The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements reflecting our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You are also urged to carefully review and consider our discussions regarding the various factors which affect our business, including the information provided in the discussion beginning on page 17 of this prospectus under the caption "Risks Related to Our Business". See the cautionary note regarding forward-looking statements at the beginning of

General

We were incorporated under the name Otish Resources, Inc. in Delaware in February 2003. Until March 2006 we were a mineral exploration stage company specializing in acquiring and consolidating mineral properties with potential for commercial ore bodies. Although we conducted some preliminary exploration work with respect to our mineral properties, we never achieved full operations with respect to our mineral properties. We had never generated any revenue from our mineral exploration operations. We incurred a total of expenses of $257,914 from inception to February 28, 2006.

On March 22, 2006, we entered into and completed a securities exchange transaction with SGI and the shareholders of SGI, pursuant to which the SGI shareholders transferred all of the equity securities of SGI to us in exchange for an aggregate of 15,980,000 shares of our common stock. At the closing of the share exchange, SGI became our wholly-owned subsidiary. Immediately after the share exchange and related transactions described elsewhere in this document, the former SGI shareholders and their designees collectively owned 98.7% of our common stock. As a result of the share exchange, we are no longer a mineral exploration stage company, and SGI's business operations become our primary operations. We are currently engaged in the research, development, production, marketing and distribution of probiotics products. These products contain live microbial food supplements which beneficially affect the host by improving its intestinal microbial balance. See "Business - History".

We accounted for the share exchange as a recapitalization whereby the historical financial statements and operations of the SGI become our historical financial statements, with no adjustment to the carrying value of the assets and liabilities. Our issued and outstanding common stock immediate prior to the share exchange is accounted for at the net book value at the time of the transaction.

Upon consummation of the share exchange, we changed our fiscal year end from August 31 to March 31 to conform to the year end date of SGI. We filed a quarterly report on Form 10-QSB on April 14, 2006 for quarter ended February 28, 2006. This quarterly report was our last filing under our previous fiscal year end date of August 31, and as a mineral exploration stage company. In our future filings with the SEC, we will report our business activities as a manufacturer and distributor of probiotics products based on our new fiscal year end date of March 31. SGI's historical financial statements will become our historical financial statements.

The results of operations related to Otish Resources, Inc., as a mineral exploration stage company, are not material and are therefore not included in the discussion below. Unless otherwise noted, all references to the "company," "we," "us" and "our" hereafter in this section refer to the current business of China-Biotics, Inc. or the historical business of SGI and its subsidiaries, as applicable.

In this document, we use the "Current rate method" to translate the financial statements of SGI from HKD into U.S. Dollars, and to translate the financial statements of Shining from RMB into U.S. Dollars, as required under the Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation" issued by the Financial Accounting Standard Board. The assets and liabilities of SGI and Shining, except for the paid-up capital, are translated into U.S. Dollars using the rate of exchange prevailing at the balance sheet date. The paid-up capital is translated at the historical rate. Adjustments resulting from the translation of SGI's and Shining's balance sheets from HKD and RMB into U.S. Dollars are recorded in shareholders' equity as part of accumulated comprehensive income. The statement of operations is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are reflected in the statement of operations for the reporting periods. The statement of cash flows is translated at average rates during the reporting period, with the exception of issue of share and payment of dividends which are translated at the historical rates. Due to the use of different rates for translation, the figures in the statement of changes in cash flows may not agree with the differences between the year end balances as shown in the balance sheets.

Overview

We manufacture and sell probiotics products. Probiotics comprise mainly live bacteria, which we produce using advanced proprietary fermentation technology. Currently, our products are sold mainly 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, 2008, over 90% of 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 61% and 48% of our total sales for the years ended March 31, 2007 and 2008, 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 will continue to decrease.

As our products comprise mainly live bacteria, which are reproduced by fermentation, we have historically had a low cost of production of which packaging costs represent the largest cost item. During the last quarter of fiscal year 2008, packaging costs have significantly increased as a result of increases in pulp and paper costs. As a result, our gross margin has reduced from 73.3% in the previous quarter to 66.4% in the fourth quarter. Management is taking action to negotiate with the suppliers of packaging materials to bring down the packaging costs going forward.

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 preservatives 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 and preservatives. 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. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics will be added to baby milk powders produced in China.

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

• The introduction of bulk additives products. We believe we are poised to achieve first-mover advantage in the bulk additive business for functional foods through the completion of our 150-ton capacity plant, which is scheduled to commence production in the fourth quarter of 2008.

Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 tons of probiotics per annum, will cost $27.50 million, $25 million of which is expected to be paid by the fourth quarter of calendar year 2008 and the balance in by the end of second quarter of calendar year 2009. These estimated costs are approximately 53% higher than the previous estimates due to a combination of improvements to the original designs, the appreciation of the Renminbi against the US dollar and significant cost inflation in China, especially steel costs, during fiscal year 2008. Management believe that the revised estimates are conservative and that we would be able to complete construction of the phase 1 of the plant at the revised cost. The construction cost of Phase 1 of the plant will be funded by cash received wholly from the sale of convertible promissory notes on December 11, 2007 and internal source of fund.

Management believes that when completed, this new production plant may be the only probiotics plant in China that will be able to meet the demands for the domestic bulk additive market. Phase 2 of this project will only commence when demand for probiotics has exceeded the production capacity of the Phase 1 facility. Phase 2 of this project is currently estimated to cost $18 million.

On March 21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park District on which we will construct this plant. The agreement provides for the payment of leasing fees of approximately $2.1 million. The Qingpu People's Republic Government issued formal confirmation of the land use right necessary for the plant construction on November 30, 2007. We have duly paid the $1.78 million leasing fee (reduced from $2.1 million because the size of the leased land was reduced to 36,075 square meters) and $210,083 refundable land deposit and are waiting for the formal land use right certificate to be issued.

• The geographical expansion of retail sales through direct sales and traditional sales channels. We intend to expand our sales to other cities in China through a combination of distributors and our own stores. In this regard, we had 60 Shining branded stores in Shanghai and 5 other major Chinese cities at March 31, 2008. We intend to have over 300 stores by the end of fiscal year 2009. We expect that the additional demands from opening new stores will be met initially by increasing production from our existing plant, which currently has the necessary capacity, and in the future from our new plant that will have a capacity of 150-300 tons. The initial, 150-ton phase of our new plant is scheduled to commence operations in the fourth quarter of 2008.

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

Our operation is generally not labor-intensive. We employed 307 people as of March 31, 2008. The construction of our new plant and the creation of the new direct sales network will result in significant increases in our number of employees as we expect our staff and employees number will increase to 1,000 over the next two years. We have been recruiting senior executives to strengthen our management team. However, as wages in China are relatively inexpensive, labor costs have remained insignificant.

Results of Operations for Fiscal Year Ended March 31, 2007 Compared with the Fiscal Year Ended March 31, 2008

Our net income was $17.5 million for the fiscal year ended March 31, 2008. This included $3.4 million surplus arising from the revaluation of the conversion feature embedded in the convertible notes issued in December 2007 as required by FAS133. Excluding this revaluation surplus, our net income was $14.1 million, which was 29.9% above our net income of $10.9 million for the fiscal year ended March 31, 2007. Our growth in net income primarily resulted from growth in our sales volume of our products. Shining Essence continued to be our best selling product. We have enjoyed strong growth in demands for many products such as Shining Golden Shield and Shining Energy which outpaced that of Shining Essence. In addition, new product sales now account for 13.6% of our sales revenue during the year ended March 31, 2008 (1.9% in the year ended March 31, 2007). As a result, the percentage of sales revenue attributable to Shining Essence has been diluted to only 48% of our total sales revenue in the year ended March 31, 2008 (61% in the year ended March 31, 2007).

Our results for 2007 and 2008 are summarized below:

                                             Years ended March 31, 2007        Years ended March 31, 2008
                                              Amount       % of Net sales       Amount       % of Net sales
Net sales                                  $ 30,609,941            100.00 %  $  42,321,111           100.00 %
Cost of sales                                (8,910,633 )           29.11 %    (12,310,092 )          29.09 %
Gross profit                               $ 21,699,308             70.89 %  $  30,011,019            70.91 %
Operating expenses:
Selling expenses                           $ (4,502,687 )           14.71 %  $  (6,869,109 )          16.23 %
General and administrative expenses          (2,265,220 )            7.40 %     (4,826,473 )          11.40 %
Total operating expenses                   $ (6,767,907 )           22.11 %  $ (11,695,582 )          27.63 %
Income from operations                     $ 14,931,401             48.78 %  $  18,315,437            43.28 %
Other income and expenses:
Other income                               $    223,401              0.73 %  $   4,163,438             9.84 %
Other expenses                                  (62,948 )            0.21 %              -                - %
Total other income (expenses)              $    160,453              0.52 %  $   4,163,438             9.84 %
Income before taxes                        $ 15,091,854             49.30 %  $  22,478,875            53.12 %
Provision for income taxes                   (4,186,868 )           13.68 %     (4,936,631 )          11.66 %
Net income                                 $ 10,904,986             35.62 %  $  17,542,244            41.45 %

