**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-KSB/A**




**AMENDMENT
      NO. 2**





þ
            
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the fiscal year ended December 31, 2007**




**OR**





o
            
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the transition period from**      **to**




**Commission
      file number**  **001-33537**




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**





*(Name
      of Small Business Issuer in Its Charter)*





Delaware
            
            20-2903562*(State or Other Jurisdiction*
              *of Incorporation or Organization)*
            
            *(IRS Employer*
              *Identification No.)*




No. 2,
      Jing You Road, Kunming National Economy & Technology Developing
      District,


People’s
      Republic of China 650217





*(Address
      of Principal Executive Offices) (Zip Code)*




0086-871-728-2628


*(Issuer’s
      Telephone Number)*




SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:





**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock, $0.0001 par value
            
            American
                Stock Exchange




SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:




None.




Check
      whether the issuer is not required to file reports pursuant to Section 13
      or 15(d) of the Exchange Act. o




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 such filing requirements for the past
      90 days. Yes o No þ *




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act). Yes o No þ




Issuer’s
      revenues for its most recent fiscal year: $19,973,918.




The
      aggregate market value of the registrant’s issued and outstanding shares of
      common stock held by non-affiliates of the registrant as of June 29, 2007
      (based on the price at which the registrant’s common stock was last sold on such
      date) was approximately $23,141,920.




The
      number of shares outstanding of the issuer’s common equity as of March 24,
      2008 was 19,679,400.




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




*
      Other
      than the disclosure that the issuer has not filed all reports required to be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months,
      the
      disclosures on the cover page of this Amendment No. 2 to Form 10-KSB continue
      to
      describe conditions as of March 31, 2008, the date of the original
      filing.







**EXPLANATORY
      NOTE**




This
      Amendment No. 2 (this “Amendment No. 2”) on Form 10-KSB/A, which amends the
      Items identified below with respect to the Form 10-KSB, filed by China Shenghuo
      Pharmaceutical Holdings, Inc. (“we” or the “Company”) with the Securities and
      Exchange Commission (the “SEC”) on March 31, 2008 (the “Original Filing”), as
      amended by Amendment No. 1 on Form 10-KSB/A filed with the SEC on April 29,
      2008
      (“Amendment No. 1”, and collectively with the Original Filing, the “Original
      Filing as Amended”) is being filed to reflect amendments and changes to
      financial and other disclosures contained in the Original Filing as
      Amended.




**Restatement
      of Financial Statements for the Fiscal Year 2007 and the First Fiscal Quarter
      of
      2008**




On
      August
      22, 2008 and September 12, 2008, the Company issued Current Reports on Form
      8-K
      and Form 8-K/A, respectively, announcing a pending internal investigation being
      conducted by the Audit Committee of the Board of Directors (the “Audit
      Committee”) based on preliminary information received from Hansen, Barnett &
Maxwell, P.C. (“HBM”), the independent registered public accounting firm of the
      Company, regarding errors in the accounting for certain sales representative
      commission advances and trade receivables, the Company’s internal controls, the
      Company’s personnel involved and related matters. The errors concern cash
      transaction journal entries in which uncollected trade accounts and notes
      receivables were credited (i.e., deemed paid) and corresponding cash debits
      (i.e., cash deemed received) were recorded, and in connection therewith,
      corresponding cash credits (deemed decreases) and debits (deemed increases)
      to
      other receivables from sales representatives were recorded. Under GAAP, it
      was
      incorrect to record these transactions as cash transactions. The effect of
      the
      incorrect entries was to improperly reflect the aging of the Company’s trade
      accounts and notes receivables and to understate the Company’s bad debt
      allowance. These errors resulted in the understatement of general and
      administrative expenses (the line item that includes bad debt allowance) and
      the
      resultant overstatement of net income and earnings per share. The errors also
      resulted in an overstatement of the deferred tax asset, which could adversely
      affect future operations and profit levels on a continuing basis. HBM also
      advised the Audit Committee that no further reliance should be placed on the
      (1)
      previously filed financial statements and related audit report dated March
      28,
      2008 contained in the Original Filing as Amended and (2) previously filed
      financial statements for the fiscal quarter contained in the Company’s Form 10-Q
      for the fiscal quarter ended March 31, 2008.




On
      September 4, 2008, the Audit Committee engaged independent counsel to assist
      in
      the investigation and to ascertain whether these errors were attributable to
      inadequate training and supervision and lack of familiarity with GAAP on the
      part of the Company’s financial staff, or whether improper conduct contributed
      to recording the incorrect journal entries.




In
      early
      October 2008, HBM concluded that it had not identified any additional errors
      or
      concerns regarding the Company’s journal entries other than those outlined
      above. On October 8, 2008 and October 10, 2008, the Audit Committee met with
      its
      independent legal counsel and HBM, and following these meetings, the Audit
      Committee concluded that the accounting errors in the Company’s journal entries
      were made at the direction of two supervisors in the Company’s financial
      department (who have been dismissed), in an incorrect attempt by such
      supervisors to follow the Company’s policy that regional managers and sales
      representatives should be responsible for the collection of trade receivables,
      as well as to simplify the financial department’s process of generating related
      data regarding trade receivables and sales representative advances. The Audit
      Committee found no evidence to suggest that the accounting errors were made
      at
      the direction of, or with the knowledge or involvement of, the Company’s
      executive officers and management, and the Audit Committee determined that
      the
      actions of the two supervisors were not intended to manipulate the Company’s
      reported results or financial statements.




The
      Company has restated its financial statements for the fiscal year ended December
      31, 2007 and the fiscal quarter ended March 31, 2008 to correct the accounting
      errors. The fiscal year ended December 31, 2007 and the fiscal quarter ended
      March 31, 2008 were the only periods found to have been impacted by the
      accounting errors. HBM has advised that there would be no need for the Company
      to restate its previously filed financial statements for the interim periods
      contained in the Company’s Forms 10-QSB for the fiscal quarters ended June 30,
      2007 and September 30, 2007 (as originally indicated by HBM) and that those
      statements may be relied upon.




The
      restatements (1) decrease net income by approximately $2,296,253, from
      $4,016,640 to $1,720,387, in the fiscal year ended December 31, 2007
      and increase net loss by approximately $514,319, from $(338,341) to
      $(852,660), in the fiscal quarter ended March 31, 2008 and (2) decrease earnings
      per share by approximately $0.12, from $0.21 to $0.09, in the fiscal year ended
      December 31, 2007 and increase loss per share by approximately $0.02, from
      $(0.02) to $(0.04), in the fiscal quarter ended March 31, 2008. For more
      information regarding the restatement, refer to Note 1 and Note 13 of the Notes
      to Consolidated Financial Statements contained herein.









The
      effects of the restatement of the financial statements for the fiscal year
      2007
      were as follows (the “Restatement”):




**As Previously**
              
              **Effect of****Reported**
              
              **Restatement**
              
              **As Restated****Consolidated
                  Balance Sheet****As
                  of December 31, 2007**Accounts
                  and notes receivable, net
              
              $
              9,651,304
              
              $
              916,368
              
              $
              10,567,672Employee
                  advances, net
              
              
              10,147,415
              
              
              (1,897,609
              )
              
              8,249,806Total
                  Current Assets
              
              
              27,581,623
              
              
              (981,241
              )
              
              26,600,382Deferred
                  Income Taxes
              
              
              1,593,159
              
              
              (1,593,159
              )
              
              -TOTAL
                  ASSETS
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718Minority
                  Interest in Net Assets of Subsidiaries
              
              
              655,962
              
              
              (176,644
              )
              
              479,318Stockholders'
                  Equity:Retained
                  earnings
              
              
              6,335,590
              
              
              (2,296,253
              )
              
              4,039,337Accumulated
                          other comprehensive income, foreign currency
                          translation
              
              
              1,031,146
              
              
              (101,503
              )
              
              929,643Total
                  Stockholders' Equity
              
              
              13,709,654
              
              
              (2,397,756
              )
              
              11,311,898TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718**Consolidated
                  Statement of Operations**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******For
                  the year ended December 31, 2007**General
                  and administrative expense
              
              
              4,935,754
              
              
              942,194
              
              
              5,877,948Total
                  Operating Expenses
              
              
              12,048,873
              
              
              942,194
              
              
              12,991,067Income
                  from Operations
              
              
              2,886,755
              
              
              (942,194
              )
              
              1,944,561Income
                  Before Income Taxes
              
              
              2,332,820
              
              
              (942,194
              )
              
              1,390,626Benefit
                  from (provision for) income taxes
              
              
              1,978,963
              
              
              (1,529,765
              )
              
              449,198Minority
                  interest in income of subsidiaries
              
              
              (295,143
              )
              
              175,706
              
              
              (119,437
              )Net
                  Income
              
              
              4,016,640
              
              
              (2,296,253
              )
              
              1,720,387Foreign
                  currency translation adjustment
              
              
              810,273
              
              
              (101,503
              )
              
              708,770Comprehensive
                  Income
              
              
              4,826,913
              
              
              (2,397,756
              )
              
              2,429,157Earnings
                  Per ShareBasic
              
              
              0.21
              
              
              (0.12
              )
              
              0.09Diluted
              
              
              0.21
              
              
              (0.12
              )
              
              0.09**Consolidated
                  Statement of Cash Flows****For
                  the year ended December 31, 2007**Cash
                  Flows from Operating Activities:Net
                  income
              
              
              4,016,640
              
              
              (2,296,253
              )
              
              1,720,387Deferred
                  income taxes
              
              
              (1,002,915
              )
              
              1,529,764
              
              
              526,849Minority
                  interest in income of subsidiaries
              
              
              295,143
              
              
              (175,706
              )
              
              119,437Change
                  in current assets and liabilities:Accounts
                  and notes receivable
              
              
              900,437
              
              
              (879,905
              )
              
              20,532Employee
                  advances
              
              
              (7,024,869
              )
              
              1,822,100
              
              
              (5,202,769
              )Net
                  Cash Used in Operating Activities
              
              
              (5,036,769
              )
              
              -
              
              
              (5,036,769
              )


**Remedial
      Actions Relating to Controls and Procedures**




The
      Audit
      Committee recommended that remedial measures be implemented in order to prevent
      similar accounting errors from occurring in the future. Based on the Audit
      Committee’s recommendations, the Company has: (1) dismissed the two supervisors
      in the Company’s financial department who were responsible for the erroneous
      journal entries; (2) provided additional training in compliance with Section
      404
      of the Sarbanes-Oxley Act of 2002 and financial document production and record
      retention to the Company’s finance personnel and other personnel who provide
      financial data that is incorporated into the Company’s financial statements; (3)
      accelerated the process of improving its disclosure controls and procedures
      and
      internal controls over financial reporting (which will include documentation
      of
      policies and procedures by the end of 2008 and implementation in January 2009
      in
      compliance with Section 404 of the Sarbanes-Oxley Act of 2002 following the
      COSO
      framework); and (4) replaced Qiong Hua Gao, the Company’s former Chief Financial
      Officer, with Wendy Fu as the new Chief Financial Officer, who is more
      experienced in the application of generally accepted accounting principles
      in
      the United States.







**Risk
      Factors**




*The
      following disclosure reflects potential risks as a result of the Company’s
      accounting errors and the resulting Restatement of the Company’s financial
      statements. These risk factors did not exist as of the date of the Original
      Filing and should be read in conjunction with the Risk Factors section in Item
      1A of Part I of this Amendment No. 2.*




**The
      internal investigation of our accounting practices and the restatement of our
      previous financial statements may result in additional litigation and could
      adversely affect our business, financial condition and results of
      operations.**




The
      Audit
      Committee conducted an internal investigation of our recently disclosed
      accounting errors, and we have restated our previously filed financial
      statements for fiscal year 2007 and the quarter ended March 31, 2008. The
      internal investigation and restatement have exposed us to risks and expenses
      associated with litigation, regulatory proceedings and government enforcement
      actions. Certain putative class action lawsuits have been asserted against
      us
      and certain of our officers and directors. No assurance can be given regarding
      the outcome of such litigation, and additional claims may arise. The
      investigation and Restatement and any settlements, payment of claims and other
      costs could lead to substantial expenses, may materially affect our cash balance
      and cash flows from operations and may divert management's attention from the
      Company's business. In addition, the internal investigation and the Restatement
      of our financial statements could impact our reputation, including our
      relationships with our investors and our customers, our ability to hire and
      retain qualified personnel and, ultimately, our ability to generate revenue.
      Furthermore, considerable legal and accounting expenses related to these matters
      have been incurred to date and significant expenditures may continue to be
      incurred in the future. We could be required to pay damages and might face
      remedies that could harm our business, financial condition and results of
      operations.




**We
        Do Not Carry Directors and Officers Liability Insurance To Cover Any Expenses
        and Losses Due to Lawsuits Related to Financial Reporting Errors. Our
        indemnification obligations could adversely affect our business, financial
        condition and results of operations.**




We
        have
        not obtained D&O Liability insurance to cover lawsuit expenses and losses
        related to financial reporting errors. Our bylaws require us to indemnify
        our
        current and former directors, officers, employees and agents against most
        actions of a civil, criminal, administrative or investigative nature. Generally,
        we are required to advance indemnification expenses prior to any final
        adjudication of an individual’s culpability. The expense of indemnifying our
        current and former directors, officers and employees and agents in their
        defense
        or related expenses as a result of any actions related to the internal
        investigation and financial restatement may be significant. Therefore, our
        indemnification obligations could result in the diversion of our financial
        resources and may adversely affect our business, financial condition and
        results
        of operations.





**Legal
      Proceedings**





*The
      following disclosure reflects developments as a result of the Company’s
      accounting errors and the resulting Restatement of the Company’s financial
      statements. These developments did not exist as of the date of the Original
      Filing and this section should be read in conjunction with the Legal Proceedings
      section in Item 3 of Part I of this Amendment No. 2.*





Putative
      class action lawsuits have been asserted against the Company and certain of
      its
      officers and directors in the United States District Court for the Southern
      District of New York (the “Court”). Only one complaint, bearing the caption,
      Beni Varghese v. China Shenghuo Pharmaceutical Holdings, Inc., Gui Hua Lan,
      Qiong Hua Gao, Gene Michael Bennett, And Yunhong Guan, Index No. 08 CIV. 7422
      (the “Varghese Action”) has been served on the Company thus far.





