            45.92
            %Other
                income and expenses:Other
                income
            
            $
            142,242
            
            
            0.63
            %
            $
            190,006
            
            
            0.65
            %Other
                expenses
            
            
            (89,476
            )
            
            -0.40
            %
            
            (404,147
            )
            
            -1.38
            %Total
                other income (expenses)
            
            $
            52,766
            
            
            0.23
            %
            $
            (214,141
            )
            
            -0.73
            %**Income
                before taxes**
            
            $
            11,125,364
            
            
            50.04
            %
            $
            13,226,549
            
            
            45.19
            %Provision
                for income taxes
            
            
            (3,066,112
            )
            
            -13.79
            %
            
            (3,672,434
            )
            
            -12.55
            %**Net
                income**
            
            $
            8,059,252
            
            
            36.25
            %
            $
            9,554,115
            
            
            32.64
            %




17




*Net
      sales*





Net
      sales
      in our financial statements are stated at invoiced value less sales tax. Our
      net
      sales for the three months and nine months ended December 31, 2006 and 2007
      comprised of the following:




Three
                months ended December 31,
            
            
            Nine
                months ended December 31,2006
            
            
            2007
            
            
            2006
            
            
            2007Invoiced
                value on sales
            
            $
            8,818,984
            
            $
            12,290,615
            
            $
            22,374,261
            
            $
            30,102,465Less
                sales discount
            
            
            -
            
            
            (279,998
            )
            
            -
            
            
            (644,819
            )Sales
                tax
            
            
            (55,834
            )
            
            (79,311
            )
            
            (141,110
            )
            
            (190,845
            )$
            8,763,150
            
            $
            11,931,306
            
            $
            22,233,151
            
            $
            29,266,801





Net
      sales
      of $11,931,306 for the quarter ended December 31, 2007 were 36.15% above the
      net
      sales of $8,763,150 for the quarter ended December 31, 2006. Net sales of
      $29,266,801 for the nine months ended December 31, 2007 were 31.64% above the
      net sales of $22,233,151 for the nine months ended December 31, 2006. The
      increase was mainly attributable to increased sales volume and increases in
      average selling prices due to changes in sales mix.





The
      contributions of each product as a percentage of invoiced value on sales for
      the
      three months and nine months ended December 31, 2006 and 2007 respectively
      are
      summarized below. New product sales now account for 15% of our sales revenue
      for
      the quarter ended December 31, 2007. While the sales revenues of Essence and
      Signal capsules have remained stable, their percentage contributions to our
      sales revenue have been diluted by increases in new product sales.




Three
                months ended December 31,
            
            Nine
                months ended December 31,2006
            
            2007
            
            2006
            
            2007Shining
                Essence Capsules
            
            
            64
            %
            
            48
            %
            
            62
            %
            
            50
            %Shining
                Signal Capsules
            
            
            18
            %
            
            13
            %
            
            19
            %
            
            14
            %Shining
                Golden Shield Capsules
            
            
            9
            %
            
            13
            %
            
            9
            %
            
            13
            %Shining
                Energy Capsules
            
            
            9
            %
            
            11
            %
            
            9
            %
            
            12
            %Miscellaneous
            
            
            -
            %
            
            15
            %
            
            1
            %
            
            11
            %100
            %
            
            100
            %
            
            100
            %
            
            100
            %





Unit
      volume and unit prices comparatives (on the invoiced value of sales) for the
      three months and nine months ended December 31, 2006 and 2007 are summarized
      below. The increase in selling prices of Golden Shield and Energy capsules
      primarily reflect changes in sales mix with more sales of packages with higher
      selling prices.




Percentages
                increase (decrease) from the prior year
                Three
                  months ended December 31,2006
            
            
            2007Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            18
            %
            
            1
            %
            
            17
            %
            
            -9
            %
            
            12
            %
            
            2
            %Shining
                Signal Capsules
            
            
            29
            %
            
            -3
            %
            
            25
            %
            
            -2
            %
            
            1
            %
            
            -1
            %Shining
                Golden Shield Capsules
            
            
            50
            %
            
            -2
            %
            
            47
            %
            
            17
            %
            
            51
            %
            
            77
            %Shining
                Energy Capsules
            
            
            50
            %
            
            3
            %
            
            54
            %
            
            19
            %
            
            36
            %
            
            62
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            456
            %
            
            97
            %
            
            995
            %




Percentages
                increase (decrease) from the prior year
                Nine
                  months ended December 31,2006
            
