**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  **FORM
        10-QSB**
  **x
        QUARTERLY REPORT UNDER
        SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
  **For
        the quarterly period ended December 31, 2006**
  **o
        TRANSITION REPORT UNDER
        SECTION 13 OR 15(d) OF THE**
 **EXCHANGE
        ACT**
  **For
        the Transition Period From _______ to _________**
  **333-110733**
 (Commission
        File Number)
  **CHINA-BIOTICS,
        INC.**
 (Exact
        Name of Small Business Issuer as Specified in Its Charter)
 
 **Delaware**
              **98-0393071**(State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              (I.R.S.
                  Employer Identification No.)
 
 **No.
        999 Ningqiao Road**
 **Jinqiao
        Export Processing Zone**
 **Pudong,
        Shanghai 201206**
 **People's
        Republic of China**
 **Telephone
        number: (86 21) 5834 9748**
 (Address
        of Principal Executive Offices)
 (Issuer's
        Telephone Number, Including Area Code)
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to the filing requirements for at least the past 90 days.
 x
        Yes o No
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 o
        Yes x No
 
 As
        of
        November 13, 2006, 17,080,000 shares of the Issuer's common stock were
        outstanding.
 
 Transitional
        Small Business Disclosure Format (check one): **** o
        Yes x No
 
 
 
 **TABLE
        OF CONTENTS**
 Page**Part
                  I - Financial Information**ITEM
                  1.
              
              FINANCIAL
                  STATEMENTS
              
              3ITEM
                  2.
              
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS
              
              13ITEM
                  3.
              
              CONTROLS
                  AND PROCEDURES
              
              24**Part
                  II - Other Information**ITEM
                  6.
              
              EXHIBITS
              
              25SIGNATURES
              
              26  2
 
 **PART
        I - FINANCIAL INFORMATION**
 **ITEM
        1. FINANCIAL STATEMENTS**
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 UNAUDITED
        CONDENSED CONSOLIDATED BALANCE SHEETS
 (Amounts
        expressed in US Dollars)
 
 
 March
                  31,
                2006
              
              December
                  31,
                2006**ASSETS****Current
                  assets**Cash
                  and cash equivalents
              
              $
              19,840,812
              
              $
              24,950,797Restricted
                  cash
              
              
              752,778
              
              
              619,818Accounts
                  receivable
              
              
              10,941,595
              
              
              14,642,606Deposit
                  Paid
              
              
              -
              
              
              213,593Inventories
              
              
              257,584
              
              
              332,669Prepayment
              
              
              31,200
              
              
              117,235Travel
                  advances
              
              
              8,972
              
              
              8,949**Total
                  current assets**
              
              $
              31,832,941
              
              $
              40,885,667**Plant
                  and equipment, net**
              
              
              1,594,047
              
              
              2,630,417**Total
                  assets**
              
              $
              33,426,988
              
              $
              43,516,084**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              1,826,441
              
              $
              1,695,409Tax
                  payables
              
              
              15,316,318
              
              
              17,293,364Loan
                  from stockholders
              
              
              2,290,230
              
              
              2,347,451Other
                  payables and accruals
              
              
              1,656,987
              
              
              1,387,737**Total
                  current liabilities**
              
              $
              21,089,976
              
              $
              22,723,961**Commitments
                  and contingencies****Stockholders'
                  equity:**Preferred
                  stock-par value $0.01, 10,000,000 shares authorized, no shares issued
                  and outstanding
              
              $
              -
              
              $
              -Common
                  stock, par value $0.0001, 100,000,000 shares authorized, 17,080,000
                  shares
                  issued and outstanding
              
              
              1,708
              
              
              1,708Additional
                  paid-in capital
              
              
              7,863,031
              
              
              7,863,031Retained
                  earnings
              
              
              1,379,914
              
              
              9,439,166Accumulated
                  other comprehensive income
              
              
              66,565
              
              
              462,424Capital
                  and statutory reserves
              
              
              3,025,794
              
              
              3,025,794**Total
                  stockholders' equity**
              
              $
              12,337,012
              
              $
              20,792,123**Total
                  liabilities and stockholders' equity**
              
              $
              33,426,988
              
              $
              43,516,084
  The
        accompanying notes are an integral part of these financial
        statements.
   3
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Amounts
        expressed in US Dollars)
  Three
                  months ended December 31,
              
              
              Nine
                  months ended December 31,2005
              
              
              2006
              
              
              2005
              
              
              2006**Net
                  sales**
              
              $
              6,677,975
              
              $
              8,763,150
              
              $
              15,061,192
              
              $
              22,233,151Cost
                  of sales
              
              
              (1,886,904
              )
              
              (2,510,544
              )
              
              (4,403,612
              )
              
              (6,519,647
              )**Gross
                  profit**
              
              $
              4,791,071
              
              $
              6,252,606
              
              $
              10,657,580
              
              $
              15,713,504Operating
                  expenses:Selling
                  expenses
              
              $
              (575,843
              )
              $
              (1,044,175
              )
              $
              (1,475,486
              )
              $
              (3,266,162
              )General
                  and administrative expenses
              
              
              (233,939
              )
              
              (584,020
              )
              
              (384,260
              )
              
              (1,374,744
              )Total
                  operating expenses
              
              $
              (809,782
              )
              $
              (1,628,195
              )
              $
              (1,859,746
              )
              $
              (4,640,906
              )**Income
                  from operations**
              
              $
              3,981,289
              
              $
              4,624,411
              
              $
              8,797,834
              
              $
              11,072,598Other
                  income and expenses:Other
                  income
              
              $
              16,114
              
              $
              37,864
              
              $
              44,311
              
              $
              142,242Other
                  expenses
              
              
              (71)
              
              
              (50,731
              )
              
              (71)
              
              
              (89,476
              )Total
                  other income (expenses)
              
              $
              16,043
              
              $
              (12,867)
              
              $
              44,240
              
              $
              52,766**Income
                  before taxes**
              
              $
              3,997,332
              
              $
              4,611,544
              
              $
              8,842,074
              
              $
              11,125,364Provision
                  for income taxes
              
              
              (1,070,148
              )
              
              (1,009,310
              )
              
              (2,767,899
              )
              
              (3,066,112
              )**Net
                  income**
              
              $
              2,927,184
              
              $
              3,602,234
              
              $
              6,074,175
              
              $
              8,059,252**Earnings
                  per share:**Basic
                  and diluted
              
              $
              2.62
              
              $
              0.21
              
              $
              5.43
              
              $
              0.47**Weighted
                  average shares outstanding**Basic
                  and diluted
              
              
              1,118,600
              
              
              17,080,000
              
              
              1,118,600
              
              
              17,080,000
 
 The
        accompanying notes are an integral part of these financial
        statements.
   4
  
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 UNAUDITED
        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 (Amounts
        expressed in US Dollars)
  
 Common
                  Stock
              
              Additional
                  Paid-in
              
              Retained
              
              Accumulated
                  Other Comprehensive
              
              Capital
                  & StatutoryShares
              
              Amount
              
              Capital
              
              Earnings
              
              Income
              
              Reserves
              
              TotalBalance-
                  March 31, 2006 (audited)
              
              
              17,080,000
              
              $
              1,708
              
              $
              7,863,031
              
              $
              1,379,914
              
              $
              66,565
              
              $
              3,025,794
              
              $
              12,337,012Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              8,059,252
              
              
              -
              
              
              -
              
              
              8,059,252Other
                  comprehensive income:Foreign
                  currency translation adjustments, net of taxes of $-0-
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              395,859
              
              
              -
              
              
              395,859Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,455,111Balance-
                  December 31, 2006
              
              
              17,080,000
              
              $
              1,708
              
              $
              7,863,031
              
              $
              9,439,166
              
              $
              462,424
              
              $
              3,025,794
              
              $
              20,792,123
  The
        accompanying notes are an integral part of these financial
        statements.
   5
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 (Amounts
        expressed in US Dollars)
 
  Nine
                  months ended December 31,2005
              
              
              2006**CASH
                  FLOW FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              6,074,175
              
              $
              8,059,252Adjustment
                  for:Depreciation
              
              
              385,400
              
              
              354,768Gain
                  on disposal of plant and equipment
              
              
              -
              
              
              (14,793
              )(Increase)/Decrease
                  in restricted cash
              
              
              -
              
              
              131,131(Increase)/Decrease
                  in accounts receivable
              
              
              (2,104,328)
              
              
              (3,392,961
              )(Increase)/Decrease
                  in other receivables
              
              
              1,876
              
              
              2,732(Increase)/Decrease
                  in inventories
              
              
              250,441
              
              
              (67,922
              )(Increase)/Decrease
                  in prepayments
              
              
              (8,978)
              
              
              (349,604
              )Increase/(Decrease)
                  in accounts payable
              
              
              1,074,577
              
              
              (89,781
              )Increase/(Decrease)
                  in income tax, surcharge tax and dividends withholding tax
              
              
              2,767,899
              
              
              2,056,802Increase/(Decrease)
                  in other payables and accruals, and value added tax
                  payable
              