The
      complaints allege, among other things, that certain of the Company’s SEC filings
      and other public statements contained false and misleading statements which
      resulted in damages to the plaintiffs and the members of the purported class
      when they purchased the Company’s securities. On the basis of those allegations,
      plaintiffs in each of the actions seek an unspecified amount of damages under
      Sections 10(b) and 20(a) of the Exchange Act.





On
      October 20, 2008, the Company and counsel to the plaintiff in the Varghese
      Action filed a stipulation with the Court in which the parties agreed that
      the
      plaintiff may file a consolidated amended complaint within 60 days after the
      entry of an order appointing and approving lead counsel, and that the Company’s
      time to answer that complaint is extended until 60 days after the filing of
      the
      consolidated complaint.





The
      Company believes the allegations in the complaint are without merit, and intends
      to vigorously defend the lawsuits. The Company does not believe the outcome
      of
      these suits will have a material adverse effect on the Company.





**This
      Amendment No. 2**




For
        the
        convenience of the reader, this Amendment No. 2 sets forth the Original Filing
        as Amended in its entirety. However, this Amendment No. 2 only amends and
        restates certain
        segments of Item
        1 of
        Part I, as
        described below, Items
        6
        and 7 of Part II and Item
        13 of Part III of the Original Filing as Amended, and amends and restates
        the
        Risk Factors section ,
        as
        described below, in
        a new
        Item 1A of Part I (the Risk Factors section was included in Item 1 of Part
        I of
        the Original Filing as Amended), in each case, to
        reflect the Restatement of the
        Company’s financial statements and to
        clarify certain other disclosures. In addition, for the convenience of the
        reader, the information contained in Items 9, 10, 11, 12 and 14 of Part III
        of
        Amendment No. 1 has been included in this Amendment No. 2 in its entirety
        and
        has not been updated. In that regard, note that Ms. Qiong Hua Gao has been
        replaced by Ms. Wendy Fu as Chief Financial Officer, effective November 10,
        2008, and Mr. Gene Michael Bennett is no longer a director or member of the
        Audit Committee (effective October 28, 2008) and has been replaced in those
        roles by Dr. Jason Zhang, effective October 29, 2008. No other
        information in the Original Filing as Amended is amended hereby.
 
 Certain
        segments of Item 1 of Part I have been amended and restated, as
        follows:
  ·
            On
                page 8 of the Original Filing, under the heading “Marketing and Sales,”
                there was a description of the percentage of Xuesaitong Soft Capsules
                sold
                to hospitals and distributors. That disclosure has been amended to
                reflect
                accurate percentages.  ·
            On
                pages 8-9 of the Original Filing, under the heading “Marketing and Sales,”
                there was a description of the dollar amount of employee advances
                to sales
                representatives. That disclosure and additional disclosure regarding
                the
                change in the employee advances and allowance for aged receivables
                has
                been deleted because such discussion was included in the Management's
                Discussion and Analysis section. 
 Certain
        segments of the Risk Factors section have been amended and restated, as
        follows:
  ·
            The
                risk factor appearing at the bottom of page 13 of the Original Filing,
“We
                May Need To Raise Additional Capital To Fund Our Operations And Failure
                To
                Raise Additional Capital May Force Us To Delay, Reduce, Or Eliminate
                Our
                Product Development Programs,” discussed risks related to our ability to
                raise additional capital, if necessary. That risk factor has been
                amended
                to add disclosure regarding the Company’s properties that are collateral
                securing certain bank loans.  ·
            The
                risk factor appearing at the top of page 14 of the Original Filing,
“We
                Make Cash Employee Advances To Our Sales Representatives, And If
                We Are
                Not Able To Collect On These Advances In A Timely Manner, Or At All,
                Then
                It Will Decrease The Amount Of Working Capital That We Have Available
                To
                Effectively Operate Our Business,” discussed risks related to our employee
                advances. That risk factor has been amended to reflect the
                Restatement.  ·
            The
                risk factor appearing at the bottom of page 15 of the Original Filing,
“If
                All Or A Significant Portion Of Our Customers With Trade Receivables
                Fail
                To Pay All Or Part Of The Trade Receivables Or Delay The Repayment,
                Our
                Net Income Will Decrease And Our Profitability Will Be Adversely
                Affected,” discussed risks related to our accounts receivable. That risk
                factor has been amended to reflect the
                Restatement.  ·
            The
                risk factor appearing on page 18 of the Original Filing, “We Do Not Carry
                Insurance To Cover Any Losses Due To Fire, Casualty Or Theft At Our
                Production Facility Located In Kunming, China,” discussed risks related to
                our lack of insurance. That risk factor has been amended to clarify
                wording.




Unless
        indicated otherwise, the disclosures in this Amendment No. 2 continue to
        describe conditions as of the date of the Original Filing, and the disclosures
        contained herein have not been updated to reflect events, results or
        developments that have occurred after the Original Filing, or to modify or
        update those disclosures affected by subsequent events. Among other things,
        forward-looking statements made in the Original Filing have not been revised
        to
        reflect events, results or developments that have occurred or facts that
        have
        become known to us after the date of the Original Filing, and such forward
        looking statements should be read in their historical context. This Amendment
        No. 2 should be read in conjunction with the Company’s filings made with the SEC
        subsequent to the Original Filing, including any amendments to those
        filings.
 
 As
        a
        result of this Amendment No. 2, the certifications pursuant to Section 302
        and
        Section 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the Original
        Filing and Amendment No. 1 have been revised, re-executed and re-filed as
        of the
        date of this Amendment No. 2. In
        addition, the consent of Hansen, Barnett & Maxwell, P.C. has been revised,
        re-executed and re-filed as of the date of this Amendment No. 2.







**TABLE
      OF CONTENTS**





**PAGE****PART
                I**ITEM
                1.
            
            DESCRIPTION
                OF BUSINESS
            
            1ITEM
                1A
            
            RISK
                FACTORS
            
            14ITEM
                2.
            
            DESCRIPTION
                OF PROPERTY
            
            28ITEM
                3.
            
            LEGAL
                PROCEEDINGS
            
            28ITEM
                4.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            28**PART
                II**ITEM
                5.
            
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER PURCHASES OF EQUITY SECURITIES
            
            29ITEM
                6.
            
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            
            31ITEM
                7.
            
            FINANCIAL
                STATEMENTS
            
            39ITEM
                8.
            
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            
            39ITEM 8A(T).
            
            CONTROLS
                AND PROCEDURES
            
            39ITEM 8B.
            
            OTHER
                INFORMATION
            
            41**PART
                III**ITEM
                9.
            
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
            
            42ITEM
                10.
            
            EXECUTIVE
                COMPENSATION
            
            44ITEM
                11.
            
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            
            47ITEM
                12.
            
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
            
            48ITEM
                13.
            
            EXHIBITS
            
            51ITEM
                14.
            
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            53SIGNATURES
            
            
            
            54





**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





The
      information contained in this report, including in the documents incorporated
      by
      reference into this report, includes some statements that are not purely
      historical and that are “forward-looking statements.” Such forward-looking
      statements include, but are not limited to, statements regarding our company’s
      and our management’s expectations, hopes, beliefs, intentions or strategies
      regarding the future, including our financial condition, and results of
      operations. In addition, any statements that refer to projections, forecasts
      or
      other characterizations of future events or circumstances, including any
      underlying assumptions, are forward-looking statements. The words “anticipates,”
“believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,”
“might,” “plans,” “possible,” “potential,” “predicts,“ “projects,“ “seeks,”
“should,” “will,” “would” and similar expressions, or the negatives of such
      terms, may identify forward-looking statements, but the absence of these words
      does not mean that a statement is not forward-looking.





The
      forward-looking statements contained in this report are based on current
      expectations and beliefs concerning future developments and the potential
      effects on the parties and the transaction. There can be no assurance that
      future developments actually affecting us will be those anticipated. These
      forward-looking statements involve a number of risks, uncertainties (some of
      which are beyond the parties’ control) or other assumptions that may cause
      actual results or performance to be materially different from those expressed
      or
      implied by these forward-looking statements, including the
      following:





·
            our
                reliance on one product for over 90% of our revenues;·
            our
                reliance on one supplier for Sanchi, a scarce plant that is the primary
                ingredient in almost all of our
                products;


·
            our
                ability to develop and market new products;·
            our
                increasing employee advances;


·
            our
                ability to establish and maintain a strong brand;·
            continued
                maintenance of certificates, permits and licenses required to conduct
                business in China;


·
            protection
                of our intellectual property rights;·
            market
                acceptance of our products;


·
            changes
                in the laws of the PRC that affect our operations;·
            any
                recurrence of severe acute respiratory syndrome or avian
                flu;


·
            our
                ability to obtain all necessary government certifications and/or
                licenses
                to conduct our business;·
            development
                of a public trading market for our securities;


·
            cost
                of complying with current and future governmental regulations and
                the
                impact of any changes in the regulations on our operations;
                and·
            other
                factors referenced in this report, including, without limitation,
                under
                the sections entitled “Risk Factors,” “Management’s Discussion and
                Analysis or Plan of Operation,” and “Description of
                Business.”




The
      risks
      included above are not exhaustive. Other sections of this report may include
      additional factors that could adversely impact our business and operating
      results. Moreover, we operate in a very competitive and rapidly changing
      environment. New risk factors emerge from time to time and we cannot predict
      all
      such risk factors, nor can we assess the impact of all such risk factors on
      our
      business or the extent to which any factor, or combination of factors, may
      cause
      actual results to differ materially from those contained in any forward looking
      statements.




You
      should not rely upon forward-looking statements as predictions of future events.
      We cannot assure you that the events and circumstances reflected in the
      forward-looking statements will be achieved or occur. Although we believe that
      the expectations reflected in the forward-looking statements are reasonable,
      we
      cannot guarantee future results, levels of activity, performance or
      achievements. Moreover, neither we nor any other person assume responsibility
      for the accuracy and completeness of the forward-looking statements. Except
      as
      required by law, we undertake no obligation to update publicly any
      forward-looking statements for any reason after the date of this report to
      conform these statements to actual results or to changes in our expectations.




You
      should read this report, and the documents that we reference in this report
      and
      have filed as exhibits to this report with the Securities and Exchange
      Commission, completely and with the understanding that our actual future
      results, levels of activity, performance and achievements may materially differ
      from what we expect. We qualify all of our forward-looking statements by these
      cautionary statements.








**PART
      I**





**ITEM 1.**
            **DESCRIPTION
                OF BUSINESS**





Unless
      the context otherwise requires, the terms “Shenghuo,” the “Company,” “we,” “us,”
or “our” as used throughout this report refer to China Shenghuo Pharmaceutical
      Holdings, Inc., our 93.75%-owned subsidiary Kunming Shenghuo Pharmaceutical
      (Group) Co., Ltd. (“Shenghuo China”) and the three foreign owned subsidiaries of
      Shenghuo China that are organized under the laws of the People's Republic of
      China (“PRC” or “China”).




**Overview**





We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is a greyish-brown or greyish-yellow
      plant that only grows in a few geographic locations on Earth, one of which
      is
      Yunnan Province in southwest China, where we are located. The main root of
      Panax
      notoginseng are cylindrical shaped and are most commonly one to six centimeters
      long and one to four centimeters in diameter. Panax notoginseng saponins (PNS),
      the active ingredients in Panax notoginseng, are extracted from the plant using
      high-tech equipment and in accord with Good Manufacturing Practice (GMP)
      standards. Our main product, Xuesaitong Soft Capsules, accounted for
      approximately 90% of our sales for the year ended December 31,
      2007.





Since
      our
      establishment, we have focused primarily on the development of products to
      serve
      three major markets—cardiovascular and cerebrovascular disease, peptic ulcer
      disease and health products. Our goal has been to focus on the development
      of
      pharmaceutical products and over the counters products based on traditional
      Chinese medicines designed to address these areas.





**Recent
      Events**





***Initial
      Public Offering***





In
      June
      2007, we completed an initial public offering consisting of 460,000 shares
      of
      our common stock. Our sale of common stock, which was sold indirectly by us
      to
      the public at a price of $3.50 per share for aggregate gross proceeds of
      $1,610,000. We received an aggregate of $1,094,381 of net proceeds from the
      offering, after deduction of underwriter’s fees and other expenses of $515,619.
      Upon the closing of the offering, we sold to the underwriter warrants to
      purchase up to 40,000 shares of our common stock. The warrants are exercisable
      at a per share price of $4.20 and expire if unexercised after five
      years.





**Market
      Focus**





Since
      our
      establishment, we have focused primarily on the development of products to
      serve
      three major markets—cardiovascular and cerebrovascular disease, peptic ulcer
      disease and health products. Our goal has been to focus on the development
      of
      pharmaceutical products and over the counters products based on traditional
      Chinese medicines designed to address these areas.





·
            ***Cardiovascular
                and Cerebrovascular Disease*****.**Hyperlipemia,
                which is high circulating blood levels of fats such as cholesterol
                and
                triglycerides, has ranked high on the list of modern health diseases.
                The
                primary effect of hyperlipemia is the development of cardiovascular
                and
                cerebrovascular diseases, including heart attacks and strokes.





·
            ***Peptic
                Ulcer Disease*****.**A
                peptic ulcer is an erosion of the lining of the stomach or the upper
                part
                of the small intestine. The causative factors may include excess
                stomach
                acid, excess pepsin, Helicobacter Pylori infection, poor health and
                eating
                habits, and psychological stress. There is no radical cure for peptic
                ulcers, which may eventually lead to gastric hemorrhage, gastric
                perforation and even cancer. People of all ages can be affected by
                peptic
                ulcers, but they are most prevalent in persons between the ages of
                45 and
                55, with incidences in men being slightly higher than in
                women.