            
            2007Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Selling
                prices
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            27
            %
            
            -1
            %
            
            26
            %
            
            -11
            %
            
            17
            %
            
            4
            %Shining
                Signal Capsules
            
            
            94
            %
            
            -2
            %
            
            90
            %
            
            -10
            %
            
            1
            %
            
            -9
            %Shining
                Golden Shield Capsules
            
            
            43
            %
            
            1
            %
            
            44
            %
            
            25
            %
            
            48
            %
            
            85
            %Shining
                Energy Capsules
            
            
            77
            %
            
            8
            %
            
            91
            %
            
            26
            %
            
            35
            %
            
            70
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            423
            %
            
            104
            
            
            967
            %




18


*Cost
      of sales*





Cost
      of
      sales for the three months ended December 31, 2007 was $3,183,056 compared
      with
      $2,510,544 for the three months ended December 31, 2006. Cost of sales for
      the
      nine months ended December 31, 2007 was $8,039,651 compared with $6,519,647
      for
      the nine months ended December 31, 2006. The increase in cost of sales was
      primarily caused by increased sales volume.





Unit
      volume and unit costs comparatives for the three months and nine months ended
      December 31, 2006 and 2007 are summarized below. The increase in unit costs
      of
      Golden Shield and Energy capsules primarily reflect changes in sales mix with
      more sales of packages with higher unit costs.






Percentages
                increase (decrease) from the prior year
                Three
                  months ended December 31,2006
            
            
            2007Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            18
            %
            
            1
            %
            
            19
            %
            
            -9
            %
            
            3
            %
            
            -6
            %Shining
                Signal Capsules
            
            
            29
            %
            
            -3
            %
            
            25
            %
            
            -2
            %
            
            -2
            %
            
            -4
            %Shining
                Golden Shield Capsules
            
            
            50
            %
            
            -2
            %
            
            47
            %
            
            17
            %
            
            32
            %
            
            54
            %Shining
                Energy Capsules
            
            
            50
            %
            
            3
            %
            
            54
            %
            
            19
            %
            
            49
            %
            
            77
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            456
            %
            
            -
            
            
            456
            %




Percentages
                increase (decrease) from the prior year
                Nine
                  months ended December 31,2006
            
            
            2007Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)
            
            
            Unit
                volume
            
            
            Unit
                costs
            
            
            Overall
                increase / (decrease)Shining
                Essence Capsules
            
            
            27
            %
            
            -1
            %
            
            26
            %
            
            -11
            %
            
            8
            %
            
            -4
            %Shining
                Signal Capsules
            
            
            94
            %
            
            -2
            %
            
            90
            %
            
            -10
            %
            
            -1
            %
            
            -11
            %Shining
                Golden Shield Capsules
            
            
            43
            %
            
            1
            %
            
            44
            %
            
            25
            %
            
            32
            %
            
            65
            %Shining
                Energy Capsules
            
            
            77
            %
            
            8
            %
            
            91
            %
            
            26
            %
            
            47
            %
            
            85
            %Miscellaneous
            
            
            100
            
            
            N/A
            
            
            100
            
            
            423
            %
            
            -
            
            
            423
            %





*Gross
      profit*





Gross
      profit for the three and nine months ended December 31, 2007 were $8,748,250
      and
      $21,227,150 respectively, representing a growth of 40% and 35% as compared
      to
      the corresponding periods of last year. The increase in gross profit was
      primarily due to an increase in sales volume.





The
      average gross profit percentage for all of our products for the three months
      and
      nine months ended December 31, 2006 and 2007 is summarized below:




Three
                months ended December 31,
            
            Nine
                months ended December 31,2006
            
            
            2007
            
            
            2006
            
            
            2007Average
                for all products
            
            
            71.35
            %
            
            73.32
            %
            
            70.68
            %
            
            72.53
            %





*Selling
      expenses*





Selling
      expenses were $1,752,637 or 14.69% of net sales for the quarter ended December
      31, 2007 compared with $1,044,175 or 11.92% of net sales for the quarter ended
      December 31, 2006. This increase in selling expenses was primarily caused by
      the
      gradual roll out of retail stores. As of December 31, 2007, we had a total
      of 27
      retail stores in operation (as of December 31, 2006, we had 9 retail
      stores).