              
              1,810,630
              
              
              (798,894
              )**NET
                  CASH PROVIDED BY OPERATING ACTIVITIES**
              
              $
              10,251,692
              
              $
              5,890,730**CASH
                  FLOWS USED IN INVESTING ACTIVITIES**Sales
                  proceeds from disposal of plant and equipment
              
              
              -
              
              
              14,793Additions
                  of fixed assets
              
              
              -
              
              
              (1,327,488
              )**NET
                  CASH PROVIDED BY INVESTING ACTIVITIES**
              
              $
              -
              
              $
              (1,312,695
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Temporary
                  advance from stockholders
              
              $
              1,500,609
              
              $
              -Repayment
                  on temporary advance from stockholders
              
              
              (1,500,609
              )
              
              -Advances
                  to related parties
              
              
              (1,712,646
              )
              
              -Distribution
                  to previous owners of subsidiary
              
              
              (6,542,727
              )
              
              -**NET
                  CASH PROVIDED BY/(USED IN) FINANCING
                  ACTIVITIES**
              
              $
              (8,255,373
              )
              $
              -Effect
                  of exchange rate changes on cash
              
              $
              144,888
              
              $
              531,950**NET
                  INCREASE IN CASH AND CASH EQUIVALENTS BALANCES**
              
              $
              2,141,207
              
              $
              5,109,985**CASH
                  AND CASH EQUIVALENTS BALANCES AT BEGINNING OF
                  PERIOD**
              
              
              10,271,503
              
              
              19,840,812**CASH
                  AND CASH EQUIVALENTS BALANCES AT END OF PERIOD**
              
              $
              12,412,710
              
              $
              24,950,797
 
 The
        accompanying notes are an integral part of these financial
        statements.
   6
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
        expressed in US Dollars)
 
 1. BASIS
        OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
 
 The
        accompanying unaudited interim financial statements of China-Biotics, Inc.
        (the
“Company” or “we”) have been prepared in accordance with accounting principles
        generally accepted in the United States of America and the rules of the
        Securities and Exchange Commission (“SEC”), and should be read in conjunction
        with the audited financial statements and notes thereto contained in our
        Annual
        Report filed with the SEC on Form 10-KSB. In the opinion of management, all
        adjustments, consisting of normal recurring adjustments, necessary for a
        fair
        presentation of financial position and the results of operations for the
        interim
        periods presented have been reflected herein. The results of operations for
        the
        interim periods are not necessarily indicative of the results to be expected
        for
        the full year. Notes to the financial statements which would substantially
        duplicate the disclosure contained in the audited financial statements for
        fiscal year ended March 31, 2006 as reported in the Form 10-KSB have been
        omitted.
 
 As
        disclosed in Note 1 to our audited financial statements for fiscal year ended
        March 31, 2006, the share exchange between us and the shareholders of Sinosmart
        Group Inc. (“SGI”) had been accounted for in accordance with the accounting and
        financial reporting interpretations and guidance set out by the Corporate
        Finance Division of the Securities and Exchange Commission (“SEC Interpretations
        and Guidance”) and accounting principles generally accepted in the United States
        of America (“US GAAP”). The share exchange was treated as a recapitalization of
        SGI, accompanied by a reverse acquisition of our company with SGI as the
        accounting acquirer. The unaudited interim financial statements presented
        herewith have been prepared on the following basis:
  (a)
              The
                  Unaudited Condensed Consolidated Balance Sheet as of December 31,
                  2006
                  includes the accounts of SGI, Shining, Growing State Limited (“GSL”),
                  Growing Bioengineering (Shanghai) Co. Limited (“GBS”) and our
                  company.
  (b)
              The
                  Unaudited Condensed Consolidated Statements of Operations for the
                  three
                  months and nine months ended December 31, 2005 and 2006 reflect
                  the
                  following:(i) result of operations of SGI, Shining and GSL from
                  October 1,
                  2005 to December 31, 2005 and from April 1, 2005 to December 31,
                  2005
                  respectively and (ii) result of operations of SGI, Shining, GSL,
                  GBS and
                  our company from October 1, 2006 to December 31, 2006 and from
                  April 1,
                  2006 to December 31, 2006 respectively. The earnings per share
                  as shown on
                  the Unaudited Condensed Consolidated Statements of Operations were
                  computed based on the weighted average number of shares of our
                  outstanding
                  common stock after giving effect to the recapitalization and reverse
                  acquisition accounting treatment as set out in Note 1 to our audited
                  financial statements for fiscal year ended March 31,
                  2006.(c)
              The
                  Unaudited Condensed Consolidated Statement of Changes in Stockholders'
                  Equity and the Unaudited Condensed Consolidated Statements of Cash
                  Flow
                  for the nine months ended December 31, 2006 include the accounts
                  of SGI,
                  Shining, GSL, GBS and our
                  company.
  In
        preparing the unaudited interim financial statements presented herewith,
        all
        significant intercompany balances and transactions have been eliminated on
        consolidation.
 
 The
        term
“Group”, as used in these unaudited interim financial statements, refers to a
        group of companies comprising SGI, Shining and GSL for any period prior to
        March
        22, 2006; and to a group of companies comprising the Company, SGI, Shining,
        GSL
        and GBS for any period from March 23, 2006.
  7
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
        expressed in US Dollars)
 
 
 2. WEIGHTED
        AVERAGE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK
 
 Earnings
        per share is computed by dividing the net income for each reporting period
        by
        the weighted average number of outstanding common stock for the same reporting
        period. The weighted average number of outstanding shares of common stock
        is
        determined by relating the portion of time within a reporting period that
        a
        particular number of shares of common stock has been outstanding to the total
        time in that period.
 
 The
        weighted average number of outstanding shares of common stock as shown in
        the
        financial statements presented herewith was computed based on the number
        of
        shares of common stock outstanding, and took into account the recapitalization
        transactions and the reverse acquisition transaction as described in the
        Notes
        to the financial statements contained in the audited financial statements
        for
        fiscal year ended March 31, 2006, as reported in our Form 10-KSB. Detailed
        computations are set out as follows:
  Date
                  of issue or purchase
                (as-if
                  basis
                for
                  the
                Company's
              
              No.
                  of
                SGI
              
              No.
                  of the
                Company's
                common
                  stock
                (Restated
                  for
                recapitalization
              
              No.
                  of days outstanding
                Three
                  months ended December 31,
              
              Weighted
                  average number of outstanding common stock
                Three
                  months ended December 31,common
                  stock)
              
              ordinary
                  shares
              
              of
                  SGI)
              
              2005
              
              2006
              
              2005
              
              2006Number
                  of days in reporting period
              
              
              
              
              
              
              
              
              
              
              
              92
              
              
              92SGI
                  existing shares as of March 31, 2004
              
              
              Pre-
                  3/31/2004
              
              
              1,000
              
              
              1,118,600
              
              
              92
              
              
              92
              
              
              1,118,600
              
              
              1,118,600SGI
                  issued new shares upon receipt of cash
              
              
              3/15/2006
              
              
              9,000
              
              
              10,067,400
              
              
              92
              
              
              92
              
              
              -
              
              
              10,067,400SGI
                  issued new shares for convertible bond conversion
              
              
              3/22/2006
              
              
              1,429
              
              
              2,924,000
              
              
              92
              
              
              92
              
              
              -
              
              
              2,924,000SGI
                  issued new shares for cash of $5M under private placement
              
              
              3/22/2006
              
              
              2,858
              
              
              1,870,000
              
              
              92
              
              
              92
              
              
              -
              
              
              1,870,00014,287Stock
                  issued in exchange for 14,287 shares of SGI stock (100% equity
                  in
                  SGI)
              
              
              
              
              
              
              
              
              15,980,000The
                  Company's stock at time of reverse acquisitionExisting
                  stock in issue at time of reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              25,481,004
              
              
              92
              
              
              92
              
              
              -
              
              
              25,481,004Stock
                  held in treasury prior to reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              (4,381,004
              )
              
              92
              
              
              92
              
              
              -
              
              
              (4,381,004
              )Repurchased
                  stock from Stan Ford in conjunction with reverse
                  acquisition
              
              
              3/22/2006
              
              
              
              
              
              (20,000,000
              )
              
              92-
              
              
              92
              
              
              --
              
              
              (20,000,000
              )17,080,000
              
              
              
              
              
              
              
              
              1,118,600
              
              
              17,080,000
    Date
                  of issue or purchase
                (as-if
                  basis
                for
                  the
                Company's
                common
                  stock)
              
              No.
                  ofSGIordinary
                  shares
              
              No.
                  of theCompany'scommon
                  stock(Restated
                  forrecapitalization
                  of SGI)
              
              
              No.
                  of days outstanding
                Nine
                  months ended December 31,
              
              
              Weighted
                  average number of outstanding common stock
                Nine
                  months ended December 31,2005
              
              
              2006
              
              
              2005
              
              
              2006Number
                  of days in reporting period
              
              
              
              
              
              
              
              
              