1





·
            ***Health
                and Food Products*****.**The
                health products industry, which consists of non-prescription traditional
                Chinese medicines and supplements, has grown as a result of quality
                improvements in products and the introduction of new products to
                the
                market in China. Over the past two decades, there has been a growth
                of
                health product sales in Chinese urban areas. The Chinese Ministry
                of
                Health has approved several uses for health products and a substantial
                number of the products on the market are designed to aid in
                immunoregulation, blood fat regulation and fatigue resistance. In
                addition, China's market for cosmetics product is one of the largest
                in Asia and within the top ten in the world.





**Products**





We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is a greyish-brown or greyish-yellow
      plant that only grows in a few geographic locations on Earth, one of which
      is
      Yunnan Province in southwest China, where we are located. The main root of
      Panax
      notoginseng are cylindrical shaped and are most commonly one to six centimeters
      long and one to four centimeters in diameter. Panax notoginseng saponins (PNS),
      the active ingredients in Panax notoginseng, are extracted from the plant using
      high-tech equipment and in accord with Good Manufacturing Practice (GMP)
      standards.





***Pharmaceutical
      Products***





Our
      pharmaceutical products are marketed under the Lixuwang brand name. The
      following is a list of our approved pharmaceutical products and their intended
      uses.





**Product Name**
            
            **Intended Use**Xuesaitong
                Soft Capsules
            
            Designed
                to invigorate the circulation of blood and improve microcirculation.
                Used
                for the treatment of symptoms of cardiovascular and cerebrovascular
                disease, such as angina pectoris, strangulation, squeezing and crushing
                of
                chest, acute and chronic peripheral vascular-metabolic disorders,
                brain
                occlusion, occlusion of retina central vein, acute and chronic cerebral
                vascular-metabolic disorders caused by arteriosclerosis. This product
                accounted for approximately 90% of our sales for the year ended December
                31, 2007. The reason for the change in percentage is that the sale
                of our
                OTC drugs has been increasing.Qiye
                Shen’an Tablets
            
            Designed
                to help relieve headache, insomnia, and palpitation. Designed to
                invigorate the circulation of blood, improve microcirculation and
                improve
                liver functionality.Banlangen
                Tablets
            
            Designed
                for the treatment of parotitis, pharyngitis, mastitis, swollen and
                sore
                throat due to cold and influenza.Bergenini
                Tablets
            
            Designed
                to help relieve cough and phlegm due to bronchial ailments.Huangtengsu
                Tablets (film tablets)
            
            Designed
                to treat the symptoms of dysentery, enteritis, respiratory tract
                infections, uncomplicated urethral, surgery infections and
                conjunctivitis.Danshen
                Tablets
            
            Designed
                to regulate blood circulation and treat the symptoms of blood stasis.
                Designed to treat the symptoms of coronary arteriosclerosis, angina
                pectoris and hyperlipemia.Triperygium
                hypoglaucum Hutch Tablet
            
            An
                immunosuppressant. Designed to treat the symptoms of rheumatoid
                arthritis.Huangtengsu
                Soft Capsules
            
            Designed
                to treat symptoms of dysentery, enteritis, respiratory tract infections,
                surgery infections and
                conjunctivitis


2




We
      have
      the following additional drugs that are currently in late-stage clinical trials
      for prescription use:





·
            *Wei
                Dingkang Soft Capsules*are a type of traditional Chinese medicine designed to treat peptic
                ulcer
                disease by inhibiting bacterial growth, relieving stomach muscle
                spasms,
                and reducing inflammation of the intestinal lining. The product is
                designed to be effective for upset stomach, vomiting, pain and degradation
                of the stomach lining. The product has been approved by the State
                Food and
                Drug Administration (SFDA) for clinical testing. Phase two clinical
                trials
                were completed in July 2007, and phase three clinical trials have
                commenced. We anticipate obtaining production approval by the end
                of 2008.
                We are also applying to the Yunnan Provincial Development and Reform
                Committee and Yunnan Agriculture Bureau to begin a pilot cultivation
                project to produce approximately 72 tons per year of daemonorops
                margaritae palms, which is the primary ingredient used to produce
                Wei
                Dingkang Soft capsules, on approximately 3.35 square kilometers of
                land.





·
            *Dencichine
                Hemostat*is
                designed to be a non-toxic product that addresses a range of
                anti-hemorrhagic applications, such as stopping bleeding without
                causing
                clotting. We anticipate receiving governmental approval for the production
                and marketing of the product in 2011. Assuming required governmental
                approvals are obtained in a timely fashion, we anticipate that production
                and marketing of the product will begin no sooner than 2012. Dencichine
                Hemostat is a drug requiring extensive technology testing by the
                national
                SFDA, and neurotoxicity testing is required to be done, which may
                take a
                significant amount of time. In addition, clinical testing and audit
                processes are out of our control, so we must allow for additional
                time.





·
            *Other
                drugs*that
                we have in the clinical testing application process are Levofloxacin
                Hydrochloride Soft Capsules, which is designed for antibiotic
                applications, and Brufen Soft Capsules, which are intended to treat
                fever
                and headache caused by influenza, colds and acute pharyngitis.
                Levofloxacin Hydrochloride Soft Capsules have received State Food
                and Drug
                Administration (SFDA) approval for clinical testing, which has entered
                the
                first phase. We expect to receive approval no later than 2009. Brufen
                Soft
                Capsules are being tested and appraised for production approval,
                which we
                hope to receive shortly.




***Health
      and Food Products***





We
      offer
      a wide array of over the counter supplements as well as vitamin capsules and
      pills. The following are some of our non-prescription products and their
      intended uses. We have received government approval and currently market each
      of
      the supplements listed below.





**Product Name**
            
            **Intended Use**Banlangen
                Grains
            
            Health
                product designed to treat swollen and sore throat due to cold and
                influenza.Gegenqinlian
                Tablets
            
            Health
                product designed to reduce stomach discomfort and treat diarrhea.Huangtensu
                Soft Capsules
            
            Designed
                to treat symptoms of dysentery, enteritis, respiratory tract infections,
                surgery infections and conjunctivitis.Luotongding
                Tablets
            
            Health
                product designed to reduce visceral pain, headache, and
                cramping.Paracetamol
                Caffeine and Aspirin Powders
            
            Health
                product designed to treat headaches, migraines and fevers caused
                by
                influenza and cold.Siji
                Sanhuang Tablets
            
            Health
                product designed to relieve inflammation and alleviate fever, commonly
                in
                connection with pharyngitis.




3





**Product
                Name**
            
            **Intended
                Use**Sulfadiazine
                Silver Ointment
            
            Health
                product designed to assist in the prevention of infections related
                to
                burns.Tianqi
                Tongjing Capsules
            
            Health
                product designed to treat dysmenorrhea and emmeniopathy caused by
                colds.





Vitamin
                AD Soft Capsules
            
            Health
                product designed to treat deficiencies of vitamin A and
                D.Vitamin
                C Tablets
            
            Health
                product designed to treat deficiencies of vitamin C.Vitamin
                B6 Tablets
            
            Health
                product designed to treat deficiencies of vitamin B6.Vitamin
                E Soft Capsules
            
            Health
                product designed to treat deficiencies of Vitamin E.Yinhuang
                Capsules
            
            Health
                product designed to relieve inflammation and sore of
                throat.Lycopene
                Soft Capsules
            
            Food
                product designed to treat side effects of and act as a general deterrent
                to certain carcinogens.Oil
                of Purple Perilla Soft Capsules
            
            Food
                product designed to treat effects of chough, asthma and
                astriction.Rhizoma
                Aspidii and Chinese Wampi leaf Grains
            
            Designed
                to treat effects of fever, aversion, headache, cough with excessive
                sputum.Soya
                Lecithin Soft Capsules
            
            Food
                product designed to treat effects of high blood fat, hypertension
                and
                other diseases of cardiovascular and cerebrovascular
                systems.Spirulina
                Soft Capsules
            
            Food
                product designed to normalize stomach and intestinal
                functions.





We
      also
      intend to introduce and market the following non-prescription supplements,
      as
      indicated in the table below. Our anticipated timelines for introduction and
      marketing of our new drugs depend, in large part, on government approval. Our
      anticipated timelines, as set forth below, are based on our experience in the
      approval process and our communications with the SFDA. However, there is no
      assurance that such approvals will be obtained, at all, or the anticipated
      timelines will be met. The SFDA issues certificates of medicine production
      approval that include the names, specifications, approval numbers and other
      information about the approved medicines. According to the law of the Drug
      Administration of the People’s Republic of China, a drug-manufacturing factory
      must acquire both the certificate of medicine production permit and medicine
      production approval, before the drug-manufacturing factory has the necessary
      qualifications to manufacture, market and sell the medicine.





In
      the
      table below, the “Application Submission Date” column indicates the month and
      year in which we submitted a formal registration application to the State Food
      and Drug Supervision Administration for the product we have researched and
      developed. That is, we have applied to the State Food and Drug Supervision
      Administration for a production approval, which we must obtain prior to the
      production and sale of each of our products. The “Anticipated Approval Date”
indicates the date by which we anticipate obtaining the production approval
      for
      manufacturing the products from the State Food and Drug Supervision
      Administration. There is no assurance that we will obtain approval by the
      Anticipated Approval Date, if at all. We would only be allowed to engage in
      production and marketing of a product after obtaining the corresponding
      production approval.




4




**Anticipated**
              **Product Name**
            
            **Intended Use**
            
            **Application**
              **Submission**
              **Date**
            
            **Anticipated**
              **Approval**
              **Date**Fructus Ligustri Lucidi
                and Radix Astragali Soft Capsules
            
            Designed
                to treat symptoms of weakness due to prolonged illness, radiation
                and
                chemical therapy. This product is currently being tested and appraised
                for
                production approval which we hope to receive shortly.
            
            September
                2005
            
            June
                2008Ginseng
                and Pilose Antler Soft Capsules
            
            Designed
                to treat effects of weakness due to deficiency of the kidney and
                heart,
                palpitation, and soreness and weakness of waist and knees. This product
                is
                currently being tested and appraised for production approval which
                we hope
                to receive shortly.
            
            March
                2006
            
            September
                2008Li
                Xu Wang Shu Tong Soft Capsules
            
            Designed
                to reduce blood viscosity and improve blood circulation. This product
                is
                currently being tested and appraised for production approval, which
                we
                hope to receive shortly.
            
            February
                2006
            
            March
                2008Long
                Xue Jie Soft Capsules
            
            Designed
                to promote blood circulation and treat effects of blood stasis, relieve
                pain, induce astringent and help promote tissue regeneration. Designed
                to
                treat effects of trauma with blood-stasis syndrome and painful swelling,
                amenorrhea due to blood stasis, and wound bleeding. This product
                is
                currently being tested and appraised for production approval which
                we hope
                to receive shortly.
            
            September
                2005
            
            June
                2008Qi
                Ju Di Huang Soft Capsules
            
            Designed
                to treat effects of weakness of the kidney and liver, dizziness,
                drumming
                in the ears, dryness in eyes, photophobia, and blurred vision. This
                product is currently being tested and appraised for production approval
                which we hope to receive shortly.
            
            January
                2006
            
            October
                2008Radix
                Polygoni Multiflori Capsules
            
            Designed
                to treat effects of weakness of the kidney and liver, fatigue, and
                dizziness due to blood deficiencies. This product is currently being
                tested and appraised for production approval which we hope to receive
                shortly.
            
            January
                2006
            
            December
                2008Tranquilization
                Soft Capsules
            
            Designed
                to enrich the blood and treat effects of dizziness, palpitation,
                insomnia,
                and poor memory. This product is currently being tested and appraised
                for
                production approval which we hope to receive shortly.
            
            March
                2006
            
            December
                2008Xue
                Zhi Kang Soft Capsules
            
            Designed
                to promote blood circulation and to treat effects of blood stasis,
                weakness of the spleen and poor digestion. This product is currently
                being
                tested and appraised for production approval which we hope to receive
                shortly.
            
            August
                2005
            
            May
                2008Yan
                Lu Ru Kang Soft Capsules
            
            Designed
                to treat the symptoms of galactophore hyperplasia diseases, hysteromyoma
                and functionality uterus bleeding. This product is currently being
                tested
                and appraised for production approval which we hope to receive
                shortly.
            
            April
                2005
            
            December
                2008


5




**Anticipated**
              **Product
                Name**
            
            **Intended
                Use**
            
            **Application**
              **Submission**
              **Date**
            
            **Anticipated**
              **Approval**
              **Date**Zhi
                Bi Tuo Soft Capsules
            
            Designed
                to affect the spleen to improve digestion, reduce phlegm, invigorate
                the
                blood and improve blood stasis. This product is currently being tested
                and
                appraised for production approval which we hope to receive
                shortly.
            
            December
                2005
            
            September
                2008Zhu
                Zi Gan Tai Soft Capsules
            
            Designed
                to be used for distending pain in the chest caused by deficiency
                of the
                spleen, fatigue, and hepatitis B virus. This product is currently
                being
                tested and appraised for production approval which we hope to receive
                shortly.
            
            January
                2006
            
            October
                2008





***Cosmetic
      Products***





We
      also
      offer an expanding line of cosmetic products including lotions, creams and
      other cosmetic items. We have conducted extensive research and have specifically
      formulated our cosmetic products to meet the cosmetic and skincare needs of
      our
      female consumers. Our “12WaysTM Chinese Traditional Medicine Beauty Salon Series”
is a line of over 100 cosmetic products that includes facial masks and creams,
      skin and eye creams, and shampoos. Our line of products has acquired production
      approval to be sold only in China. Each of our cosmetic skincare products
      contains natural ingredients including herbal anti-irritants and anti-oxidants,
      as well as Sanchi. Our comprehensive line of skincare includes a mixture of
      basic products (e.g., creams and gels), treatment products (e.g., firming
      treatments), specialty helpers (e.g., masks), and beauty supplements. The use
      of
      supplements is an important element of skincare, nurturing the skin’s health
      using vital nutrients. Our cosmetic line combines the strength of several
      skincare methods to achieve healthy skin and beauty.