*General
      and administrative expenses*





General
      and administrative expenses were $1,258,927 or 10.55% of net sales for the
      quarter ended December 31, 2007 compared with $584,020 or 6.66% of net sales
      for
      the quarter ended December 31, 2006. The increase in general and administrative
      expenses was primarily due to additional research costs of $491,773, related
      to
      the development and launch of new products.




19
 *Table
          of Contents*




*Other
      expenses*





Other
      expenses of $384,212 for the quarter ended December, 2007 represent foreign
      currency conversion loss on the remittance of $14.8 million to China to pay
      up
      the capital contribution of our subsidiary, Growing Bioengineering (Shanghai)
      Co. Ltd. This expense is not expected to recur.




20




*Provision
      for income taxes*





Provision
      for income taxes for the three months and nine months ended December 31, 2006
      and 2007 comprised the following items:




Three
                months ended December 31,
            
            
            Nine
                months ended December 31,2006
            
            
            2007
            
            
            2006
            
            
            2007Income
                taxes
            
            $
            719,521
            
            $
            873,894
            
            $
            1,842,285
            
            $
            2,096,902Surcharge
                at 0.5% per day on accrued taxes
            
            
            289,789
            
            
            552,895
            
            
            1,223,827
            
            
            1,575,532Total
                provision for income tax
            
            $
            1,009,310
            
            $
            1,426,789
            
            $
            3,066,112
            
            $
            3,672,434





The
      increase in income taxes for the three months ended December 31, 2007 was due
      to
      higher income before taxes, which increased 3.5%. The tax surcharge was accrued
      for unpaid taxes relating to calendar years prior to 2005.




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





According
      to Chinese tax regulations, outstanding tax payable in China for the calendar
      years prior to 2005 may be subject to potential penalties for the late payment
      of taxes, which is calculated on the basis of 0.5 times to five times the amount
      of taxes payable. This amounts to $4.9 million (if calculated based on 0.5
      times
      the taxes payable) to $49 million (if calculated based on five times the amount
      of taxes payable) as of December 31, 2007. The Group has reserved for the
      payment of taxes that may be owed for calendar years prior to 2005 and any
      associated interest surcharges in its financial statements until the matter
      is
      fully resolved. However, the Group has not reserved for any associated penalties
      as management believes that the probability of penalties being assessed is
      low
      because the Group has timely paid all taxes due and has informed the tax
      authorities of the matter.




21




*Segment
      reporting*





We
      have
      adopted the “products and services” approach for segment reporting. For the
      three months and nine months ended December 31, 2006 and 2007, we had only
      one
      reporting segment--the probiotic products as health supplement. We manufactured
      and sold the probiotic products solely in China and delivered all shipments
      to
      destinations within China, and all of our long-lived assets were physically
      located in China. We made all sales to external customers, and no single
      customer accounted for 10% or more of our total sales.





**Liquidity
      and Capital Resources**





We
      had
      cash of $59.08 million and working capital of $49.61 million as of December
      31,
      2007. Cash generated from operations was $13.31 million in the 9 months ended
      December 31, 2007. The cash generated from operations mainly reflect net income
      for the 9 months of $9.55 million and improvement in working capital items.





Our
      business is not capital or labor intensive. Typically, 60% of our sales take
      place in the second half of our 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 as seasonal because the bulk products
      are purchased by food manufacturers consistently throughout the
      year. **** Since
      our customers have historically been large distributors with which we have
      done
      business for a number of years, our cash flows from our existing business have
      been, and we expect them to be, fairly reliable.





We
      had
      capital expenditures totaling $8.39 million in the nine months ended December
      31, 2007, of which $4 million related to improvements to the existing production
      and research facilities and the balance was for the construction of the new
      plant. Our current facility commenced operations in 2000. To meet anticipated
      increases in sales volume in the near future, we are increasing the capacity
      of
      our current production facility. We have started our plan to construct a new
      plant with an overall project size of $30 million. Phase 1 of the project
      involves constructing a facility capable of producing 150 tons of probiotics
      per
      annum and is estimated to cost $18 million, $16 million of which is expected
      to
      be paid by the third quarter of calendar year 2008 and the balance by the end
      of
      2008. Phase 2 of this project will only commence when demands for probiotics
      have exceeded the production capacity of the Phase 1 facility. The construction
      cost of Phase 1 of the plant will be funded by cash received from the sale
      of
      convertible promissory notes to Pope Investments II LLC on December 11, 2007.
      Management believes that when completed, this new production plant may be the
      only probiotics plant in China that will be able to meet the demands for the
      domestic bulk additive market.