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the past two fiscal years comprised of the following:

                                             Year ended March 31,
                                             2007             2008
               Invoiced value on sales   $ 30,806,063     $ 43,775,529
               Less: sales discount                 -       (1,171,096 )
               Less: sales tax               (196,122 )       (283,322 )
                                         $ 30,609,941     $ 42,321,111

Net sales of $42,321,111 for the fiscal year ended March 31, 2008 were 38.3% above the net sales of $30,609,941 for the fiscal year ended March 31, 2007. The increase was mainly attributable to increased sales volume and increases in average selling prices due to changes in sales mix.

The contributions of each product as a percentage of invoiced value on sales for the year ended March 31, 2007 and 2008 respectively are summarized below. New product sales (including Energy, Stomach Protection and others) now account for 13.6% of our sales revenue for the year ended March 31, 2008. While the sales revenues of Essence and Signal capsules have remained stable, their percentage contributions to our sales revenue have been diluted by increases in new product sales.

                                                      Year ended March 31,
                                                        2007          2008
      Shining Essence Capsules                             61.57 %      48.61 %
      Shining Signal Capsules                              18.31 %      13.23 %
      Shining Golden Shield Capsules                        9.30 %      13.12 %
      Shining Energy Capsules                               8.91 %      11.47 %
      Shining Essence Stomach Protection Capsules              - %       4.75 %
      Shining Probiotics Protein Powder                        - %       3.65 %
      Other products                                        1.91 %       5.17 %
                                                          100.00 %     100.00 %

Unit volume and unit prices comparatives (on the invoiced value of sales) for 2007 and 2008 are summarized below. The increase in selling prices of Golden Shield and Energy capsules primarily reflect a combination of price increase and changes in sales mix with more sales of packages with higher selling prices.

                                                                Percentages increase (decrease) from the prior year
                                                                               Year ended March 31,
                                                          2007                                                        2008
                                                                               Overall                                                   Overall
                                                                             increase /                                                increase /
                                 Unit volume         Selling prices          (decrease)        Unit volume        Selling prices       (decrease)
Shining Essence Capsules                   21 %                    - %                 21 %              (5 )%                 12 %               6 %
Shining Signal Capsules                    60 %                   (2 )%                57 %              (6 )%                  2 %              (4 )%
Shining Golden Shield
Capsules                                   40 %                    - %                 40 %              37 %                  34 %              84 %
Shining Energy Capsules                    72 %                    - %                 72 %              45 %                  16 %              68 %
Shining Essence Stomach
Protection Capsules                         - %                    - %                  - %             100 %                 100 %             100 %
Shining Probiotics Protein
Powder                                      - %                    - %                  - %             100 %                 100 %             100 %
Other products                          3,600 %                    - %              3,600 %             685 %                 -51 %             285 %

Cost of sales

Cost of sales for the year ended March 31, 2008 was $12,310,092 compared with $8,910,633 for the year ended March 31, 2007. The increase in cost of sales was primarily caused by increased sales volume.

Unit volume and unit costs comparatives for the year ended March 31, 2007 and 2008 are summarized below. The increase in unit costs of Golden Shield and Energy capsules primarily reflect changes in sales mix with more sales of packages with higher unit costs.

                                                         Percentages increase (decrease) from the prior year
                                                                        Year ended March 31,
                                                     2007                                                    2008
                                                                        Overall                                               Overall
                                                                       increase /                                            increase /
                              Unit volume         Unit costs           (decrease)       Unit volume        Unit costs        (decrease)
Shining Essence Capsules                21 %                 0 %                21 %              (5 )%              3 %              (2 )%
Shining Signal Capsules                 60 %                (4 )%               54 %              (6 )%             (2 )%             (8 )%
Shining Golden Shield
Capsules                                40 %                (4 )%               34 %              37 %              17 %              60 %
Shining Energy Capsules                 72 %                (3 )%               67 %              45 %              25 %              81 %
Shining Essence Stomach
Protection Capsules                      - %                 - %                 - %             100 %             100 %             100 %
Shining Probiotics Protein
Powder                                   - %                 - %                 - %             100 %             100 %             100 %
Other products                       3,600 %                 0 %             3,600 %             685 %               0 %             685 %