In
      September 2007, we expanded the geographic region in which our 12Ways products
      were sold from our native Yunnan province to a number of cities and provinces
      outside our local region. We have opened a number of retail specialty counters
      to offer our cosmetic products at pharmacies throughout Eastern China, and
      we
      hope to eventually expand our retail presence across China. As of December
      31,
      2007, we have opened approximately 106 retail specialty counters in Beijing,
      Shanghai, Hangzhou, Dongwan, Shengzhen, and Shaoguang. We believe that this
      retail counter strategy will allow us to increase our brand recognition, as
      well
      as sell and market our newest cosmetics products developed using our experience
      in traditional Chinese medicine.





Our
      line
      of cosmetic products includes the following food products and health
      supplements.





**Product
                Name**
            
            **Intended
                Use**Jasmine
                Tea
            
            Food
                product designed to help and promote healthy skin affected by
                acne.Rose
                Tea
            
            Food
                product designed to help promote healthy skin and
                complexionSHEN
                HUO Beauty Soft Capsules
            
            Health
                supplement designed to help with balancing water in the body.SHEN
                HUO Brighten Soft Capsules
            
            Health
                supplement designed to help promote healthy skin affected by
                spotting.SHEN
                HUO Immaculacy Soft Capsules
            
            Health
                supplement designed to help promote healthy skin affected by
                acne.12ways
                Yunnan Bamboo Anti-Acne Cream
            
            Health
                supplement designed to help promote healthy skin affected by
                acne.12
                Ways DanShen Spot Fade Light Cream
            
            Health
                supplement designed to lighten skin
                discoloration.


6





**Product
                Name**
            
            **Intended
                Use**12
                Ways Eye care series
            
            Health
                supplement designed to improve the appearance of fine lines, dark
                circle,
                and puffiness12
                Ways Sunscreen Series
            
            Sunscreen
                product12
                Ways Panax Notoginseng Moisturizer Series
            
            Moisturizer12
                Ways Snow Poria Whiten Series
            
            Health
                supplement designed to lighten and whiten the
                skin





**Growth
      Strategies**





We
      believe that our business has opportunities for growth through the following
      growth strategies:




·
            ***New
                Product Development.***We
                have traditionally focused on research and development of products
                serving
                the cardiovascular and cerebrovascular disease, peptic ulcer disease
                and
                health products markets.******We
                intend to devote additional resources to research and development
                and to
                continue to evaluate and develop additional product candidates to
                expand
                our pipeline where we perceive an unmet need and commercial potential,
                and
                to improve existing products to enhance their
                efficacy.





·
            ***Focus
                on Brand Development.***With intense price competition among many similar or identical products
                in
                the industry, we believe that building brand equity is the primary
                means
                to generate and sustain profitable growth in the future. Our brand
                strategy is centered on “Lixuwang”—the brand under which most of our
                products are sold. We believe that our relationships within the Chinese
                pharmaceutical industry is key to building brand equity, which we
                can
                benefit from by developing and maintaining relationships with
                professionals within the industry, especially with physicians and
                hospitals.





·
            ***Domestic
                Growth (China).***We
                intend to grow our internal marketing and sales function and increase
                our
                relationships with other national distributors to expand the distribution
                and presence of our non-prescription brands and cosmetics. In expanding
                market share of our products, we intend to take advantage of our
                large
                manufacturing scale and reasonable cost control mechanisms, and our
                strong
                sales network. In addition, our goal is to establish our products
                as a
                preferred choice for prescription drugs in major hospitals. We believe
                that establishing a strong reputation with major hospitals may open
                the
                market for smaller, community and rural hospitals because patients
                from
                large hospitals also receive services from smaller hospitals. We
                also
                anticipate that the inclusion of Xuesaitong Soft Capsules on China’s
                National Medical Insurance List in 2005 should result in increased
                growth
                for that product over the next several years. We hope to add other
                prescription drugs, some of which are now in late-stage clinical
                trial,
                into this channel over the next few years.





·
            ***International
                Growth.***In
                addition to China,******we
                have sold our products in Asian countries such as Indonesia, Thailand
                and
                Kyrgystan. We hope to expand sales into other countries where our
                products
                could be affordable treatment
                options.





·
            ***Growth
                of Cosmetics Market Share.***We
                intend to focus on the expansion of our cosmetics product line and
                devote
                additional marketing and sales resources. We hope that our cosmetics
                products will account for a larger percentage of our revenue in the
                future.


7


**Research
      and Development**





As
      of
      December 31, 2007, we employed 48 technicians, including 10 senior researchers,
      16 mid-level researchers, and 22 junior analysts. The technicians’
specializations include medicine, pharmacology, chemistry, biology, and medicine
      production equipment.





In
      an
      attempt to capitalize on the natural resource of Sanchi in Yunnan Province
      and
      to develop a strong medical industry in the Yunnan Province, we have recently
      established an enterprise technology center – Kunming Beisheng Science and
      Technology Development Company – in cooperation with the Shijia Research
      Center of Beijing University. This collaboration combines the natural resources
      of Yunnan Province and the working conditions of our company with technical
      information and expertise of Beijing University. The project is designed to
      develop new techniques of extraction, purification and quality control while
      developing natural medicines native to Yunnan Province. The objectives are
      as
      follows: modernizing Chinese medicine development techniques; improving
      technological skill and processing techniques; industrialization of Chinese
      herbal medicine; creation of intellectual property rights; and deepening
      research into high-end Yunnan Province medicine. Pursuant to the joint
      establishment agreement that we entered into with Shijia Research Center, the
      project will have a duration of ten years from the date of completion of the
      industrial and commercial registration with the State Department of Industrial
      and Commercial Supervision Administration and receipt of an Enterprise Legal
      Person Business License. The business scope of the project includes development
      and technology transfer of bulk pharmaceuticals, prepared Chinese medicine,
      chemicals, biologicals, health food, and medical cosmetic products; importation
      of scientific instruments and medical technology, and communication with foreign
      and domestic research centers.





After
      signing the agreement with the Shijia Research Center, we completed the
      industrial and commercial registration of Kunming Beisheng Science and
      Technology Development Company, or the Development Company. The Development
      Company could not engage in enterprise activities, such as production and
      marketing, until it completed its industrial and commercial registration with
      the State Department of Industrial and Commercial Supervision Administration
      and
      obtained an Enterprise Legal Person Business License. Currently, we have
      obtained the appropriate Enterprise Legal Person Business License, which was
      approved by the Industrial and Commercial Administration of Kunming City, Yunnan
      Province in December 2006. Thus, the Development Company’s industrial and
      commercial registration process has been completed and the Development Company
      is now our subsidiary. We own 70% of the shares of the Development Company
      and
      the chairman of the board and legal representative is Mr. Lan Gui Hua. The
      remaining 30% of the shares are owned by the Shijia Research Center. The
      Development Company operates according to the regulations of our agreement
      with
      the Shijia Research Center.





**Marketing
      and Sales**





As
      of
      December 31, 2007, our marketing team maintains sales offices or agents in
      approximately 20 provinces throughout China. The sales network covers
      approximately 186 cities and is staffed by approximately 400 sales
      representatives.





We
      also
      use a distribution system comprised of independent regional distributors. In
      a
      typical distribution contract, a distributor will be provided with certain
      sales
      targets for a particular period according to a set retail price. If the
      distributor completes the sales task within the prescribed period, the agent
      distributor will be given greater economic incentives and future distribution
      opportunities. If the distributor fails to complete the sales task within the
      prescribed period, we will cancel our contract with the distributor and sign
      with other competent distributors. We also sign reselling contracts with
      franchise drug companies for the distribution of our products. The franchise
      drug company, as a reseller, resells our products to local hospitals, drug
      stores, and other channel distributors. In addition, we sell our products
      directly to distributors and retail drug stores. Our three largest customers
      accounted for approximately 21.6%, 32.1%, and 21.7% of our sales for the years
      ended December 31, 2007, 2006, and 2005, respectively.





Currently,
      less than 5% of sales of Xuesaitong Soft Capsules are sold to military hospitals
      through China’s military procurement system, while over 95% of sales are made to
      non-military hospitals, through distributors.





Prices
      for our products are fixed and determinable. Each time products are purchased
      a
      specific price is agreed upon, a contract is signed and we and the customer
      are
      legally bound and neither can change the price. Prices for products are normally
      derived from our standard price lists, however, larger, more established
      customers are given quantity discounts. There are no instances in which payment
      for products sold is contingent on re-sales to or otherwise used by end-user
      patients.


8




We
      establish selling offices in many cities in China, and the selling offices
      manage sales representatives according to our internal management rules and
      sales policy. Because the main product “Xuesaitong” capsule is sold to hospitals
      through distributors located in the various cities of China and because China
      has thousands of distributors and hospitals, in order to increase market share,
      we employ a large number of sales representatives to expand into new markets
      and
      gain new customers.





In
      order
      to encourage sales representatives to increase sales, we make cash employee
      advances to sales representatives. We accomplish this by having the selling
      offices sign advance agreements with sales representatives to determine the
      conditions of the advances, specifying the amounts and the term. According
      to
      our sales policy, sales representatives earn sales commissions from us based
      on
      the sale amount and the amount of collection of trade receivables, less expenses
      paid by sales representatives. The remaining amount is the net profit of the
      sales representatives. However, the sales representatives still have the
      obligation of paying off employee advances. We believe the sales representatives
      are able to expand in to new markets and obtain new customers if they have
      advanced funds for their travel, meals, and other incidental expenses that
      arise
      over the time they perform their functions as sales representatives. When we
      makes advances to sales representatives, we require that our selling offices
      sign advance agreements with sales representatives to arrange the specific
      purpose of the advance, the amount of the advance, and the term of the advance.
      Our finance department records the detail of advances and checks the remaining
      balance with sales representatives every month. We also supervise the repayment
      of the advances. For sales representatives who refuse to pay off the
      advances, we attempt to collect on the advances and decrease the risk of bad
      debt as much as possible by withholding sales commissions, prosecuting
      delinquent sales representatives, and by other valid means of collection. On
      January 1, 2007, we added punitive measures for overdue advances to the advance
      agreement. In compliance with established policy to reserve an allowance for
      specific percentages of our aged receivables, we accrued a larger allowance
      for the increased employee advances.





**Production**





We
      manufacture and package our products at our factory located in Kunming, China.
      The factory, which was built in 2000, is approximately 161,460 square feet
      and
      includes a clean area that occupies approximately 86,110 square feet. Our clean
      area in the production facilities includes approximately 52,500 square feet
      of
      Class 10,000 certified and 2,350 square feet of Class 100,000 certified. The
      cleanliness classification is based on the number of dust particles and bacteria
      per cubic meter, so lower numbers indicate a higher cleanliness class. According
      to the Regulation for Quality Control of Drug Production issued by the SFDA,
      oral preparations of traditional Chinese medicines must be produced in a Class
      300,000 or lower environment. Our production facilities use equipment imported
      from the U.S. and are designed to meet American standards, so our Class 10,000
      and Class 100,000 certified areas are cleaner than the Chinese national
      standard. The production facilities have more than 600 machines and supporting
      parts for pharmaceutical production from domestic and foreign suppliers. The
      factory has a total of 28 complete production lines for semi-finished and
      finished hard capsules, tablets, granules, powder, electuary, and emulsifier.
      The key facilities are two soft capsule production lines obtained from GIC
      Company, an Italian producer of industrial machinery, and an automatic packaging
      production line purchased from Klockner Haensel GmbH, a German company. In
      addition, all of our precision testing machines are supplied by Sharp Document
      Systems, U.S.A. Our production facilities were certified to be in compliance
      with Good Manufacturing Practice (GMP) standards in August 2002 and February
      2004. In May 2004 and October 2005, we received the GMP certifications, which
      is
      renewed through July 18, 2012, for the production of health food products and
      supplements, including soft capsules, hard capsules, tablets and granule
      productions. We also received an additional GMP certification for production
      of
      pharmaceutical ointment products.




We
      utilize a complex process in extracting active components from the Sanchi plant,
      purifying the components and manufacturing our products. A typical manufacturing
      process begins by us obtaining the Sanchi plant from our supplier, washed clean,
      divided into main root, branch root and rhizome. The branch root known as
“Sanchi Jintiao” and rhizome is known as “Sanchi Jiankou.” The Sanchi Jiankou is
      the portion of the Sanchi that contains the active ingredient, Panax Notoginseng
      Saponins. The Sanchi Jiankou is then sent to heavy pulverizing machinery to
      crush it into a specified powder size. The Sanchi Jiankou powder then undergoes
      a complex extracting process in which the powder is mixed with extracting
      solvents and the resulting solution is percolated and filter processed. The
      solution is concentrated by vacuum equipment while the extracting solvent is
      recollected and the active ingredient condensate is collected. The active
      ingredient condensate is then separated and purified through a chromatographic
      column, and the Sanchi polysaccharides and Sanchi saponins are collected
      separately. The solutions of Sanchi saponins and Sanchi polysaccharides are
      then
      separately purified by second chromatographic column to remove pigments and
      other useless compounds and obtain the pure saponins and polysaccharides,
      respectively. The Sanchi saponins and Sanchi polysaccharides are then separately
      dried by a spray-dryer, the resulting powders are weighed and packaged into
      separate contamination resistant plastic bags, which undergo quality control
      inspections and are stored in a warehouse for use in our line of products.
      Production of each product varies depending on the ingredients and form of
      the
      product, but production usually includes mixing of the Sanchi powder and the
      delivery agent, such as oil for soft capsules, and the ingredients are then
      processed using advanced pressing, drying, polishing and blister packaging
      equipment.


9




**Quality
      Control**





Our
      production facilities are designed and maintained with a view towards conforming
      with good practice standards. To comply with GMP operational requirements,
      we
      have implemented a quality assurance plan setting forth our quality assurance
      procedures. Our Quality Control department is responsible for maintaining
      quality standards throughout the production process. Quality Control executes
      the following functions:





·
            setting
                internal controls and regulations for semi-finished and finished
                products;





·
            implementing
                sampling systems and sample files;




·
            maintaining
                quality of equipment, instruments, reagents, test solutions, volumetric
                solutions, culture media and laboratory animals;




·
            auditing
                production records to ensure delivery of quality products;




·
            monitoring
                the number of dust particles and microbes in the clean areas;




·
            evaluating
                stability of raw materials, semi-finished products and finished products
                in order to generate accurate statistics on storage duration and
                shelf
                life;




·
            articulating
                the responsibilities of Quality Control staff; and




·
            on-site
                evaluation of supplier quality control
                systems.