We
      intend
      to expand our sales to other cities in China through a combination of
      distributors and our own stores. In this regard, we opened our first pilot
      store
      in Shanghai in March 2006 and intend to open over 300 stores over the next
      two
      years at an anticipated cost of approximately $11 million, which comprise mainly
      store fit out costs, rental deposits and working capital. In preparation for
      the
      opening of our retail stores, we have repackaged a number of our existing
      products for sale in our stores, and have introduced several new products which
      are available exclusively in our stores. The costs of repackaging the existing
      products and releasing the new products are minimal and have been included
      in
      our cost of sales and selling and administrative expenses. We intend to continue
      to develop new products to strengthen our product pipeline and add to our retail
      store offerings. As our development costs mainly comprise staff costs, we do
      not
      expect that such costs will be significant.





On
      December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the
      amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010.
      The principal amount of the Note is convertible into shares of our common stock
      at an exercise price of $12.00 per share at any time until the maturity date.
      If
      the Note is not converted at maturity, we will redeem the Note at a price that
      gives a total yield of 10% per annum inclusive of the annual interest. The
      Note
      also provides for mandatory conversion into common stock if the Group
      achieve a net income of $60 million in fiscal year 2010. Net proceeds of the
      Note are expected to be used to fund the construction of a proposed
      150-metric-ton-per-year manufacturing facility and for other capital
      expenditures.





We
      did
      not have any changes related to f inancing
      activities for the
      quarter ended December 31, 2006.




22
 *Table
          of Contents*




**Inflation**





We
      believe that inflation has not had a material impact on our results of
      operations for the three months and nine months ended December 31, 2006 and
      2007.





**Seasonality**





Typically,
      60% of our sales take place in the second half of our 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
      throughout 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 $659,785
      and
      $168,012 in the three months ended December 31, 2007 and 2006, respectively.
      This increase was related to the development and launch of new
      products.





**Critical
      Accounting Policies**





This
      MD&A discusses our consolidated financial statements for the three months
      and six months ended December 31 2006 and 2007. 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.




*Revenue
      recognition*





Sales
      are recognized when revenue is realized or realizable and has been earned.
      The
      Company's policy is to recognize revenue when risk of loss and title to the
      product transfers to the customer. Revenue for consignment sales are not
      recognized until sell through to the final customer is established.




We
        consider accounting policies related to (a) revenue recognition, (b) allowance
        for doubtful accounts, and (c) 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 $12,590,434 as of December 31, 2007, and a zero balance
      for
      allowance for doubtful accounts. We have considered all relevant factors,
      including the financial conditions, affecting the payment abilities of customers
      comprising these receivables up to the date of this Form-10QSB and we believe
      these customers are able to make required payments. We, however, cannot give
      assurance that these factors, including the financial conditions of these
      customers, will not change adversely in the future. We will continue to evaluate
      the ability of all our customers to make required payments. Were the financial
      condition of a customer to deteriorate, resulting in an impairment of its
      ability to make payments, allowances may be required.





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





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




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          of Contents*





According
      to Chinese tax regulations, our outstanding tax payable in China for the
      calendar years prior to 2005 may be subject to potential penalties for the
      late
      payment of taxes which is calculated on the basis of 0.5 times to five times
      the
      amount of taxes payable. This amounts to $4.9 million (if calculated based
      on
      0.5 times of taxes payable) to $49 million (if calculated based on five times
      of
      the amount of taxes payable) as of December 31, 2007. The Group has reserved
      for
      the payment of taxes that may be owed for calendar years prior to 2005 and
      any
      associated interest surcharges in its financial statements until the matter
      is
      fully resolved. However, the Group has not reserved for any associated penalties
      as management believes that the probability of penalties being assessed is
      low
      because the Group has timely paid all taxes due and has informed the tax
      authorities of the matter.





**Recent
      Accounting Pronouncements**





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




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 results of operations. The Company does not believe that any other of the
      recently issued and adopted, but not yet effective, accounting standards would
      have a material effect on the accompanying financial statements.




24
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          of Contents*





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





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




There
      were no changes in our internal control over financial reporting during the
      quarter ended December 31, 2007 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




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**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.




**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
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          of Contents*




**SIGNATURES**





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




**CHINA-BIOTICS,
                INC.**
                (Registrant)Date:
                February 12, 2008
            By:
            /s/
                Li Chi YuenLi
                Chi YuenChief
                Financial Officer




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