              
              
              275
              
              
              275SGI
                  existing shares as of March 31, 2004
              
              
              Pre-
                  3/31/2004
              
              
              1,000
              
              
              1,118,600
              
              
              275
              
              
              275
              
              
              1,118,600
              
              
              1,118,600SGI
                  issued new shares upon receipt of cash
              
              
              3/15/2006
              
              
              9,000
              
              
              10,067,400
              
              
              275
              
              
              275
              
              
              -
              
              
              10,067,400SGI
                  issued new shares for convertible bond conversion
              
              
              3/22/2006
              
              
              1,429
              
              
              2,924,000
              
              
              275
              
              
              275
              
              
              -
              
              
              2,924,000SGI
                  issued new shares for cash of $5M under private placement
              
              
              3/22/2006
              
              
              2,858
              
              
              1,870,000
              
              
              275
              
              
              275
              
              
              -
              
              
              1,870,00014,287Stock
                  issued in exchange for 14,287 shares of SGI stock (100% equity
                  in
                  SGI)
              
              
              
              
              
              
              
              
              15,980,000The
                  Company's stock at time of reverse acquisitionExisting
                  stock in issue at time of reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              25,481,004
              
              
              275
              
              
              275
              
              
              -
              
              
              25,481,004Stock
                  held in treasury prior to reverse acquisition
              
              
              3/22/2006
              
              
              
              
              
              (4,381,004
              )
              
              275
              
              
              275
              
              
              -
              
              
              (4,381,004
              )Repurchased
                  stock from Stan Ford in conjunction with reverse
                  acquisition
              
              
              3/22/2006
              
              
              
              
              
              (20,000,000
              )
              
              275
              
              
              275
              
              
              -
              
              
              (20,000,000
              )17,080,000
              
              
              
              
              
              
              
              
              1,118,600
              
              
              17,080,000
   8
  
  CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
        expressed in US Dollars)
 
 3. RISKS,
        UNCERTAINTIES, AND CONCENTRATIONS
 
 (a) Nature
        of Operations
 
 Substantially
        all of the Group's operations are conducted in the 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, 2006, the Group had cash deposits of $ 24.95 million
        placed with several banks in the PRC, which includes the Special Administrative
        Region of Hong Kong, where there is currently no rules or regulations in
        place
        for obligatory insurance of bank accounts.
 
 As
        of
        December 31, 2006, the Group had a cash deposit of $619,818 placed with a
        bank
        in the United States, which is insured by the Federal Deposit Insurance
        Corporation (FDIC) up to $100,000 for each customer account. $519,818 of
        the
        Group's cash deposit at this bank therefore was in excess of the FDIC insured
        limit. This cash deposit has been shown under the caption “Restricted cash” in
        these financial statements.
 
 For
        the
        three months and nine months ended December 31, 2005 and 2006, all of the
        Group's sales arose in the PRC. In addition, all accounts receivable as at
        December 31, 2006 also arose in the PRC.
 
 4. RESTRICTED
        CASH
 
 In
        March
        2006, SGI completed a private placement for an aggregate consideration of
        $5.07
        million. As part of the agreement for this private placement, SGI agreed
        with
        the investors to place $750,000 in an escrow account, which is to be released
        from time to time to cover certain marketing and executive officer search
        expenses. Any amounts remaining in the escrow account on March 22, 2007 will
        automatically be released to SGI.
 
 The
        marketing expenses that are covered include payment for the creation of a
        website, the publication of Company newsletters, the procurement of independent
        research coverage, and the preparation of press releases and presentations.
        The
        executive officer search expenses primarily cover the payment to consultants
        and
        search firms for the recruitment of senior management and may also cover
        the
        appointment of independent directors, if applicable.
 
 As
        of
        December 31, 2006, the balance in this escrow account was $619,818.
 
 5. ACCOUNTS
        RECEIVABLE
 
 The
        Group's accounts receivable as of the balance sheet date as presented in
        these
        financial statements are summarized as follows:
   March
                  31,
                2006
              
              December
                  31,
                2006Trade
                  receivables
              
              $
              10,941,595
              
              $
              14,642,606Less
                  : Allowances for doubtful debt
              
              
              -
              
              
              -$
              10,941,595
              
              $
              14,642,606
   9
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
        expressed in US Dollars)
 
 
 6. INVENTORIES
 
 The
        Group's inventories as of the balance sheet date as presented in these financial
        statements are summarized as follows:
   March
                  31,
                2006
              
              December
                  31,
                2006Raw
                  materials
              
              $
              188,112
              
              $
              136,416Work-in-progress
              
              
              50,362
              
              
              25,489Finished
                  goods
              
              
              19,110
              
              
              170,764$
              257,584
              
              $
              332,669
 
 7. PLANT
        AND EQUIPMENT
 
 The
        Group's plant and equipment as of the balance sheet date as presented in
        these
        financial statements are summarized as follows:
   March
                  31,
                2006
              
              December
                  31,
                2006Plant
                  and machinery
              
              $
              3,093,152
              
              $
              3,418,464Office
                  equipment
              
              
              1,101,779
              
              
              1,668,363Motor
                  vehicles
              
              
              28,716-
              
              
              -Leasehold
                  improvements
              
              
              -
              
              
              570,0084,223,647
              
              
              5,656,835Less:
                  Accumulated depreciation
              
              
              (2,629,600
              )
              
              (3,026,418
              )$
              1,594,047
              
              $
              2,630,417
  8. TAX
        PAYABLES
 
 The
        Group's tax payables as of the balance sheet date as presented in these
        financial statements are summarized as follows:
   March
                  31,
                2006
              
              December
                  31,
                2006Value
                  added tax and other taxes
              
              $
              4,393,629
              
              $
              4,030,360Income
                  tax
              
              
              3,169,773
              
              
              3,492,657Surcharge
                  tax
              
              
              4,393,213
              
              
              6,326,705Dividends
                  withholding tax
              
              
              3,359,703
              
              
              3,443,642$
              15,316,318
              
              $
              17,293,364
 
 9. COMMON
        STOCK
 
 We
        are
        authorized to issue 100,000,000 shares of common stock, $0.0001 par value
        per
        share. The common stock as of December 31, 2006, as presented in these financial
        statements, comprises the following:
 
 
 March
                  31, 2006
              
              Changes
                  from April 1, 2006 to
                December
                  31, 2006
              
              December
                  31, 2006Number
                  of shares
              
              Par
                  value $0.0001
              
              Number
                  of shares
              
              Par
                  value $0.0001
              
              Number
                  of shares
              
              Par
                  value $0.0001In
                  issue
              
              
              41,461,004
              
              $
              4,146
              
              
              -
              
              $
              -
              
              
              41,461,004
              
              $
              4,146Stock
                  held in treasury (Treasury stock)
              
              
              (24,381,004
              )
              
              (2,438
              )
              
              -
              
              
              -
              
              
              (24,381,004
              )
              
              (2,438
              )Issued
                  and outstanding
              
              
              17,080,000
              
              $
              1,708
              
              
              -
              
              $
              -
              
              
              17,080,000
              
              $
              1,708
 
  10
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
        expressed in US Dollars)
 
 
 10. INCOME
        TAXES
 
 The
        income (loss) generated in the British Virgin Islands and the 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 31,2005
              
              2006
              
              2005
              
              2006Income/(Loss)
                  in the British Virgin Islands before income taxes
              
              $
              (111,779)
              
              $
              (185,242
              )
              $
              (110,274)
              
              $
              (427,211
              )Income
                  in the PRC before income taxes
              
              
              4,109,111
              
              
              4,796,786
              
              
              8,952,350
              
              
              11,552,575$
              3,997,332
              
              $
              4,611,544
              
              $
              8,842,076
              
              $
              11,125,364
 
 There
        is
        no income tax for companies domiciled in the British Virgin Islands if no
        operation is carried out 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
        is summarized as follows:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006Current
              
              $
              1,070,148
              
              $
              1,009,310
              
              $
              2,767,899
              
              $
              3,066,112Deferred
              
              
              -
              
              
              -
              
              
              -
              
              
              -$
              1,070,148
              
              $
              1,009,310
              
              $
              2,767,899
              
              $
              3,066,112
 
 As
        of
        December 31, 2006, we had no deferred tax assets and liabilities.
 