**Competition**





The
      pharmaceutical industry both within China and globally is intensely competitive
      and is characterized by rapid and significant technological progress, and our
      operating environment is increasingly competitive. Our competitors, both
      domestic and international, include large pharmaceutical companies,
      universities, and public and private research institutions that currently engage
      in or may engage in efforts related to the discovery and development of new
      pharmaceuticals. Many of these entities have substantially greater research
      and
      development capabilities and financial, scientific, manufacturing, marketing
      and
      sales resources than we do, as well as more experience in research and
      development, clinical trials, regulatory matters, manufacturing, marketing
      and
      sales.





Competition
      in the manufacture and sale of medical products for cardiovascular and
      cerebrovascular disease in China is also intense. There are a large number
      of
      companies that are licensed to manufacture and sell these type of medical
      products in China. Western drugs such as lovastatins and nitroglycerine
      have more than half of the market share of medications used to treat
      cardiovascular and cerebrovascular disease in China, with Chinese traditional
      medicines make up the next largest part of the market. On the whole, Chinese
      patent medicine still generally has many problems such as complex and unclear
      ingredients, inconsistent quality, slow action and ineffectiveness. Therefore,
      new Chinese medicines tend not to stay on the market for very long.





There
      are
      also many Chinese traditional medicines available to treat peptic ulcers. While
      they are inexpensive and readily available, they are not as effective as western
      medicines. In China, peptic ulcers are usually treated with western medicines
      such as H2 blockers (e.g., Zantac), proton pump inhibitors (e.g., Nexium) and
      bismuth (e.g., Pepto-Bismol). In addition, amoxicillin and other antibiotics
      are
      now commonly used in conjunction to treat peptic ulcers.





The
      market for health and cosmetic products in China is also highly competitive.
      Both industries have a high number of competitors, some of which overlap, and
      many of which have a longer operating history and higher visibility, name
      recognition and financial resources than we do. Our competitors include
      manufacturers and marketers of personal care and nutritional products,
      pharmaceutical companies and other organizations.


10





**Intellectual
      Property**





We
      rely
      on a combination of trademark, copyright and trade secret protection laws in
      China, as well as confidentiality procedures and contractual provisions to
      protect our intellectual property. Our primary product, Xue Saitong Soft
      Capsules, first received patent protection and production and new medicine
      certification in 1999 and the protections continue until April 25, 2012. We
      also
      have protections for our technology methods of using Sanchi to help stop
      bleeding and combination methods, production and function of the medicine to
      treat intestinal disease. Xue Saitong Soft Capsules receive protections from
      the
      SFDA, which will not issue additional drug permits other than those already
      issued during the protection period. We have eight registered trademarks and
      have applied for registration of another two trademarks in China. Other than
      the
      foregoing, we do not have any measures to prevent any infringement of our
      intellectual property rights.




**Seasonality**





Sales
      in
      the first quarter are usually lower due to people traveling and taking vacations
      during the traditional Chinese New Year and Chinese Spring Festival holidays.
      Sales in the fourth quarter are usually higher.





**Government
      Regulations of Pharmaceuticals**





The
      testing, approval, manufacturing, labeling, advertising and marketing,
      post-approval safety reporting, and export of our products or product candidates
      are extensively regulated by governmental authorities in the PRC and other
      countries. Our principal sales market is presently in China. We are subject
      to
      the Drug Administration Law of China, which governs the licensing,
      manufacturing, marketing and distribution of pharmaceutical products in China
      and sets penalties for violations of the law. Additionally, we are subject
      to
      various regulations and permit systems by the Chinese government.





The
      application and approval procedure in China for a newly developed drug product
      has numerous steps. New drug applicants prepare the documentation of
      pharmacological study, toxicity study and pharmacokinetics and drug metabolism
      (PKDM) study and new drug samples. Documentation and samples are then submitted
      to provincial food and drug administration (“provincial FDA”). The provincial
      FDA sends its officials to the applicant to check the applicant’s research and
      development facilities and to arrange new drug examination committee meeting
      for
      approval deliberations. This process usually takes three months. After the
      documentation and samples being approved by the provincial FDA, the provincial
      FDA will submit the approved documentation and samples to SFDA. SFDA examines
      the documentation and tests the samples and arranges new drug examination
      committee meeting for approval deliberations. If the application is approved
      by
      SFDA, SFDA will issue a clinical trial license to the applicant for clinical
      trials. The clinical trial license approval typically takes one year. The
      applicant completes the clinical trial process and prepares documentation and
      files submitted to SFDA for new drug approval. The clinical trial process
      usually takes one year or two depending on the category and class of the new
      drug. SFDA examines the documentation and gives final approval for the new
      drug
      and issues the new drug license to the applicant. This process usually takes
      eight months. The whole process for new drug approval usually takes three to
      four years.





**Insurance
      Catalogue**





Pursuant
      to the Decision of the State Council on the Establishment of the State Basic
      Medical Insurance System for Urban Employees and the Implementation Measures
      for
      the Administration of the Scope of Medical Insurance Coverage for
      Pharmaceuticals for Urban Employees, the Ministry of Labor and Social Security
      in China established the Insurance Catalogue. The Insurance Catalogue is divided
      into Parts A and B. The medicines included in Part A are designated by the
      Chinese governmental authorities for general application. Local governmental
      authorities may not adjust the content of medicines in Part A. Although the
      medicines included in Part B are designated by Chinese governmental authorities
      in the first instance, provincial level authorities may make limited changes
      to
      the medicines included in Part B, resulting in some regional variations in
      the
      medicines included in Part B from region to region.




Patients
      purchasing medicines included in Part A are entitled to reimbursement of the
      costs of such medicines from the social medical fund in accordance with relevant
      regulations in China. Patients purchasing medicines included in Part B are
      required to pay a predetermined proportion of the costs of such medicines.


11





The
      medicines included in the Insurance Catalogue are selected by the Chinese
      government authorities based on various factors including treatment
      requirements, frequency of use, effectiveness and price. Medicines included
      in
      the Insurance Catalogue are subject to price control by the Chinese government.
      The Insurance Catalogue is revised every two years. In connection with each
      revision, the relevant provincial drug authority collects proposals from
      relevant enterprises before organizing a comprehensive appraisal. The SFDA
      then
      makes the final decision on any revisions based on the preliminary opinion
      suggested by the provincial drug administration. Other than completing a normal
      application process, we have no role in the selection of products for inclusion
      in the Insurance Catalog. We do not pay any fee in order to be
      listed.





In
      2005,
      our primary product, Xuesaitong Soft Capsules was listed in Part B of the
      Insurance Catalogue. Xuesaitong Soft Capsules represented approximately 90%
      of
      our sales for the year ended December 31, 2007. Removal of the product from
      the
      Insurance Catalogue would adversely affect our total revenue.





We
      are
      seeking to have other products listed in the Insurance Catalogue. At present,
      Xuesaitong Soft Capsules and Sulfadiazine Silver Ointment have already been
      listed in the Insurance Catalogue. The China Society and Labor Security
      Department plans to update the Insurance Catalogue every two years, but since
      2000, the catalog has only been updated once. It is expected to be updated
      again
      after 2007 and we hope to receive approval for listing of our Huangtensu Soft
      Capsules based on its medicinal attributes and sales, but there is no guarantee
      that this product will be approved for listing.





**Price
      Controls**





Drugs
      that are listed in the Insurance Catalogue and whose production or trading
      will
      constitute monopolies are commonly subject to price control by the Chinese
      government. The maximum prices of such medicine products are published by the
      state and provincial administration authorities from time to time. The prices
      of
      other medicines that are not subject to price control are determined by the
      pharmaceutical manufacturers, subject, in certain cases, to providing notice
      to
      the provincial pricing authorities. Our primary product, Xuesaitong Soft
      Capsules, is subject to retail and wholesale price controls.





The
      price
      of Xuesaitong Soft Capsules is determined by The National Development and Reform
      Commission of the PRC. The original price, as approved by the government, was
      45
      RMB (U.S. $5.63) per box of 24 capsules. As of December 31, 2007, its maximum
      price has been adjusted to 44.2 RMB (U.S. $5.53) per box of 24 capsules. We
      have
      submitted an application to The National Development and Reform Commission
      of
      the PRC requesting that the Xuesaitong Soft Capsules be placed into the category
      of drugs with good quality and low price that benefits from price protection,
      which, if approved, would exempt our product from price reductions.





**Employees**





As
      of
      December 31, 2007, we had 540 full-time, salaried employees and 471 of these
      employees receive labor insurance. These employees are organized into a
      union under the labor laws of China and can bargain collectively with us. In
      addition, we employ over 400 sales representatives who are paid on a commission
      basis. These representatives are not part of the union. We maintain good
      relations with our employees.





We
      are
      required to contribute a portion of our employees’ total salaries to the Chinese
      government’s social insurance funds, including medical insurance, unemployment
      insurance and job injuries insurance, and a housing assistance fund, in
      accordance with relevant regulations. In the last three years, we contributed
      approximately $147,434, $115,744 and $99,700 for the years ended December 31,
      2007, 2006 and 2005, respectively. We expect the amount of our contribution
      to
      the government’s social insurance funds to increase in the future as we expand
      our workforce and operations.





**Additional
      Information**





We
      are
      subject to the information and periodic reporting requirements of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”) and in accordance with the
      Exchange Act, we file annual, quarterly and special reports, and other
      information with the Securities and Exchange Commission. These periodic reports
      and other information are available for inspection and copying at the regional
      offices, public reference facilities and website of the Securities and Exchange
      Commission referred to below.


12





Statements
      contained in this report about the contents of any contract or any other
      document that is filed as an exhibit are not necessarily complete, and we refer
      you to the full text of the contract or other document filed as an exhibit.
      A
      copy of annual, quarterly and special reports and related exhibits and schedules
      may be inspected without charge at the Public Reference Room maintained by
      the
      Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C.
      20549, and copies of such reports may be obtained from the Securities and
      Exchange Commission upon payment of the prescribed fee. Information regarding
      the operation of the Public Reference Room may be obtained by calling the
      Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
      Exchange Commission maintains a web site that contains reports, proxy and
      information statements, and other information regarding registrants that file
      electronically with the SEC. The address of the site is www.sec.gov .


13


**ITEM
              1A.**
            **RISK
                FACTORS**




Any
      investment in our common stock involves a high degree of risk. Investors should
      carefully consider the risks described below and all of the information
      contained in this report before deciding whether to purchase our common stock.
      Our business, financial condition or results of operations could be materially
      adversely affected by these risks if any of them actually occur. The trading
      price of our common stock could decline due to any of these risks, and an
      investor may lose all or part of his investment. Some of these factors have
      affected our financial condition and operating results in the past or are
      currently affecting our company. This report also contains forward-looking
      statements that involve risks and uncertainties. Our actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of certain factors, including the risks we face as described below and
      elsewhere in this report. With respect to this discussion, the terms “Shenghuo,”
the “Company,” “we,” “us,” or “our” refer to China Shenghuo Pharmaceutical
      Holdings, Inc., our 93.75%-owned subsidiary Kunming Shenghuo Pharmaceutical
      (Group) Co., Ltd. (“Shenghuo China”) and the three foreign owned subsidiaries of
      Shenghuo China that are organized under the laws of the People’s Republic of
      China (“PRC” or “China”).




**RISKS
      RELATED TO OUR OPERATIONS**





**Our
      Current Business Is Primarily Based On A Single Product, Which Currently
      Accounts For More Than 90% Of Our Revenues, And We May Not Be Able To Generate
      Significant Revenue If This Product Fails.**




Approximately
      90% of our sales for the years ended December 31, 2007 comes from a single
      product, Xuesaitong Soft Capsules, and our business may fail if this product
      fails. If we experience difficulties or obstacles in the manufacture and sale
      of
      the Xuesaitong Soft Capsules, or if our licenses and government approvals are
      revoked to sell the product, then we may not be able to generate significant
      revenues, our business may fail and you would lose all or part of your
      investment in our company.





**We
      Rely On A Few Suppliers For Sanchi, The Primary Ingredient in Most of Our
      Products, And Any Disruption With Our Suppliers Could Delay Product Shipments
      And Have a Material Adverse Impact on Our Business Operations And
      Profitability.**





Due
      to
      the limited availability of Sanchi, we currently rely on a small number of
      suppliers as our source for Sanchi, the primary raw material that is needed
      for
      us to produce our products. We believe that there are few alternative suppliers
      available to supply the Sanchi plant, and should any of our current suppliers
      terminate their business arrangements with us or increase their prices of
      materials supplied, it would delay product shipments and adversely affect our
      business operations and profitability. In addition, if the suppliers refused
      to
      sell Sanchi, or increased the sales prices of Sanchi, this would also have
      a
      material adverse impact on our results of operations.





**If
      Our Primary Product Is Replaced By Other Medicines Or Is Removed From China’s
      Insurance Catalogue In The Future, Our Revenue Will Suffer
      Substantially.**





Under
      Chinese regulations, patients purchasing medicines listed by China’s state
      and/or provincial governments in the Insurance Catalogue may be reimbursed,
      in
      part or in whole, by a social medicine fund. Accordingly, pharmaceutical
      distributors prefer to engage in the distribution of medicines listed in the
      Insurance Catalogue. Since 2005, the main product, Xuesaitong Soft Capsules,
      that we manufacture and sell is listed in the Insurance Catalogue. The content
      of the Insurance Catalogue is subject to change by the Ministry of Labor and
      Social Security of China, and new medicines may be added to the Insurance
      Catalogue by provincial level authorities as part of their limited ability
      to
      change certain medicines listed in the Insurance Catalogue. Xuesaitong Soft
      Capsules accounted for approximately 90% of our sales for the year ended
      December 31, 2007, and if this product is replaced by other medicines or removed
      from the Insurance Catalogue in the future, our total revenue will suffer
      substantially.