Gross profit

Gross profit increased by $8,311,711 from $21,699,308 for the 2007 fiscal year to $30,011,019 for the 2008 fiscal year. This represents a 38.3% increase, which reflects primarily increases in sales volume. Our gross profit margin remained the same as last year at 70.9%. In the fourth quarter of fiscal year 2008, the cost of packaging increased significantly due to increases in pulp and paper costs which reduced our gross profit margin for the fourth quarter to 66.6% from 73.3% in the third quarter. Management is taking action to bring down the packaging costs going forward.

Selling expenses

Selling expenses were $6,869,109 or 16.2% of net sales for the fiscal year ended March 31, 2008 compared with $4,502,687 or 14.7% of net sales for the fiscal year ended March 31, 2007. The operating costs of the retail stores are included as selling expenses. This increase in selling expenses was primarily caused by the roll out of retail stores. As of March 31, 2008, we had a total of 60 retail stores in operation (as of March 31, 2007, we had 9 retail stores).

General and administrative expenses

General and administrative expenses were $4,826,473 or 11.4% of net sales for the year ended March 31, 2008 compared with 2,265,220 or 7.4% of net sales for the year ended March 31, 2007. The increase in general and administrative expenses was due to additional research costs of $1,696,657 related to the development and launching of new products, and staff and administrative costs incurred in connection with the construction of the new plant.

Other Income

Other income comprised the $3.37 million revaluation of the convertible note and interest income of $0.7 million. At the date of issuance, the estimated fair value of embedded derivative portion of the convertible note was $9.1 million. As a result of a decrease in our share price and share trading volatility, the fair value of such portion as at March 31, 2008 decreased to $5.7 million. The $3.37 million decrease in the fair value of the convertible note has been recorded as other income.

Provision for income taxes

Provision for income taxes was $4.94 million and $4.19 million for the fiscal years ended March 31, 2008 and 2007, respectively. Excluding the $3.37 million surplus on revaluation of the convertible note, income before taxes was $22.5 million for fiscal year 2008 compared with $15.1 million for 2007. The increase in income tax payable is attributable to an increase in operating profit.

Segment reporting

We have adopted the "products and services" approach for segment reporting. For fiscal years 2007 and 2008, we had only one reporting segment-the probiotic products as health supplement. We manufactured and sold the probiotic products solely in China and delivered all shipments to destinations within China, and all of our long-lived assets were physically located in China. We made all sales to external customers.

Liquidity and Capital Resources

We had cash of $64.31 million and working capital of $53.08 million as of March 31, 2008, and cash of $26.99 million and working capital of $21.23 million as of March 31, 2007. Cash generated from operations was $19.36 million for the fiscal year ended March 31, 2008 and $10.01 million for the fiscal year ended March 31, 2007.

Our business is not capital or labor intensive. Typically, 60% of our sales take place in the second half of the fiscal year. Since our customers have historically been large distributors with which we have done business for a number of years, our cash flows from our existing business have been, and we expect them to continue to be, fairly reliable.

We had capital expenditures totaling $10.30 million for the year ended March 31, 2008, primarily on improvements to production and research facilities. We spent $1.49 million on fixed assets in fiscal year 2007.

Our current facility commenced operations in 2000. With the increases in sales volume in the last couple of years, we are reaching our production capacity. We have started to construct a new plant with an overall project size of $45.5 million. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and is estimated to cost $27.50 million, $25 million of which is expected to be paid in the fourth quarter of calendar year 2008 and the balance by the end of second quarter of calendar year 2009. Subsequent phases of this project will only commence when demands for probiotics have exceeded the production capacity of the Phase 1 facility.

We are expanding our sales to other cities in China through a combination of distributors and our own stores. In this regard, we have opened 60 stores in Shanghai and 5 other cities in China at March 31, 2008 and intend to have over 300 stores by the end of 2009 fiscal year at an anticipated cost of approximately $11 million. In preparation for the opening of our retail stores, we have repackaged a number of our existing products for sale in our stores, and have introduced several new products which are available exclusively in our stores. The costs of repackaging the existing products and releasing the new products are minimal and have been included in our cost of sales and selling and administrative expenses. We will continue to develop new products to strengthen our product pipeline and add to our retail store offerings. As our development costs mainly comprise staff costs, we do not expect that such costs will be significant.

. . .