 The
        principal reconciling items from income tax computed at the statutory rates
        and
        at the effective income tax rates are as follows:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              
              2005
              
              
              2006Computed
                  tax at the local PRC statutory rate of 33%
              
              $
              1,356,007
              
              $
              1,582,946
              
              $
              2,954,276
              
              $
              3,812,357Non-deductible
                  items
              
              
              (49,214
              )
              
              -
              
              
              23,465
              
              
              240,669Tax
                  concession
              
              
              (712,796
              )
              
              (863,425
              )
              
              (1,624,222
              )
              
              (2,210,741
              )Surcharge
                  at 0.5% per day on accrued taxes
              
              
              476,151
              
              
              289,789
              
              
              1,414,380
              
              
              1,223,827Total
                  provision for income at effective rate
              
              $
              1,070,148
              
              $
              1,009,310
              
              $
              2,767,899
              
              $
              3,066,112
 
 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 amount of taxes, which amounted from $4.9 million to $49 million
        as of
        December 31, 2006. No provision for the potential tax penalties has been
        made in
        the Group's financial statements as management of the Group believes that
        the
        Group did not cause the late payment of taxes, and that the possibility of
        having to pay such late payment penalties is highly unlikely.
   11
  
 
 CHINA-BIOTICS,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Amount
        expressed in US Dollars)
 
 
 11. COMMITMENTS
        AND CONTINGENCIES
 
 COMMITMENTS
 
 In
        addition to the commitments as disclosed in the notes to the audited financial
        statements for fiscal years ended March 31, 2005 and 2006, the Group made
        additional commitments during the period from April to December 2006. In
        May,
        2006, the Group entered into an agreement with an unrelated party for marketing
        and investor relation services for a period of one year. Under this agreement,
        a
        further $165,000 is due and payable ratably on a monthly basis over the period
        from June 2006 to May 2007, and an additional payment of $40,000 is due and
        payable upon the achievement of certain measurable targets. In October, 2006,
        the Group entered into four tenancy agreements with an unrelated parties
        for
        renting of retail stores for a period of three years.
 
 CONTINGENCIES
 
 As
        disclosed in Note 10, the Group has its principal operations in the PRC.
        Business enterprises are subject to income taxes and value added taxes under
        PRC
        tax laws and regulations unless they have exemptions. It has been the belief
        of
        the Group's management that its PRC operations were exempted from income
        taxes
        and value added taxes as these operations were recognized by the local
        government as an advanced technology enterprise. The Group, however, has
        never
        received a written confirmation from the appropriate tax authorities for
        the tax
        exemption status of its PRC operations. In January 2006, management of the
        Group's PRC operations took initiative to make tax payments to the PRC tax
        authorities for the calendar year 2005, and accrual for all applicable tax
        liabilities, plus surcharge, for all prior fiscal years were reflected in
        the
        Group's financial statements. According to PRC tax regulations, the Group's
        outstanding tax payables for calendar years prior to 2005 may be subject
        to
        potential penalties for the late payment of taxes which is calculated on
        the
        basis of 0.5 times to 5 times amount of taxes, which amounted from $4.9 million
        to $49 million as of December 31, 2006. Under the Statements of Financial
        Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, it is required
        to accrue a charge to income for an estimated loss from a loss contingency
        if
        two conditions are met: (a) information available prior to issuance of the
        financial statements indicates that it is probable that an asset had been
        impaired or a liability had been incurred at the date of the financial
        statements, and (b) the amount of loss can be reasonably estimated. SFAS
        defines
        the levels of probability as to whether or not future events will confirm
        the
        existence of a loss as follows: (1) probable - the future event or events
        are
        likely to occur, (2) reasonably possible - the chance of the future events
        occurring is more than remote but less than likely, and (3) remote - the
        chance
        of the future event or events occurring is slight. No provision for the
        potential tax penalties has been made in the Group's financial statements
        as
        management of the Group believes the Group did not cause the late payment
        of
        taxes, and that the probability of having to pay such late payment penalties
        is
        remote.
   12
  
 **ITEM
        2.** **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 **NOTE
        REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
        Quarterly Report on Form 10-QSB, including the following "Management's
        Discussion and Analysis of Financial Condition and Results of Operations",
        contains forward-looking statements which involve risks and uncertainties,
        including statements regarding our capital needs, business strategy and
        expectations. Any statements contained herein that are not statements of
        historical fact may be deemed to be forward-looking statements. In some cases,
        you can identify forward-looking statements by terminology such as “may,” “should,” “will,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”
        “predict,” “potential,” “forecast,” “project”
        or “continue,” the negative of such terms or other comparable
        terminology.
 
 You
        should not rely on forward-looking statements as predictions of future events
        or
        results. Any or all of our forward-looking statements may turn out to be
        wrong.
        They can be affected by inaccurate assumptions, risks and uncertainties and
        other factors which could cause actual events or results to be materially
        different from those expressed or implied in the forward-looking statements.
        In
        evaluating these statements, you should consider various factors, including
        the
        risks described under “Risk Factors” in our Forms 10-KSB, Forms 10-QSB and other
        SEC filings. These factors may cause our actual results to differ materially
        from any forward-looking statement. In addition, new factors emerge from
        time to
        time and it is not possible for us to predict all factors that may cause
        actual
        results to differ materially from those contained in any forward-looking
        statements. We disclaim any obligation to publicly update any forward-looking
        statements to reflect events or circumstances after the date of this report,
        except as required by applicable law.
 
 Except
        as
        otherwise indicated by the context, references in this Quarterly Report on
        Form
        10-QSB to “we,” “us,”
        or “our”
are
        to the combined business of China-Biotics, Inc. (“the Company”) and its
        wholly-owned direct subsidiaries, Sinosmart Group Inc. (“SGI”) and Growing State
        Limited (“GSL”), and SGI's wholly-owned subsidiary, Shanghai Shining
        Biotechnology Co. Ltd. (“Shining”), and GSL's wholly-owned subsidiary, Growing
        Bioengineering (Shanghai) Co. Ltd. (“GBS”). References to “China” or to the
“PRC” are references to the People's Republic of China. All references to
“dollars” or “$”refers to United States dollars.
 
 **Overview**
 
 We
        manufacture and sell probiotics products. Probiotics comprise mainly live
        bacteria, which we produce using advanced proprietary fermentation technology.
        Currently, our products are 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, 2006 and the quarter ended December 31, 2006, substantially all our sales
        revenue comprised amounts receivable from the distributors for the sale of
        these
        products. Typically, 60 to 90 days' credits are given to the
        distributors.
  Our
        first
        product, Shining Essence, which was launched in April 2001, remains our
        best-selling product. Sales of Shining Essence represented approximately
        70% and
        68% of our total sales for the years ended March 31, 2005 and 2006,
        respectively, and 67 %
        and 64%
        for the quarter ended December 31, 2005 and 2006 respectively. In addition
        to
        Shining Essence, we have successfully created other new products, such as
        Shining Signal. As we release new products in the future, we expect the
        percentage contribution of Shining Essence to our total sales to decrease.
        As
        our products comprise mainly live bacteria, which are reproduced by
        fermentation, we have historically had a low cost of production.
  We
        intend
        to expand our sales to other cities in China through a combination of
        distributors and our stores (training and logistics centers). In this regard,
        we
        opened our first pilot centre 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 centers will be met initially by increasing production from our
        existing plant, which currently has spare capacity, and in the longer term
        from
        our new plant. We expect that our centers 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. However, with more staff and agents
        there
        will be more selling and general and administrative expenses, with the result
        that we do not expect significant changes to our overall profit
        margins.
   13
  
 Our
        management believes that as China becomes more affluent, its citizens are
        becoming more health conscious. This has led to higher demand for health
        and
        functional food such as probiotics and yogurt. In addition, probiotics are
        increasingly used as additives in the production of infant formula. Based
        on
        informal discussions with officials from the Ministry of Health, we expect
        that
        it will become mandatory for baby milk powders produced in China to contain
        probiotics. Currently, the probiotics used in China for such purposes are
        imported. To capitalize on what we believe is a significant opportunity in
        this
        area, we are planning to construct a plant that will enable us to capture
        the
        anticipated demand for food additives. We expect the new plant will commence
        production by the first half of 2008 and start to make significant contribution
        to our earnings in 2008. The costs for business expansion, expected to be
        approximately $18 million for the first phase, will be financed by our internal
        working capital. In connection with our plan to build the new plant, on March
        21, 2006, our wholly-owned subsidiary, Growing State Limited, entered into
        an
        agreement with Shanghai Qingpu Industrial Park District Development (Group)
        Company Limited for the lease of 73,157 square meters of land in the Shanghai
        Qingpu Industrial Park District, on which we will construct a plant consisting
        of bulk manufacturing facilities that will have an initial capacity of 150
        tons
        per year of bulk product with the room for expansion to 300 tons per year.
        We
        have made a construction application relating to the new plant. As of December
        31, 2006, we are still awaiting these government approvals.
  Our
        management believes that the following trends in China will have an important
        impact on, and present significant opportunities for, our business:
 ** ̇**
              **Increasing
                  demand for functional food products.**As
                  the discretionary income and health-consciousness of the average
                  Chinese
                  consumer increase, we expect the demand for functional foods and
                  dietary
                  supplements to increase.
 
 
 ** ̇**
              **Curtailment
                  of the use of antibiotics and government support for
                  probiotics.**China has the highest per capita consumption of antibiotics in
                  the world.
                  To curtail the overuse of antibiotics, the Chinese government has
                  taken
                  steps to limit the use of antibiotic drugs. Moreover, the Chinese
                  State
                  Food and Drug Administration has also acknowledged that probiotics
                  are
                  beneficial for human health.
 