**We
      May Need To Raise Additional Capital To Fund Our Operations And Failure To
      Raise
      Additional Capital May Force Us To Delay, Reduce, Or Eliminate Our Product
      Development Programs.**





Due
      to
      the large funds required for research and development and the subsequent
      marketing of products, the pharmaceutical industry is very capital intensive.
      The industry is characterized by large receivable turnovers, which could mean
      that we will need more working capital if our revenues increase. We have
      traditionally been committed to research and development and it is possible
      that
      we will need to raise additional capital within the foreseeable future.
      Additional capital may be needed for the development of new products or product
      lines, advances to employees, financing of general and administrative expenses,
      licensing or acquisition of additional technologies, and marketing of new or
      existing products. There are no assurances that we will be able to raise the
      appropriate amount of capital needed for our future operations. Failure to
      obtain funding when needed may force us to delay, reduce, or eliminate our
      product development programs.


14





Currently,
      all of the Company’s land, buildings and machinery are collateral securing
      certain bank loans. If we default on the repayment obligations when due,
      the properties may be foreclosed upon by the lenders, and our operations
      would be materially adversely affected and we might cease to be able to operate
      as a going concern.




**We
      Make Cash Employee Advances To Our Sales Representatives, And If We Are Not
      Able
      To Collect On These Advances In A Timely Manner, Or At All, Then It Will
      Decrease The Amount Of Working Capital That We Have Available To Effectively
      Operate Our Business.**





We
      have
      experienced a significant growth in the amount of outstanding employee advances,
      and if we are unable to collect such advances in a timely manner, or at all,
      it
      will reduce our available cash and restrict out ability to effectively operate
      our business. Net current and long-term employee advances were approximately
      $8.76 million at December 31, 2007 and $3.13 million as of December 31, 2006,
      and increase of $5.63 million, or 180%. We make cash advances to our sales
      representatives in an attempt to encourage and assist them in expanding the
      marketing and sales of our products into new regions. We employ a large number
      of sales representatives and, as a result, the aggregate amount advanced to
      sales representatives is a significant amount. By making such cash advances,
      we
      will not have advanced amounts to operate our business, harming our liquidity
      and forcing us to look to other, possibly unfavorable means, sources of capital
      to fund our operations. In addition, if we are unable to collect the amounts
      advanced, or if it takes a significant amount of time and resources to collect
      such advances, our results of operation may suffer, and the value of our stock
      may decline.





**Our
      Three Largest Customers Account For A Significant Percentage of Our Sales.
      We
      Cannot Be Certain That These Sales Will Continue; If They Do Not, Our Revenues
      Will Likely Decline.**





Our
      three
      largest customers accounted for approximately 21.7%, 32.1% and 21.6% of our
      sales for the years ended December 31, 2005, 2006 and 2007, respectively. We
      do
      not have any long-term contracts with these customers, each of whom orders
      only
      on a “purchase order” basis. There can be no assurances that any of these
      customers will continue to purchase products from us. The loss of any or all
      of
      these customers or a significant reduction in their orders would have a
      materially adverse effect on our revenues.





**The
      Failure To Manage Growth Effectively Could Have An Adverse Effect On Our
      Business, Financial Condition, And Results Of Operations**





The
      rapid
      market growth, if any, of our pharmaceutical products may require us to expand
      our employee base for managerial, operational, financial, and other purposes.
      As
      of December 31, 2007, we had 540 full-time, salaried employees, in addition
      to
      our employment over 400 sales representatives who are paid on a commission
      basis. The continued future growth will impose significant added
      responsibilities upon the members of our management to identify, recruit,
      maintain, integrate, and motivate new employees. Aside from increased
      difficulties in the management of human resources, we may also encounter working
      capital issues, as we need increased liquidity to finance the purchases of
      raw
      materials and supplies, research and development of new products, acquisition
      of
      new businesses and technologies, and the hiring of additional employees. For
      effective growth management, we will be required to continue improving our
      operations, management, and financial systems and control. Our failure to manage
      growth effectively may lead to operational and financial inefficiencies that
      will have a negative effect on our profitability.





**Our
      Planned Expansion Of Sales Into Overseas Markets Could Fail, Reduce Operating
      Results And/Or Expose Us To Increased Risks Associated With Different Market
      Dynamics And Competition In Any Of The Foreign Countries Where We Attempt To
      Sell Our Products.**





We
      would
      face many new obstacles in our planned expansion of product sales in overseas
      markets. These markets are untested for our products and we face risks in
      expanding our business overseas, which include differences in regulatory product
      testing requirements, patent protection, taxation policy, legal systems and
      rules, marketing costs, fluctuations in currency exchange rates and changes
      in
      political and economic conditions. We may not be as successful as our
      competitors in generating revenues in international markets due to the lack
      of
      recognition of our products or other factors. Developing product recognition
      overseas is expensive and time-consuming and our international expansion efforts
      may be more costly and less profitable than we expect. If we are not successful
      in our target markets, our sales could decline, our margins could be negatively
      impacted and we could lose market share, any of which could materially harm
      our
      business, results of operations and profitability.


15





**We
      Are Dependent On Certain Key Personnel And Loss Of These Key Personnel Could
      Have A Material Adverse Effect On Our Business, Financial Condition And Results
      Of Operations.**





Our
      success is, to a certain extent, attributable to the management, sales and
      marketing, and pharmaceutical factory operational expertise of key personnel.
      Gui Hua Lan, our Chief Executive Officer, Zheng Yi Wang, our Executive Director
      of Exports, Feng Lan, our President, Lei Lan, our Executive Director of Sales,
      and Qiong Hua Gao, our Chief Financial Officer, perform key functions in the
      operation of our business. There can be no assurance that we will be able to
      retain these officers after the term of their employment contracts expire.
      The
      loss of these officers could have a material adverse effect upon our business,
      financial condition, and results of operations. We must attract, recruit and
      retain a sizeable workforce of technically competent employees. Our ability
      to
      effectively implement our business strategy will depend upon, among other
      factors, the successful recruitment and retention of additional highly skilled
      and experienced management and other key personnel. We cannot assure that we
      will be able to hire or retain such employees.





**Our
      Business And The Success Of Our Products Could Be Harmed If We Are Unable To
      Maintain Our Brand Image.**





We
      believe that establishing and strengthening our Lixuwang brand is critical
      to
      achieving widespread acceptance of our products and to establishing key
      strategic relationships. The importance of brand recognition will increase
      as
      current and potential competitors enter the Chinese pharmaceutical market with
      competing products. Our ability to promote and position our Lixuwang brand
      depends largely on the success of our marketing efforts and our ability to
      provide high quality products and customer service. These activities are
      expensive and we may not generate a corresponding increase in sales to justify
      these costs. If we fail to establish and maintain our brand, or if our brand
      value is damaged or diluted, we may be unable to maintain or increase our sales
      or revenue.





**We
      Face Intense Competition In The Pharmaceutical Industry And Such Competition
      Could Cause Our Sales Revenue And Profits To Decline.**





The
      pharmaceutical industry both within China and globally is intensely competitive
      and is characterized by rapid and significant technological progress, and our
      operating environment is increasingly competitive. We face intense competitors
      that will attempt to create or are marketing products in the PRC that are
      similar to our products. Our competitors, both domestic and international,
      include large pharmaceutical companies, universities, and public and private
      research institutions that currently engage in or may engage in efforts related
      to the discovery and development of new pharmaceuticals. Many of these entities
      have substantially greater research and development capabilities and financial,
      scientific, manufacturing, marketing and sales resources than we do, as well
      as
      more experience in research and development, clinical trials, regulatory
      matters, manufacturing, marketing and sales. There can be no assurance that
      our
      products will be either more effective in their therapeutic abilities and/or
      be
      able to compete in price with that of our competitors. Failure to do either
      of
      these may result in decreased profits.





**If
      Our Pharmaceutical Products Fail To Receive Regulatory Approval Or Are Severely
      Limited In These Products’ Scope Of Use, We May Be Unable To Recoup Considerable
      Research And Development Expenditures.**





The
      production of our pharmaceutical products is subject to the regulatory approval
      of the State Food and Drug Administration (SFDA) in China. The regulatory
      approval procedure for pharmaceuticals can be quite lengthy, costly, and
      uncertain. Depending upon the discretion of the SFDA, the approval process
      may
      be significantly delayed by additional clinical testing and require the
      expenditure of resources not currently available; in such an event, it may
      be
      necessary for us to abandon our application. Even where approval of the product
      is granted, it may contain significant limitations in the form of narrow
      indications, warnings, precautions, or contra-indications with respect to
      conditions of use. If approval of our product is denied, abandoned, or severely
      limited in terms of the scope of products use, it may result in the inability
      to
      recoup considerable research and development expenditures.





Currently,
      two of our products, Wei Dingkang Soft Capsules and Dencichine Hemostat, have
      pending applications with the SFDA. Phase II clinical testing for Wei DingKang
      Soft Capsules was completed in July 2007. Dencichine Hemostat completed a second
      review and was required to undergo neurotoxicity testing. The Chinese Military
      Medical Institute will perform these tests. The risk is that if we do not
      receive timely approval for either of these drugs, then production will be
      delayed and sales of the products cannot be planned for.


16





**If
      All Or A Significant Portion Of Our Customers With Trade Receivables Fail To
      Pay
      All Or Part Of The Trade Receivables Or Delay The Repayment, Our Net Income
      Will
      Decrease And Our Profitability Will Be Adversely Affected.**





As
      of
      December 31, 2007, our accounts receivable (less allowance for doubtful accounts
      of $3.22 million) were $10.57 million. The standard credit period for most
      of
      our new clients is two months. For certain clients, such as long-standing
      clients or large clients, we will extend the credit period. Currently, most
      of
      our clients have established a long-term corporate relationship with us, so
      their credit periods are generally six months. Within the medical industry
      in
      China, the collection period is generally longer than for other industries.
      Our
      estimated average collection period for the year ended December 31, 2007 was
      90
      to 180 days. There is no assurance that our trade receivables will be fully
      repaid on a timely basis. If all or a significant portion of our customers
      with
      trade receivables fail to pay all or part of the trade receivables or delay
      the
      payment due to us for whatever reason, our net profit will decrease and our
      profitability will be adversely affected.





**Our
      Success Is Highly Dependent On Continually Developing New And Advanced Products,
      Technologies, And Processes And Failure To Do So May Cause Us To Lose Our
      Competitiveness In The Pharmaceutical Industry And May Cause Our Profits To
      Decline.**





To
      remain
      competitive in the pharmaceutical industry, it is important to continually
      develop new and advanced products, technologies, and processes. There is no
      assurance that our competitors’ new products, technologies, and processes will
      not render our existing products obsolete or non-competitive. Our
      competitiveness in the pharmaceutical market therefore relies upon our ability
      to enhance our current products, introduce new products, and develop and
      implement new technologies and processes. The research and development of new
      products and technologies is costly and time consuming, and there are no
      assurances that our research and development of new products will either be
      successful or completed within the anticipate timeframe, if ever at all. Our
      failure to technologically evolve and/or develop new or enhanced products may
      cause us to lose our competitiveness in the pharmaceutical industry and may
      cause our profits to decline.





**If
      We Fail To Develop New Products With High Profit Margins And Our High Profit
      Margin Products Are Substituted By Competitor’s Products, Our Gross And Net
      Profit Margins Will Be Adversely Affected.**





For
      the
      years ended December 31, 2007 and 2006, the gross profit margin for our products
      was approximately 74.8% and 67.9%, respectively. However, there is no assurance
      that we will be able to sustain such profit margins in the future. The
      pharmaceutical industry is very competitive, and there may be pressure to reduce
      sale prices of products without a corresponding decrease in the price of raw
      materials. In addition, the medical industry in China is highly competitive
      and
      new products are constantly being introduced to the market. In order to increase
      the sales of our products and expand our market, we may be forced to reduce
      prices in the future, leading to a decrease in gross profit margin. To the
      extent that we fail to develop new products with high profit margins and our
      high profit margin products are substituted by competitors’ products, our gross
      profit margins will be adversely affected.





**The
      Commercial Success Of Our Products Depends Upon The Degree Of Market Acceptance
      Among The Medical Community And Failure To Attain Market Acceptance Among The
      Medical Community May Have An Adverse Impact On Our Operations And
      Profitability.**





The
      commercial success of our products depends upon the degree of market acceptance
      among the medical community, such as hospitals and physicians. Even if our
      products are approved by the SFDA, there is no assurance that physicians will
      prescribe or recommend our products to patients. Furthermore, a product’s
      prevalence and use at hospitals may be contingent upon our relationship with
      the
      medical community. The acceptance of our products among the medical community
      may depend upon several factors, including but not limited to, the product’s
      acceptance by physicians and patients as a safe and effective treatment, cost
      effectiveness, potential advantages over alternative treatments, and the
      prevalence and severity of side effects. Failure to attain market acceptance
      among the medical community may have an adverse impact on our operations and
      profitability.





**Our
      Primary Product Is Subject To Price Controls By The China Government, Which
      May
      Affect Both Our Revenues And Net Income.**





The
      laws
      of the PRC provide for the government to fix and adjust prices. During the
      years
      ended December 31, 2005, 2006 and 2007, our primary product Xuesaitong Soft
      Capsules was subject to price controls which affected our gross profit, gross
      margin and net income. It is possible that additional products may be subject
      to
      price control, or that price controls may be increased in the future. To the
      extent that we are subject to price control, our revenue, gross profit, gross
      margin and net income will be affected since the revenue we derive from our
      sales will be limited and it may face no limitation on our costs. Further,
      if
      price controls affect both our revenue and costs, our ability to be profitable
      and the extent of our profitability will be effectively subject to determination
      by the applicable regulatory authorities in the PRC.


17





**Our
      Certificates, Permits, And Licenses Related To Our Pharmaceutical Operations
      Are
      Subject To Governmental Control And Renewal And Failure To Obtain Renewal Will
      Cause All Or Part Of Our Operations To Be Terminated.**





We
      are
      subject to various PRC laws and regulations pertaining to the pharmaceutical
      industry. We have attained certificates, permits, and licenses required for
      the
      operation of a pharmaceutical enterprise and the manufacturing of pharmaceutical
      products in the PRC. We also obtained pharmaceutical products and health food
      GMP certificates. The pharmaceutical production permit and GMP certificates
      are
      valid for a term of five years and the health food certifications are valid
      for
      four year terms, and each must be renewed before their expiration. We originally
      obtained our Medicine Production Permit on November 4, 1996, which is valid
      until December 31, 2010. The Medicine Production Permit applies to products
      described as tablet, granule, capsule, soft capsule, powder, ointment and
      medicinal. If the permit expires without renewal, we will not be able to operate
      medicine production which will cause our operations to be terminated. We intend
      to apply for a renewed Medicine Production Permit before our current production
      permit expires on December 31, 2010.





We
      hold
      numerous GMP certificates that expire, as follows:





·
            a
                GMP certificate for ointment products that expires on June 12,
                2011;




·
            a
                GMP certificate for powder products that expires on April 21,
                2009;




·
            a
                GMP certificate for products in the form of tablet, granule, capsule,
                and
                soft capsule that expires on July 12, 2012; and




·
            a
                GMP certificate for health food products in the form of tablets,
                capsules,
                soft capsules, and granules that expires on October 13, 2009.




We
      intend
      to apply for renewal of these GMP certificates prior to expiration. During
      the
      renewal process, we will be re-evaluated by the appropriate governmental
      authorities and must comply with the then prevailing standards and regulations
      which may change from time to time. In the event that we are not able to renew
      the certificates, permits and licenses, all or part of our operations may be
      terminated. Furthermore, if escalating compliance costs associated with
      governmental standards and regulations restrict or prohibit any part of our
      operations, it may adversely affect our operation and
      profitability.





**We
      Cannot Guarantee The Protection Of Our Intellectual Property Rights And If
      Infringement Or Counterfeiting Of Our Intellectual Property Rights Occurs,
      Our
      Reputation And Business May Be Adversely Affected.**





To
      protect the reputation of our products, we have registered and applied for
      registration of our trademarks in the PRC where we have a major business
      presence. Our products are sold under these trademarks. There is no assurance
      that there will not be any infringement of our brand name or other registered
      trademarks or counterfeiting of our products in the future. Should any such
      infringement or counterfeiting occur, our reputation and business may be
      adversely affected. We may also incur significant expenses and substantial
      amounts of time and effort to enforce our intellectual property rights in the
      future. Such diversion of our resources may adversely affect our existing
      business and future expansion plans.





**The
      Success of Our Expansion Into the Retail Distribution Of Our Cosmetic Products
      Thought Counters Depends On Our Ability To Open And Operate A Certain Number
      Of
      New Counters On An Ongoing Basis, Which Could Strain Our Resources And Cause
      The
      Performance Of Our Existing Operations To Suffer.**





We
      have
      been opening a number of retail specialty counters to offer our cosmetic
      products at pharmacies throughout Eastern China, with plans to eventually expand
      our retail presence across China. Our retail strategy will largely depend on
      our
      ability to find sites for, open and operate retail locations successfully.
      Our
      ability to open and operate retail locations successfully depends on several
      factors, including, among others, our ability to:


18





•
            identify
                suitable counter locations, the availability of which is outside
                our
                control;


•
            purchase
                and negotiate acceptable lease terms;





•
            prepare
                counters for opening within budget;


•
            source
                sufficient levels of inventory at acceptable costs to meet the needs
                of
                counters;





•
            hire,
                train and retain personnel;





•
            secure
                required governmental permits and approvals;


•
            successfully
                integrate counters into our existing operations;





•
            contain
                payroll costs; and


•
            generate
                sufficient operating cash flows or secure adequate capital on commercially
                reasonable terms to fund our retail strategy
                plans.




Any
      failure to successfully open and operate retail counters for our cosmetic
      products could have a material adverse effect on our results of operations.
      In
      addition, our proposed retail plan will place increased demands on our
      operational, managerial and administrative resources. These increased demands
      could cause us to operate our business less effectively, which, in turn, could
      cause deterioration in the financial performance of our overall
      business.





**We
      Expect to Lose Certain Preferential Tax Concessions, Which May Cause Our Tax
      Liabilities To Increase And Our Profitability To Decline.**





We
      enjoy
      preferential tax concessions in the PRC as a high-tech enterprise. Pursuant
      to
      the State Council’s Regulations on Encouraging Investment in and Development, we
      were granted a reduction in our income tax rate and have had an income tax
      rate
      of 15% since 2003. In addition, there is no assurance that the preferential
      tax
      treatment in the PRC will remain unchanged and effective. Our tax liabilities
      will increase and our profits may accordingly decline if our reduced income
      tax
      rate is no longer applicable and/or the tax relief on investment in PRC is
      no
      longer available.




Additionally,
      the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
      Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax
      rate of 25.0% for all enterprises (including foreign-invested enterprises)
      and
      cancel several tax incentives enjoyed by foreign-invested enterprises. On March
      16, 2007, the National People’s Congress of China passed the new Enterprise
      Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
      issued the Implementation Regulations for the EIT Law which took effect on
      January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
      unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
      Entities unless they qualify under certain limited exceptions. We believe that
      we will continue to have a 15% rate with a tax preferences for 2008 and will
      have a favorable rate of 50% of the tax rates in effect during fiscal 2009
      through 2011 as determined by the PRC government and the regional tax
      authorities, but it is unclear how any increases in the transition period will
      specifically occur. We believe that our profitability may be negatively affected
      in the near future as a result of the new EIT Law. Any future increase in the
      enterprise income tax rate applicable to us or other adverse tax treatments
      could increase our tax liabilities and reduce our net income. Further, any
      future increase in the enterprise income tax rate applicable to us or other
      adverse tax treatments, such as the discontinuation of preferential tax
      treatments for high and new technology enterprises altogether, would have a
      material adverse effect on our results of operations and financial
      condition.


19




**We
      Do Not Carry Insurance To Cover Any Losses Due To Fire, Casualty Or Theft At
      Our
      Production Facility Located In Kunming, China.**





We
      have
      not obtained fire, casualty and theft insurance, and there is no insurance
      coverage for our raw materials, goods and merchandise, furniture and buildings
      in China. Any losses incurred by us will have to be borne by us without any
      assistance, and we may not have sufficient capital to cover material damage
      to,
      or the loss of, our production facility due to fire, severe weather, flood
      or
      other cause, and such damage or loss would have a material adverse effect on
      our
      financial condition, business and prospects.




**We
      May Suffer As A Result Of Product Liability Or Defective
      Products.**





We
      may
      produce products which inadvertently have an adverse pharmaceutical effect
      on
      the health of individuals despite proper testing. Existing PRC laws and
      regulations do not require us to maintain third party liability insurance to
      cover product liability claims. However, if a product liability claim is brought
      against us, it may, regardless of merit or eventual outcome, result in damage
      to
      our reputation, breach of contract with our customers, decreased demand for
      our
      products, costly litigation, product recalls, loss of revenue, and the inability
      to commercialize some products.





**We
      Rely On The Cooperation With Research Laboratories And Universities, And If
      These Institutions Cease To Cooperate With Us And We Cannot Find Other Suitable
      Substitute Research And Development Partners, Our Ability To Develop New
      Products May Be Hindered And Our Business May Be Adversely
      Affected.**





We
      cooperate with several research institutions including the Shijia Research
      Center of Beijing University. We rely to a certain extent on these institutions
      for our development of new products. There is no assurance that these
      institutions will continue cooperating with us to develop new products. In
      the
      event that these institutions cease to cooperate with us and it cannot find
      other suitable substitute research and development partners, our ability to
      develop new products may be hindered and our business may be adversely affected.





**RISKS
      RELATED TO CONDUCTING BUSINESS IN CHINA**





**All
      Of Our Assets Are Located In China And Substantially All Of Our Revenues Are
      Derived From Our Operations In China, And Changes In The Political And Economic
      Policies Of The PRC Government Could Have A Significant Impact Upon The Business
      We May Be Able To Conduct In The PRC And Our Results Of Operations And Financial
      Condition.**





Our
      business operations may be adversely affected by the current and future
      political environment in the PRC. The PRC has operated as a socialist state
      since the mid-1900s and is controlled by the Communist Party of China. The
      Chinese government exerts substantial influence and control over the manner
      in
      which we must conduct our business activities. The PRC has only permitted
      provincial and local economic autonomy and private economic activities since
      the
      1970s. The government of the PRC has exercised and continues to exercise
      substantial control over virtually every sector of the Chinese economy,
      particularly the pharmaceutical industry, through regulation and state
      ownership. Our ability to operate in China may be adversely affected by changes
      in Chinese laws and regulations, including those relating to taxation, import
      and export tariffs, raw materials, environmental regulations, land use rights,
      property and other matters. Under our current leadership, the government of
      the
      PRC has been pursuing economic reform policies that encourage private economic
      activity and greater economic decentralization. There is no assurance, however,
      that the government of the PRC will continue to pursue these policies, or that
      it will not significantly alter these policies from time to time without notice.


20





**The
      PRC Laws And Regulations Governing Our**  **Current
      Business Operations Are Sometimes Vague And Uncertain. Any Changes In Such
      PRC
      Laws And Regulations May Have A Material And Adverse Effect On Our
      Business.**





The
      PRC’s
      legal system is a civil law system based on written statutes, in which system
      decided legal cases have little value as precedents unlike the common law system
      prevalent in the United States. There are substantial uncertainties regarding
      the interpretation and application of PRC laws and regulations, including but
      not limited to the laws and regulations governing our business, or the
      enforcement and performance of our arrangements with customers in the event
      of
      the imposition of statutory liens, death, bankruptcy and criminal proceedings.
      The Chinese government has been developing a comprehensive system of commercial
      laws, and considerable progress has been made in introducing laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, because
      these laws and regulations are relatively new, and because of the limited volume
      of published cases and judicial interpretation and their lack of force as
      precedents, interpretation and enforcement of these laws and regulations involve
      significant uncertainties. New laws and regulations that affect existing and
      proposed future businesses may also be applied retroactively. We are considered
      a foreign persons or foreign funded enterprises under PRC laws, and as a result,
      we are required to comply with PRC laws and regulations. We cannot predict
      what
      effect the interpretation of existing or new PRC laws or regulations may have
      on
      our businesses. If the relevant authorities find that we are in violation of
      PRC
      laws or regulations, they would have broad discretion in dealing with such
      a
      violation, including, without limitation:





·
            levying
                fines;




·
            revoking
                our business and other licenses;




·
            requiring
                that we restructure our ownership or operations;
                and




·
            requiring
                that we discontinue any portion or all of our
                business.




**The
      Foreign Currency Exchange Rate Between U.S. Dollars And Renminbi Could Adversely
      Affect Our Financial Condition.**





To
      the
      extent that we need to convert dollars into Renminbi for our operational needs,
      our financial position and the price of our common stock may be adversely
      affected should the Renminbi appreciate against the U.S. dollar at that time.
      Conversely, if we decide to convert our Renminbi into dollars for the
      operational needs or paying dividends on our common stock, the dollar equivalent
      of our earnings from our subsidiary in China would be reduced should the dollar
      appreciate against the Renminbi.





Until
      1994, the Renminbi experienced a gradual but significant devaluation against
      most major currencies, including dollars, and there was a significant
      devaluation of the Renminbi on January 1, 1994 in connection with the
      replacement of the dual exchange rate system with a unified managed floating
      rate foreign exchange system. Since 1994, the value of the Renminbi relative
      to
      the U.S. Dollar has remained stable and has appreciated slightly against the
      U.S. dollar. Countries, including the United States, have argued that the
      Renminbi is artificially undervalued due to China’s current monetary policies
      and have pressured China to allow the Renminbi to float freely in world markets.
      In July 2005, the PRC government changed its policy of pegging the value of
      the
      Renminbi to the dollar. Under the new policy the Renminbi is permitted to
      fluctuate within a narrow and managed band against a basket of designated
      foreign currencies. While the international reaction to the Renminbi revaluation
      has generally been positive, there remains significant international pressure
      on
      the PRC government to adopt an even more flexible currency policy, which could
      result in further and more significant appreciation of the Renminbi against
      the
      dollar.





**Inflation
      In The PRC Could Negatively Affect Our Profitability And
      Growth.**





While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. During the past two decades, the rate of inflation in China has
      been
      as high as approximately 20%. According to the National Bureau of Statistics
      of
      China, the inflation rate in China reached a high point of 4.8% in 2007 as
      compared to the past several years. The inflation rate in China was 1.8% in
      2005
      and 1.5% in 2006. The inflation rate is expected to continue to increase in
      2008. If prices for our products rise at a rate that is insufficient to
      compensate for the rise in the costs of supplies such as raw materials, it
      may
      have an adverse effect on our profitability. In order to control inflation
      in
      the past, the PRC government has imposed controls on bank credits, limits on
      loans for fixed assets and restrictions on state bank lending. The
      implementation of such policies may impede economic growth. In October 2004,
      the
      People’s Bank of China, the PRC’s central bank, raised interest rates for the
      first time in nearly a decade and indicated in a statement that the measure
      was
      prompted by inflationary concerns in the Chinese economy. During 2007, the
      interest rate was increased from 5.67% to 7.83%. Repeated rises in interest
      rates by the central bank would likely slow economic activity in China which
      could, in turn, materially increase our costs and also reduce demand for our
      products.


21





**Recent
      PRC Regulations Relating To Acquisitions Of PRC Companies By Foreign Entities
      May Create Regulatory Uncertainties That Could Restrict Or Limit Our Ability
      To
      Operate. Our Failure To Obtain The Prior Approval Of The China Securities
      Regulatory Commission, Or The CSRC, For The Listing And Trading Of Our Common
      Stock On The American Stock Exchange Could Have A Material Adverse Effect On
      Our
      Business, Operating Results, Reputation And Trading Price Of Our Common
      Stock.**





The
      PRC
      State Administration of Foreign Exchange, or SAFE, issued a public notice in
      January 2005 concerning foreign exchange regulations on mergers and acquisitions
      in China. The public notice states that if an offshore company controlled by
      PRC
      residents intends to acquire a PRC company, such acquisition will be subject
      to
      strict examination by the relevant foreign exchange authorities. The public
      notice also states that the approval of the relevant foreign exchange
      authorities is required for any sale or transfer by the PRC residents of a
      PRC
      company’s assets or equity interests to foreign entities for equity interests or
      assets of the foreign entities.