 
 ** ̇**
              **Increasing
                  demand for dairy product additives.**The demand for functional foods and foods that use probiotic supplements
                  is growing at a significant rate and our management believes that
                  it will
                  continue to do so. Moreover, based on informal discussions with
                  officials
                  at the Chinese Ministry of Health, we expect that the Chinese Ministry
                  of
                  Health will make it mandatory for baby milk powders sold in China
                  to
                  contain live bacteria.
 
 Our
        management expects to capitalize on the opportunities created by these trends
        to
        achieve significant growth through:
 
 ** ̇**
              **The
                  introduction of bulk additives products.**We believe we are poised to achieve first-mover advantage into
                  the bulk
                  additive business for functional foods through the completion of
                  our
                  150-ton capacity plant, which is scheduled to commence production
                  by early
                  2008 and which we believe will start to make significant contribution
                  to
                  our earnings in 2008. Phase 1 of the project, which involves
                  constructing a facility capable of producing 150 tons of probiotics
                  per
                  annum, is expected to cost $18 million. Subsequent phases of this
                  project
                  will only commence when demand for probiotics has exceeded the
                  production
                  capacity of the Phase 1 facility, and may increase the overall
                  project costs to an estimated $30 million. The construction cost
                  of the
                  plant will be funded by cash at hand and cash inflow from operations.
                  In
                  connection with our plan to build the new plant, on March 21, 2006,
                  our
                  wholly-owned subsidiary, Growing State Limited, entered into an
                  agreement
                  with Shanghai Qingpu Industrial Park District Development (Group)
                  Company
                  Limited for the lease of 73,157 square meters of land in the Shanghai
                  Qingpu Industrial Park District, on which we will construct our
                  new plant
                  consisting of bulk manufacturing facilities that will have an initial
                  capacity of 150 tons per year of bulk product with the room for
                  expansion
                  to 300 tons per year. As of December 31, 2006, we are still awaiting
                  for
                  the approval from the relevant government authorities to grant
                  a
                  construction permit.
   14
  
 ** ̇**
              **The
                  geographical expansion of retail sales through direct sales and
                  traditional sales channels.**We
                  intend to expand our sales to other cities in China through a combination
                  of distributors and our training and logistics centers. In this
                  regard, we
                  opened our first pilot center in Shanghai in March 2006 and intend
                  to open
                  over 300 centers over the next two years. We expect that the additional
                  demands from opening new centers will be met initially by increasing
                  production from our existing plant, which currently has spare capacity,
                  and in the longer term from our new plant that will have a capacity
                  of
                  150-300 tons. The initial, 150-ton phase of our new plant is scheduled
                  to
                  commence operations by early 2008. With our direct sales network,
                  we will
                  be selling to the end users, thereby capturing the margin previously
                  made
                  by our distributors. However, with more staff and agents there
                  will be
                  more selling and general and administrative expenses, with the
                  result that
                  we do not expect significant changes to our overall profit
                  margins.
 
 
 ** ̇**
              **The
                  development of new products.**We have introduced several new products which are sold exclusively
                  in our
                  stores. We plan to continue to develop new products aimed at improving
                  the
                  general health conditions of humans, enhancing their immune system
                  and
                  reducing health problems to strengthen our product pipeline so
                  that we may
                  offer a wider array of products for sale in the Shining
                  stores.
  
 **Results
        of Operations**
 
 **Quarter
        Ended December 31, 2006 Compared with the Quarter Ended December 31,
        2005**
 
 We
        achieved a net income of $3.60 million in the quarter ended December 31,
        2006,
        which was 23% above our net income of $2.93 million for the quarter ended
        December 31, 2005. Our growth in net income primarily resulted from growth
        in
        our sales volume on our products. Shining Essence continued to be our best
        selling product, accounting for 64% and 62% of our sales revenue for the
        three
        months and nine months ended December 31, 2006, respectively (67% and 70%
        for
        the three months and nine months ended December 31, 2005, respectively).
        Shining
        Essence's sales volume grew by 18% and 27% for the three months and nine
        months
        ended December 31, 2006, respectively (54% and 45% for the three months and
        nine
        months ended December 31, 2005, respectively). The growth in sales volume
        of
        three of our other products (Shining Signal, Shining Golden Shield and Shining
        Energy) ranged from 29% to 50% for the three months and 43% to 94% for the
        nine
        months ended December 31, 2006 respectively, compared with the same period
        last
        year. We launched several new products during 2006. These products contributed
        only 1.04% of our sales revenue for the nine months ended December 31,
        2006.
 
  15
  
 As
        of
        December 31, 2006, we had a total of nine training and logistics centers
        in
        operation. We also spent $1.4 million to improve our existing production
        and
        research facilities in the nine months ended December 31, 2006.
 
 Our
        results for the three months and nine months ended December 31, 2005 and
        2006
        are summarized below:
 
 Three
                  months ended December 31, 2005
              
              Three
                  months ended December 31, 2006Amount
              
              %
                  of Net sales
              
              Amount
              
              %
                  of Net sales**Net
                  sales**
              
              $
              6,677,975
              
              
              100.00
              %
              $
              8,763,150
              
              
              100.00
              %Cost
                  of sales
              
              
              (1,886,904
              )
              
              -28.26
              %
              
              (2,510,544
              )
              
              -28.65
              %**Gross
                  profit**
              
              $
              4,791,071
              
              
              71.74
              %
              $
              6,252,606
              
              
              71.35
              %Operating
                  expenses:Selling
                  expenses
              
              $
              (575,843
              )
              
              -8.62
              %
              $
              (1,044,175
              )
              
              -11.92
              %General
                  and administrative expenses
              
              
              (233,939
              )
              
              -3.50
              %
              
              (584,020
              )
              
              -6.66
              %Total
                  operating expenses
              
              $
              (809,782
              )
              
              -12.12
              %
              $
              (1,628,195
              )
              
              -18.58
              %**Income
                  from operations**
              
              $
              3,981,289
              
              
              59.62
              %
              $
              4,624,411
              
              
              52.77
              %Other
                  income and expenses:Other
                  income
              
              $
              16,114
              
              
              0.24
              %
              $
              37,864
              
              
              0.43
              %Other
                  expenses
              
              
              (71)
              
              
              0.00
              %
              
              (50,731
              )
              
              -0.58
              %Total
                  other income (expenses)
              
              $
              16,043
              
              
              0.24
              %
              $
              (12,867)
              
              
              -0.15
              %**Income
                  before taxes**
              
              $
              3,997,332
              
              
              59.86
              %
              $
              4,611,544
              
              
              52.62
              %Provision
                  for income taxes
              
              
              (1,070,148
              )
              
              -16.03
              %
              
              (1,009,310
              )
              
              -11.52
              %**Net
                  income**
              
              $
              2,927,184
              
              
              43.83
              %
              $
              3,602,234
              
              
              41.10
              %
   Nine
                  months ended December 31, 2005
              
              Nine
                  months ended December 31, 2006Amount
              
              %
                  of Net sales
              
              Amount
              
              %
                  of Net sales**Net
                  sales**
              
              $
              15,061,192
              
              
              100.00
              %
              $
              22,233,151
              
              
              100.00
              %Cost
                  of sales
              
              
              (4,403,612
              )
              
              -29.24
              %
              
              (6,519,647
              )
              
              -29.32
              %**Gross
                  profit**
              
              $
              10,657,580
              
              
              70.76
              %
              $
              15,713,504
              
              
              70.68
              %Operating
                  expenses:Selling
                  expenses
              
              $
              (1,475,486
              )
              
              -9.80
              %
              $
              (3,266,162
              )
              
              -14.69
              %General
                  and administrative expenses
              
              
              (384,260
              )
              
              -2.55
              %
              
              (1,374,744
              )
              
              -6.18
              %Total
                  operating expenses
              
              $
              (1,859,746
              )
              
              -12.35
              %
              $
              (4,640,906
              )
              
              -20.87
              %**Income
                  from operations**
              
              $
              8,797,834
              
              
              58.41
              %
              $
              11,072,598
              
              
              49.81
              %Other
                  income and expenses:Other
                  income
              
              $
              44,311
              
              
              0.29
              %
              $
              142,242
              
              
              0.63
              %Other
                  expenses
              
              
              (71)
              
              
              0.00
              %
              
              (89,476
              )
              
              -0.40
              %Total
                  other income (expenses)
              
              $
              44,240
              
              
              0.29
              %
              $
              52,766
              
              
              0.23
              %**Income
                  before taxes**
              
              $
              8,842,074
              
              
              58.70
              %
              $
              11,125,364
              
              
              50.04
              %Provision
                  for income taxes
              
              
              (2,767,899
              )
              
              -18.38
              %
              
              (3,066,112
              )
              
              -13.79
              %**Net
                  income**
              
              $
              6,074,175
              
              
              40.32
              %
              $
              8,059,252
              
              
              36.25
              %
   16
  
 
 *Net
        sales*
 
 Net
        sales
        in our financial statements are stated at invoiced value less sales tax.
        Our net
        sales for the three months and nine months ended December 31, 2005 and 2006
        comprised of the following:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006Invoiced
                  value on sales
              
              $
              6,711,901
              
              $
              8,818,984
              
              $
              15,139,966
              
              $
              22,374,261Less
                  : sales tax
              
              
              (33,926
              )
              
              (55,834
              )
              
              (78,774
              )
              
              (141,110
              )$
              6,677,975
              
              $
              8,763,150
              
              $
              15,061,192
              
              $
              22,233,151
 
 Net
        sales
        of $8,763,150 for the quarter ended December 31, 2006 were 31.22% above the
        net
        sales of $6,677,975 for the quarter ended December 31, 2005. Net sales of
        $22,233,151 for the nine months ended December 31, 2006 were 47.62% above
        the
        net sales of $15,061,192 for the nine months ended December 31, 2005. The
        increase was mainly attributable to increased sales volume.
 
 The
        contributions of each product as a percentage of invoiced value on sales
        for the
        three months and nine months ended December 31, 2005 and 2006 respectively
        are
        summarized below:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006Shining
                  Essence Capsules
              
              
              67
              %
              
              64
              %
              
              70
              %
              
              62
              %Shining
                  Signal Capsules
              
              
              18
              %
              
              18
              %
              
              15
              %
              
              19
              %Shining
                  Golden Shield Capsules
              
              
              8
              %
              
              9
              %
              
              9
              %
              
              9
              %Shining
                  Energy Capsules
              
              
              7
              %
              
              9
              %
              
              6
              %
              
              9
              %Miscellaneous
              
              
              0
              %
              
              -
              %
              
              0
              %
              
              1
              %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, 2005 and 2006 are summarized
        below:
  Percentages
                  increase (decrease) from the prior yearThree
                  months ended December 31,2005
              
              2006Unit
                  volume
              
              Selling
                  prices
              
              Overall
                  increase / (decrease)
              
              Unit
                  volume
              
              Selling
                  prices
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              54
              %
              
              -3
              %
              
              49
              %
              
              18
              %
              
              1
              %
              
              17
              %Shining
                  Signal Capsules
              
              
              113
              %
              
              2
              %
              
              117
              %
              
              29
              %
              
              -3
              %
              
              25
              %Shining
                  Golden Shield Capsules
              
              
              14
              %
              
              3
              %
              
              17
              %
              
              50
              %
              
              -2
              %
              
              47
              %Shining
                  Energy Capsules
              
              
              100
              %
              
              -4
              %
              
              92
              %
              
              50
              %
              
              3
              %
              
              54
              %Miscellaneous
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              100
              %
              
              N/A
              
              
              100
              %
 
 
 Percentages
                  increase (decrease) from the prior yearNine
                  months ended December 31,2005
              
              2006Unit
                  volume
              
              Selling
                  prices
              
              Overall
                  increase / (decrease)
              
              Unit
                  volume
              
              Selling
                  prices
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              45
              %
              
              -2
              %
              
              42
              %
              
              27
              %
              
              -1
              %
              
              26
              %Shining
                  Signal Capsules
              
              
              60
              %
              
              2
              %
              
              63
              %
              
              94
              %
              
              -2
              %
              
              90
              %Shining
                  Golden Shield Capsules
              
              
              16
              %
              
              2
              %
              
              18
              %
              
              43
              %
              
              1
              %
              
              44
              %Shining
                  Energy Capsules
              
              
              70
              %
              
              -6
              %
              
              60
              %
              
              77
              %
              
              8
              %
              
              91
              %Miscellaneous
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              100
              %
              
              N/A
              
              
              100
              %
   17
  *Cost
        of sales*
 
 Cost
        of
        sales for the three months ended December 31, 2006 was $2,510,544 compared
        with
        $1,886,904 for the three months ended December 31, 2005. Cost of sales for
        the
        nine months ended December 31, 2006 was $6,519,647 compared with $4,403,612
        for
        the nine months ended December 31, 2005. The increase in cost of sales was
        primarily caused by increased sales volume. The increase in production volume
        has resulted in slightly lower overhead on a per unit basis.
 
 Unit
        volume and unit costs comparatives for the three months and nine months ended
        December 31, 2005 and 2006 are summarized below:
 
 Percentages
                  increase (decrease) from the prior yearThree
                  months ended December 31,2005
              
              2006Unit
                  volume
              
              Unit
                  costs
              
              Overall
                  increase / (decrease)
              
              Unit
                  volume
              
              Unit
                  costs
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              54
              %
              
              -3
              %
              
              49
              %
              
              18
              %
              
              1
              %
              
              19
              %Shining
                  Signal Capsules
              
              
              113
              %
              
              2
              
              
              117
              %
              
              29
              %
              
              -3
              %
              
              25
              %Shining
                  Golden Shield Capsules
              
              
              14
              %
              
              3
              
              
              17
              %
              
              50
              %
              
              -2
              %
              
              47
              %Shining
                  Energy Capsules
              
              
              100
              %
              
              -4
              
              
              92
              %
              
              50
              %
              
              3
              %
              
              54
              %Miscellaneous
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              100
              %
              
              N/A
              
              
              100
              %
 
 
 Percentages
                  increase (decrease) from the prior yearNine
                  months ended December 31,2005
              
              2006Unit
                  volume
              
              Unit
                  costs
              
              Overall
                  increase / (decrease)
              
              Unit
                  volume
              
              Unit
                  costs
              
              Overall
                  increase / (decrease)Shining
                  Essence Capsules
              
              
              45
              %
              
              -2
              %
              
              42
              %
              
              27
              %
              
              -1
              %
              
              26
              %Shining
                  Signal Capsules
              
              
              60
              %
              
              2
              %
              
              63
              %
              
              94
              %
              
              -2
              %
              
              90
              %Shining
                  Golden Shield Capsules
              
              
              16
              %
              
              2
              %
              
              18
              %
              
              43
              %
              
              1
              %
              
              44
              %Shining
                  Energy Capsules
              
              
              70
              %
              
              -6
              %
              
              60
              %
              
              77
              %
              
              8
              %
              
              91
              %Miscellaneous
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              100
              %
              
              N/A
              
              
              100
              %
 
 *Gross
        profit*
 
 Gross
        profit for the three and nine months ended December 31, 2006 were $6,252,606
        and
        $15,713,504 respectively, representing a growth of 31% and 47% as compared
        to
        the corresponding periods of last year. The increase in gross profit was
        primarily due to an increase in sales volume.
 
 The
        contributions of each product as a percentage of total gross profit for the
        three months and nine months ended December 31, 2005 and 2006 are summarized
        below:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006%
              
              %
              
              %
              
              %Shining
                  Essence Capsules
              
              
              73
              %
              
              69
              %
              
              76
              %
              
              68
              %Shining
                  Signal Capsules
              
              
              13
              %
              
              14
              %
              
              11
              %
              
              15
              %Shining
                  Golden Shield Capsules
              
              
              6
              %
              
              7
              %
              
              6
              %
              
              7
              %Shining
                  Energy Capsules
              
              
              8
              %
              
              10
              %
              
              7
              %
              
              9
              %Miscellaneous
              
              
              0
              %
              
              0
              %
              
              0
              %
              
              1
              %100
              %
              
              100
              %
              
              100
              %
              
              100
              %
  The
        average gross profit percentage for all of our product for the three months
        and
        nine months ended December 31, 2005 and 2006 is summarized below:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006Average
                  for all products
              
              
              71.74
              %
              
              71.35
              %
              
              70.76
              %
              
              70.68
              %
 
 *Selling
        expenses*
 
 Selling
        expenses were $1,044,175 or 11.92% of net sales for the quarter ended December
        31, 2006 compared with $575,843 or 8.62% of net sales for the quarter ended
        December 31, 2005. The increase was mainly attributable to an increase in
        advertising expenses, which was the most significant item included in selling
        expenses. Advertising expenses accounted for 66% of total selling expenses
        for
        the quarter ended December 31, 2006 (75% for the quarter ended December 31,
        2005). Advertising expenses were increased to support the gradual roll out
        of
        training and logistic centers.
 
 *General
        and administrative expenses*
 
 General
        and administrative expenses were $584,020 or 6.66% of net sales for the quarter
        ended December 31, 2006 compared with 233,939 or 3.50% of net sales for the
        quarter ended December 31, 2005. The increase of $350,081 was primarily due
        to
        additional investor relations fees and research and development fees.
   18
  
 *Provision
        for income taxes*
 
 Provision
        for income taxes for the three months and nine months ended December 31,
        2005
        and 2006 comprised the following items:
  Three
                  months ended December 31,
              
              Nine
                  months ended December 31,2005
              
              2006
              
              2005
              
              2006Income
                  taxes
              
              $
              593,997
              
              $
              719,521
              
              $
              1,353,519
              
              $
              1,842,285Surcharge
                  at 0.5% per day on accrued taxes
              
              
              476,151
              
              
              289,789
              
              
              1,414,380
              
              
              1,223,827Total
                  provision for income
              
              $
              1,070,148
              
              $
              1,009,310
              
              $
              2,767,899
              
              $
              3,066,112
 
 The
        increase in income taxes for the three months ended December 31, 2006 was
        due to
        higher income before taxes which increased 15%. The tax surcharge was accrued
        for unpaid taxes relating to calendar years prior to 2005.
 
 Our
        principal operations are in China. Business enterprises established in China
        are
        subject to income taxes and value added taxes under Chinese tax laws and
        regulations unless they have exemptions. We have made tax payments to the
        Chinese tax authorities 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, 2006. No provision for the potential
        tax
        penalties has been made in our financial statements as our management believes
        that the possibility of having to pay the penalties is remote.
   19
  
 *Segment
        reporting*
 
 We
        have
        adopted the “products and services” approach for segment reporting. For the
        three months and nine months ended December 31, 2005 and 2006, we had only
        one
        reporting segment--the probiotic products as health supplement. We manufactured
        and sold the probiotic products solely in China and delivered all shipments
        to
        destinations within China, and all of our long-lived assets were physically
        located in China. We made all sales to external customers, and no single
        customer accounted for 10% or more of our total sales.
 
 **Liquidity
        and Capital Resources**
 
 We
        had
        cash of $24.95 million and working capital of $18.16 million as of December
        31,
        2006. We started to pay taxes in early 2006 in respect of the 2005 fiscal
        year.
        Prior to that, we did not pay taxes. As a result, during the nine months
        ended
        December 31, 2005, cash generated from operations of $10.25 million was higher
        than the net income for the period of $6.07 million. Cash generated from
        operations for the nine months ended December 31, 2006 of $5.89 million was
        lower than the net income for the period of $8.06 million.
 
 We
        had
        capital expenditures totaling $1.4 million in the nine months ended December
        31,
        2006, primarily on improvements to production and research facilities. We
        did
        not spend any cash on acquisition of assets in fiscal year 2005. We did not
        have
        any cash flows from/used in financing activities for the quarter ended December
        31, 2006.
 
 Our
        current facility commenced operations in 2000. Despite the increases in sales
        volume in the last couple of years, we still have spare production capacity.
        We
        have started to plan construction of a new plant with an overall project
        size of
        $30 million. Phase 1 of the project involves constructing a facility capable
        of
        producing 150 tons of probiotics per annum and is estimated to cost $18 million,
        $16 million of which is expected to be paid in the first quarter of fiscal
        year
        2008 and the balance by the end of 2007.  Subsequent phases of this project
        will only commence when demands for probiotics have exceeded the production
        capacity of the Phase 1 facility.
 
 We
        intend
        to expand our sales to other cities in China through a combination of
        distributors and our training and logistics centres. In this regard, we opened
        our first pilot centre in Shanghai in March 2006 and intend to open over
        300 centers over the next two years at an anticipated cost of approximately
        $11million. In preparation for the opening of our training and logistics
        centre,
        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 training and logistics centers
        offerings. As our development costs mainly comprise staff costs, we do not
        expect that such costs will be significant.
 
 Shining,
        our wholly-owned subsidiary, made advances to its equity holders (whom are
        referred to as related parties in the summary above) prior to the share exchange
        under which it became our wholly-owned subsidiary. The total amount of $1.71
        million of advances was fully repaid to us in March 2006, shortly after the
        share exchange.
 
 Taking
        into account our current cash position and our anticipated cash flows from
        operations, we expect we will be able to meet all our funding needs, including
        payments required in the next twelve months to settle our contractual
        obligations, for the construction of our new plant and for our opening of
        new
        stores. No assurance, however, can be given that our business plan will succeed.
        In the event that our business plan does not materialize as predicted, we
        may
        need to seek external financing to fund our expansion plan. There can be
        no
        assurance that we will be able to raise the needed capital on favorable terms,
        if at all. In addition, there is no assurance that our estimate of our liquidity
        needs is accurate or that new business development or other unforeseen events
        will not occur, resulting in the need to raise additional funds.
   20
  
 **Inflation**
 
 We
        believe that inflation has not had a material impact on our results of
        operations for the three months and nine months ended December 31, 2005 and
        2006.
 
 **Seasonality**
 
 Typically,
        60% of our sales take place in the second half of the fiscal year. We may
        experience additional seasonal variations in our future revenues and our
        operating costs; however, we do not believe that these variations will be
        material.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements.
 
 **Research
        and Development Expenditures**
 
 We
        have a
        research and development team supported by a technical advisory board of
        experts. In addition to having advanced technology in bacteria culturing
        and
        protection, we also conduct research and development into complimentary
        technology, including genetically engineered drugs, drug delivery solutions
        and
        Chinese medicine, in an effort formulates solutions to address specific health
        problems and expand our product line. We incurred research and development
        costs
        of approximately $176,000 and $246,000 in the three months and nine months
        ended
        December 31, 2006, respectively, and $15,000 and $40,000 in the three months
        and
        nine months ended December 31, 2005, respectively. Such research and development
        costs are mainly comprised of staff salaries in the research and development
        division, which were included as part of the production costs in the Company's
        financial statements for such periods.
 
 **Critical
        Accounting Policies**
 
 Our
        critical accounting policies are described in the Notes to the Financial
        Statements included in our Annual Report filed with the SEC on Form 10-KSB
        for
        the fiscal year ended March 31, 2006, and this Form 10-QSB should be read
        in
        conjunction with that Annual Report. This MD&A discusses our consolidated
        financial statements for the three months ended December 31, 2005 and 2006.
        These financial statements have been prepared in accordance with generally
        accepted accounting principles in the United States. In preparing these
        financial statements, we are required to make estimates and assumptions
        affecting the reported amounts of assets and liabilities and the disclosure
        of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        On an
        ongoing basis, we evaluate our estimates and judgments. We base our estimates
        and judgments on historical experience and on various other factors we believe
        are reasonable under the circumstances, the results of which form the basis
        for
        making judgments about the carrying values of assets and liabilities not
        readily
        apparent from other sources. Actual results may differ from these estimates
        under different assumptions or conditions.
 
 We
        consider accounting policies related to (a) allowance for doubtful accounts,
        and
        (b) use of estimates as applied to potential penalties for the late payment
        of
        taxes, to be critical accounting policies due to the estimation process involved
        in each.
 
 *Allowance
        for doubtful accounts*
 
 We
        maintain an allowance for doubtful accounts for estimated losses that may
        result
        from the inability of our customers to make required payments. Such allowances
        are based upon several factors including, but not limited to, historical
        experience and the current and projected financial condition of specific
        customers. Since our inception of business, we have never experienced any
        unrecoverable receivables. We have not experienced situations causing us
        to
        caste doubt on the ability of our customers to make required payments. The
        balance of our allowance for doubtful account has always been zero. We had
        trade
        receivables totaling $14,642,606 as of December 31, 2006, and a zero balance
        for
        allowance for doubtful accounts. We have considered all relevant factors,
        including the financial conditions, affecting the payment abilities of customers
        comprising these receivables up to the date of this Form-10QSB and we believe
        these customers are able to make required payments. We, however, cannot give
        assurance that these factors, including the financial conditions of these
        customers, will not change adversely in the future. We will continue to evaluate
        the ability of all our customers to make required payments. Were the financial
        condition of a customer to deteriorate, resulting in an impairment of its
        ability to make payments, allowances may be required.
   21
  
 *Use
        of estimates as applied to potential penalties for the late payment of
        taxes*
 
 As
        disclosed in our financial statements for the fiscal years ended March 31,
        2005
        and 2006, we have made tax payments to the Chinese tax authorities for 2005.
        We
        believe that our operations in China were exempted from income taxes and
        value
        added taxes for all prior years because we had been recognized by the local
        government as an advanced technology enterprise. However, we have never received
        a written confirmation from the appropriate tax authorities for the tax
        exemption status of our operations in China. As a result, there is no way
        to
        ascertain the position which may be taken by the relevant Chinese tax
        authorities in the future. Accordingly, our financial statements contain
        full
        provisions for all applicable tax liabilities, plus surcharge, for all prior
        calendar years. Such provisions for tax liabilities and surcharge will be
        reversed out of the financial statements at the appropriate point in the
        future.
 
 According
        to Chinese tax regulations, our outstanding tax payable in China for the
        calendar years prior to 2005 may be subject to potential penalties for the
        late
        payment of taxes which is calculated on the basis of 0.5 times to five times
        the
        amount of taxes payable. This amounts to $4.9 million (if calculated based
        on
        0.5 times of taxes payable) to $49 million (if calculated based on five times
        of
        the amount of taxes payable) as of December 31, 2006. Under the Statements
        of
        Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, it
        is required to accrue a charge to income for an estimated loss from a loss
        contingency if two conditions are met: (a) information available prior to
        issuance of the financial statements indicates that it is probable that an
        asset
        had been impaired or a liability had been incurred at the date of the financial
        statements, and (b) the amount of loss can be reasonably estimated. SFAS
        defines
        the levels of probability as to whether or not future events will confirm
        the
        existence of a loss as follows: (1) probable - the future event or events
        are
        likely to occur, (2) reasonably possible - the chance of the future events
        occurring is more than remote but less than likely, and (3) remote - the
        chance
        of the future event or events occurring is slight. No provision for the
        potential tax penalties has been made in our financial statements as we believe
        we did not cause the late payment of taxes, and that the probability of having
        to pay such late payment penalties is remote. We have reviewed our tax situation
        up to the date of this Form-10QSB, and concluded that the probability of
        having
        to pay such late payment penalties remains remote.
 
 **Recent
        Accounting Pronouncements**
   22
  
 In
        February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments” SFAS No. 155 amends SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interests that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
        CHINA-BIOTICS, INC. AND SUBSIDIARIES qualifying special-purpose entity from
        holding a derivative financial instrument that pertains to a beneficial interest
        other than another derivative financial instrument. This statement is effective
        for all financial instruments acquired or issued after the beginning of our
        first fiscal year that begins after September 15, 2006. We have not evaluated
        the impact of this pronouncement on our financial statements.
 
 In
        March
        2006, FASB issued SFAS 156 “Accounting for Servicing of Financial Assets” this
        Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
        of Financial Assets and Extinguishments of Liabilities, with respect to the
        accounting for separately recognized servicing assets and servicing liabilities.
        This Statement:
 
 1. Requires
        an entity to recognize a servicing asset or servicing liability each time
        it
        undertakes an obligation to service a financial asset by entering into a
        servicing contract.
 
 2. Requires
        all separately recognized servicing assets and servicing liabilities to be
        initially measured at fair value, if practicable.
 
 
 3. Permits
        an entity to choose `Amortization method' or `Fair value measurement method'
        for
        each class of separately recognized servicing assets and servicing
        liabilities.
 
 4. At
        its initial adoption, permits a one-time reclassification of available-for-sale
        securities to trading securities by entities with recognized servicing rights,
        without calling into question the treatment of other available-for-sale
        securities under Statement 115, provided that the available-for-sale securities
        are identified in some manner as offsetting the entity's exposure to changes
        in
        fair value of servicing assets or servicing liabilities that a servicer elects
        to subsequently measure at fair value.
 
 
 5. Requires
        separate presentation of servicing assets and servicing liabilities subsequently
        measured at fair value in the statement of financial position and additional
        disclosures for all separately recognized servicing assets and servicing
        liabilities. An entity should adopt this Statement as of the beginning of
        its
        first fiscal year that begins after September 15, 2006.
 
 We
        believe that this statement will not have a significant impact on our financial
        statement.
 
 In
        April
        2006, the FASB issued FASB Staff Position No. FIN 46(R)-6, “Determining the
        Variability to Be Considered in Applying FASB Interpretation No. 46(R)”(“FSP FIN
        46(R)-6”). FSP FIN 46(R)-6 requires that the determination of the variability to
        be considered in applying FIN 46R be based on an analysis of the design of
        the
        entity. In evaluating whether an interest with a variable interest entity
        creates or absorbs variability, FSP FIN 46(R)-6 focuses on the role of a
        contract or arrangement in the design of an entity, regardless of its legal
        form
        or accounting classification. The Company will adopt the guidance in FSP
        FIN
        46(R)-6 prospectively beginning September 1, 2006 to all entities that the
        Company first becomes involved with and to all entities previously required
        to
        be analyzed under FIN 46R when a reconsideration event has occurred under
        paragraph 7 of FIN 46R. We do not expect the adoption of FSP FIN 46(R)-6
        to have
        a material impact on our financial statements.
   23
  
 In
        July
        2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
        No. 109* (FIN
        48) *.* This Interpretation provides guidance for recognizing and measuring uncertain
        tax positions, as defined in SFAS No. 109, *Accounting for Income Taxes* . FIN 48
        prescribes a threshold condition that a tax position must meet for any of
        the
        benefit of the uncertain tax position to be recognized in the financial
        statements. Guidance is also provided regarding derecognition, classification
        and disclosure of these uncertain tax positions. FIN 48 is effective for
        fiscal
        years beginning after December 15, 2006. We do not expect that this
        Interpretation will have a material impact on our financial position, results
        of
        operations or cash flows.
 
 In
        June 2006, the EITF reached consensus on and ratified EITF Issue
        06-03, *How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement* (EITF
        06-03). The scope of this Issue includes any tax assessed by a governmental
        authority that is directly imposed on a revenue-producing transaction between
        a
        seller and a customer and may include, but is not limited to, sales, use,
        value
        added, and some excise taxes. The Task Force concluded that the presentation
        of
        taxes within the scope of the Issue on either a gross (included in revenues
        and
        costs) or a net (excluded from revenues) basis is an accounting policy decision
        that should be disclosed pursuant to Opinion 22. In addition, for any such
        taxes
        that are reported on a gross basis, a company should disclose the amounts
        of
        those taxes in interim and annual financial statements for each period for
        which
        an income statement is presented if those amounts are significant. The
        disclosure of those taxes can be done on an aggregate basis. The consensus
        in
        this Issue should be applied to financial reports for interim and annual
        reporting periods beginning after December 15, 2006. We believe the
        adoption of EITF 06-03 will not have a material impact on our method for
        recording and reporting these type taxes in its consolidated financial
        statements, as the Company's policy is to exclude all such taxes from
        revenue.
  In
        September 2006, the Securities and Exchange Commission issued Staff
        Accounting Bulletin (SAB) 108, *Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements.* SAB 108
        provides guidance on how prior year misstatements should be taken into
        consideration when quantifying misstatements in current year financial
        statements for purposes of determining whether the current year's financial
        statements are materially misstated. SAB 108 is effective for fiscal years
        ending on or after November 15, 2006. The adoption of SAB 108 is not
        expected to have a material impact on our financial statements.
 
 In
        September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS
        157 ). FAS 157
        defines fair value, establishes a framework for measuring fair value in
        accordance with generally accepted accounting principles, and expands
        disclosures about fair value measurements. The provisions of FAS 157
        are effective for the fiscal year beginning after November 15, 2007. We are
        currently evaluating the impact of the provisions of FAS
        157.
 
 In
        September 2006, the FASB issued FAS 158, Employers' Accounting for Defined
        Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires
        employers to fully recognize the obligations associated with single-employer
        defined benefit pension, retiree healthcare and other postretirement plans
        in
        their financial statements. The requirement by FAS 158 to recognize the funded
        status of a benefit plan and the disclosure requirements of FAS 158 are
        effective as of the end of the fiscal year ending after December 15, 2006
        for entities with publicly traded equity securities. The requirement to measure
        plan assets and benefit obligations as of the date of the employer's fiscal
        year-end statement of financial position is effective for fiscal years ending
        after December 15, 2008. We are currently evaluating the impact of the
        provisions of FAS 158.
 
 **ITEM
        3.**  **CONTROLS
        AND PROCEDURES**
 
 As
        of the
        end of the period covered by this report, our principal executive officer
        and
        principal financial officer evaluated the effectiveness of the design and
        operation of our disclosure controls and procedures.  Based upon, and as of
        the date of that evaluation, our principal executive officer and principal
        financial officer concluded that our disclosure controls and procedures are
        effective to assure that information required to be disclosed in the reports
        that we file or submit under the Securities and Exchange Act of 1934 is
        recorded, processed, summarized and reported within the time periods specified
        by the Securities and Exchange Commission's rules and forms and accumulated
        and
        communicated to our management to allow timely decisions regarding
        disclosure.
  There
        were no changes in our internal control over financial reporting during the
        quarter ended December 31, 2006 that have materially affected, or are reasonably
        likely to materially affect, our internal control over financial
        reporting.
   24
  **PART
        II - OTHER INFORMATION**
 **ITEM
        1.**  **LEGAL
        PROCEEDINGS**
 
 None.
  **ITEM
        2.**  **UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
 
 None.
  **ITEM
        3.**  **DEFAULTS
        UPON SENIOR SECURITIES**
 
 None.
  **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 None.
  **ITEM
        5.**  **OTHER
        INFORMATION**
 
 None.
  **ITEM
        6.**  **EXHIBITS**
 
 Exhibit
        31.1 - Certification of Chief Executive Officer pursuant to Section 302 of
        the
        Sarbanes-Oxley Act of 2002
 Exhibit
        31.2 - Certification of Chief Financial Officer pursuant to Section 302 of
        the
        Sarbanes-Oxley Act of 2002
 Exhibit
        32.1 - Certification of Chief Executive Officer pursuant to Section 906 of
        the
        Sarbanes-Oxley Act of 2002
 Exhibit
        32.2 - Certification of Chief Financial Officer pursuant to Section 906 of
        the
        Sarbanes-Oxley Act of 2002
 
 *
        * * *
        *
   25
  
 **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
   **CHINA-BIOTICS,
                  INC.**
                (Registrant)Date:
                February 12, 2007
              By:
              /s/
                Li
                Chi YuenLi
                Chi YuenChief
                Financial Officer
   26