In
      April
      2005, SAFE issued another public notice further explaining the January notice.
      In accordance with the April notice, if an acquisition of a PRC company by
      an
      offshore company controlled by PRC residents has been confirmed by a Foreign
      Investment Enterprise Certificate prior to the promulgation of the January
      notice, the PRC residents must each submit a registration form to the local
      SAFE
      branch with respect to their respective ownership interests in the offshore
      company, and must also file an amendment to such registration if the offshore
      company experiences material events, such as changes in the share capital,
      share
      transfer, mergers and acquisitions, spin-off transaction or use of assets in
      China to guarantee offshore obligations. The April notice also provides that
      failure to comply with the registration procedures set forth therein may result
      in restrictions on our PRC resident shareholders and our subsidiaries. Pending
      the promulgation of detailed implementation rules, the relevant government
      authorities are reluctant to commence processing any registration or application
      for approval required under the SAFE notices.





In
      addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
      State-Owned Assets Supervision and Administration Commission of the State
      Council, State Administration of Taxation, State Administration for Industry
      and
      Commerce, CSRC and SAFE, amended and released the Provisions for Foreign
      Investors to Merge and Acquire Domestic Enterprises, new foreign-investment
      rules which took effect September 8, 2006, superseding much, but not all, of
      the
      guidance in the prior SAFE circulars. These new rules significantly revise
      China’s regulatory framework governing onshore-offshore restructurings and how
      foreign investors can acquire domestic enterprises. These new rules signify
      greater PRC government attention to cross-border merger, acquisition and other
      investment activities, by confirming MOFCOM as a key regulator for issues
      related to mergers and acquisitions in China and requiring MOFCOM approval
      of a
      broad range of merger, acquisition and investment transactions. Further, the
      new
      rules establish reporting requirements for acquisition of control by foreigners
      of companies in key industries, and reinforce the ability of the Chinese
      government to monitor and prohibit foreign control transactions in key
      industries.




Specifically,
      this regulation, among other things, has some provisions that purport to require
      that an offshore special purpose vehicle, or SPV, formed for listing purposes
      and controlled directly or indirectly by PRC companies or individuals shall
      obtain the approval of the CSRC prior to the listing and trading of such SPV’s
      securities on an overseas stock exchange. On September 21, 2006, the CSRC
      published on its official website procedures specifying documents and materials
      required to be submitted to it by SPVs seeking CSRC approval of their overseas
      listings. However, the application of this PRC regulation remains unclear with
      no consensus currently existing among the leading PRC law firms regarding the
      scope and applicability of the CSRC approval requirement.





Our
      PRC
      counsel, Tianyuan Law Firm, has advised us that because we completed our
      restructuring before September 8, 2006, the effective date of the new
      regulation, it is not necessary for us to submit the application to the CSRC
      for
      its approval, and the listing and trading of our Common Stock on the American
      Stock Exchange does not require CSRC approval.





If
      the
      CSRC or another PRC regulatory agency subsequently determines that CSRC approval
      was required for our initial public offering that was completed in June 2007,
      we
      may face regulatory actions or other sanctions from the CSRC or other PRC
      regulatory agencies. These regulatory agencies may impose fines and penalties
      on
      our operations in the PRC, limit our operating privileges in the PRC, delay
      or
      restrict the repatriation of the proceeds from our initial public offering
      or
      subsequent offerings into the PRC, or take other actions that could have a
      material adverse effect on our business, financial condition, results of
      operations, reputation and prospects, as well as the trading price of our Common
      Stock. The CSRC or other PRC regulatory agencies also may take actions requiring
      us, or making it advisable for us, to halt future offerings before settlement
      and delivery of the Common Stock offered hereby. Consequently, if you engage
      in
      market trading or other activities in anticipation of and prior to settlement
      and delivery, you do so at the risk that settlement and delivery may not occur.


22





Also,
      if
      later the CSRC requires that we obtain its approval, we may be unable to obtain
      a waiver of the CSRC approval requirements, if and when procedures are
      established to obtain such a waiver. Any uncertainties and/or negative publicity
      regarding this CSRC approval requirement could have a material adverse effect
      on
      the trading price of our Common Stock.





These
      new
      rules may significantly affect the means by which offshore-onshore
      restructurings are undertaken in China in connection with offshore private
      equity and venture capital financings, mergers and acquisitions. It is expected
      that such transactional activity in China in the near future will require
      significant case-by-case guidance from MOFCOM and other government authorities
      as appropriate. It is anticipated that application of the new rules will be
      subject to significant administrative interpretation, and we will need to
      closely monitor how MOFCOM and other ministries apply the rules to ensure its
      domestic and offshore activities continue to comply with PRC law. Given the
      uncertainties regarding interpretation and application of the new rules, we
      may
      need to expend significant time and resources to maintain
      compliance.





It
      is
      uncertain how our business operations or future strategy will be affected by
      the
      interpretations and implementation of the SAFE notices and new rules. Our
      business operations or future strategy could be adversely affected by the SAFE
      notices and the new rules. For example, we may be subject to more stringent
      review and approval process with respect to our foreign exchange
      activities.





**Failure
      To Comply With The United States Foreign Corrupt Practices Act Could Subject
      Us
      To Penalties And Other Adverse Consequences.**





Upon
      completion of the Share Exchange, we became subject to the United States Foreign
      Corrupt Practices Act, which generally prohibits United States companies from
      engaging in bribery or other prohibited payments to foreign officials for the
      purpose of obtaining or retaining business. Foreign companies, including some
      that may compete with us, are not subject to these prohibitions. Corruption,
      extortion, bribery, pay-offs, theft and other fraudulent practices occur from
      time-to-time in the PRC. We can make no assurance, however, that our employees
      or other agents will not engage in such conduct for which we might be held
      responsible. If our employees or other agents are found to have engaged in
      such
      practices, we could suffer severe penalties and other consequences that may
      have
      a material adverse effect on our business, financial condition and results
      of
      operations.





**Any
      Recurrence Of Severe Acute Respiratory Syndrome, Avian Flu, Or Another
      Widespread Public Health Problem, In The PRC Could Adversely Affect Our
      Operations.**





A
      renewed
      outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread
      public health problem in China, where all of our manufacturing facilities are
      located and where all of our sales occur, could have a negative effect on our
      operations. Such an outbreak could have an impact on our operations as a result
      of:





·
            quarantines
                or closures of some of our manufacturing facilities, which would
                severely
                disrupt our operations,




·
            the
                sickness or death of our key officers and employees,
                and




·
            a
                general slowdown in the Chinese
                economy.




Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect our operations.





**A
      Downturn In The Economy Of The PRC May Slow Our Growth And
      Profitability.**





The
      growth of the Chinese economy has been uneven across geographic regions and
      economic sectors. There can be no assurance that growth of the Chinese economy
      will be steady or that any downturn will not have a negative effect on our
      business, especially if it results in either a decreased use of our products
      or
      in pressure on us to lower our prices.


23





**We
      May Have Difficulty Establishing Adequate Management, Legal And Financial
      Controls In The PRC.**





PRC
      companies have historically not adopted a Western style of management and
      financial reporting concepts and practices, which includes strong corporate
      governance, internal controls and, computer, financial and other control
      systems. In addition, we may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards. Therefore, we may, in turn, experience
      difficulties in implementing and maintaining adequate internal controls as
      required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result
      in
      significant deficiencies or material weaknesses in our internal controls which
      could impact the reliability of our financial statements and prevent it from
      complying with SEC rules and regulations and the requirements of the
      Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
      compliance could have a materially adverse effect on our business.





**If
      We Make Equity Compensation Grants To Persons Who Are PRC Citizens, They May
      Be
      Required To Register With The State Administration Of Foreign Exchange Of The
      PRC, Or SAFE. We May Also Face Regulatory Uncertainties That Could Restrict
      Our
      Ability To Adopt An Equity Compensation Plan For Our Directors And Employees
      And
      Other Parties Under PRC Law.**




On
      April
      6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
      Individuals Participating in the Employee Stock Ownership Plan or Stock Option
      Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
      whether Circular 78 covers all forms of equity compensation plans or only those
      which provide for the granting of stock options. For any plans which are so
      covered and are adopted by a non-PRC listed company after April 6, 2007,
      Circular 78 requires all participants who are PRC citizens to register with
      and
      obtain approvals from SAFE prior to their participation in the plan. In
      addition, Circular 78 also requires PRC citizens to register with SAFE and
      make
      the necessary applications and filings if they participated in an overseas
      listed company’s covered equity compensation plan prior to April 6, 2007. We
      intend to adopt an equity compensation plan in the future and make option grants
      to our officers and directors, most of whom are PRC citizens. Circular 78 may
      require our officers and directors who receive option grants and are PRC
      citizens to register with SAFE. We believe that the registration and approval
      requirements contemplated in Circular 78 will be burdensome and time consuming.
      If it is determined that any of our equity compensation plans are subject to
      Circular 78, failure to comply with such provisions may subject us and
      participants of our equity incentive plan who are PRC citizens to fines and
      legal sanctions and prevent us from being able to grant equity compensation
      to
      our PRC employees. In that case, our ability to compensate our employees and
      directors through equity compensation would be hindered and our business
      operations may be adversely affected.





**You
      May Experience Difficulties In Effecting Service Of Legal Process, Enforcing
      Foreign Judgments Or Bringing Original Actions In China Based Upon U.S. laws,
      Including The Federal Securities Laws Or Other Foreign Laws Against Us Or Our
      Management.**





All
      of
      our current operations are conducted in China. Moreover, all of our directors
      and officers are nationals and residents of China. All or substantially all
      of
      the assets of these persons are located outside the United States and in the
      PRC. As a result, it may not be possible to effect service of process within
      the
      United States or elsewhere outside China upon these persons. In addition,
      uncertainty exists as to whether the courts of China would recognize or enforce
      judgments of U.S. courts obtained against us or such officers and/or directors
      predicated upon the civil liability provisions of the securities law of the
      United States or any state thereof, or be competent to hear original actions
      brought in China against us or such persons predicated upon the securities
      laws
      of the United States or any state thereof.





**RISKS
      RELATED TO OUR CAPITAL STRUCTURE**





**The
      Price Of Our Common Stock May Be Volatile, And If An Active Trading Market
      For
      Our Common Stock Does Not Develop, The Price Of Our Common Stock May Suffer
      And
      Decline.**





Prior
      to
      our initial public offering and listing of our common stock on the American
      Stock Exchange on June 14, 2007, there has been no public market for our
      securities in the United States. Accordingly, we cannot assure you that an
      active trading market will develop or be sustained or that the market price
      of
      our common stock will not decline. The price at which our common stock will
      trade after our initial public offering is likely to be highly volatile and
      may
      fluctuate substantially due to many factors, some of which are outside of our
      control.


24





**Shares
      Eligible For Future Sale May Adversely Affect The Market Price Of Our Common
      Stock, As The Future Sale Of A Substantial Amount Of Outstanding Stock In The
      Public Marketplace Could Reduce The Price Of Our Common
      Stock.** **





In
      June
      2007, we completed a public offering and sale of 460,000 shares of common stock,
      all of which are currently freely tradeable. In addition, we registered
      2,000,000 shares of common stock issued in a Private Placement, and all lock
      up
      restrictions regarding these shares have expired, therefore the shares are
      freely tradable. We also registered 2,006,400 additional shares of common stock.
      All of the shares included in an effective registration statement as described
      above may be freely sold and transferred except if subject to a lock up
      agreement.





Additionally,
      following the Share Exchange, the former stockholder of Shenghuo China may
      be
      eligible to sell all or some of our shares of common stock by means of ordinary
      brokerage transactions in the open market pursuant to Rule 144, promulgated
      under the Securities Act (“Rule 144”), subject to certain limitations.
      Previously, in general, pursuant to Rule 144, a stockholder (or stockholders
      whose shares are aggregated) who has satisfied a one-year holding period may,
      under certain circumstances, sell within any three-month period a number of
      securities which does not exceed the greater of 1% of the then outstanding
      shares of common stock or the average weekly trading volume of the class during
      the four calendar weeks prior to such sale. February 15, 2008, Rule 144 was
      amended to, among other things, shorten the holding period from one year to
      six
      months and to remove the volume limitations, among other things, for
      non-affiliates of the company, all of which make it easier for a non-affiliate
      stockholder to sell shares under Rule 144. Any substantial sale of common stock
      pursuant to any resale prospectus or Rule 144 may have an adverse effect on
      the
      market price of our common stock by creating an excessive supply.




**Our
      Principal Stockholder Has Significant Influence Over Us** .




Our
      largest shareholder, Lan’s Int’l Medicine Investment Co., Limited, or LIMI,
      beneficially owns or controls approximately 78% of our outstanding shares as
      of
      the close of the Share Exchange. Gui Hua Lan, our Chief Executive Officer,
      Feng
      Lan, our President, and Zheng Yi Wang, our Executive Director of Exports, are
      directors and have voting and investment control over the shares owned by LIMI.
      In addition, Gui Hua Lan, Feng Lan and Zheng Yi Wang owns 62.42%, 5.015% and
      1.345%, respectively, of LIMI’s issued and outstanding shares. Other of our
      officers and directors hold equity interests in LIMI. LIMI has controlling
      influence in determining the outcome of any corporate transaction or other
      matters submitted to our shareholders for approval, including mergers,
      consolidations and the sale of all or substantially all of our assets, election
      of directors, and other significant corporate actions. LIMI also has the power
      to prevent or cause a change in control. In addition, without the consent of
      LIMI, we could be prevented from entering into transactions that could be
      beneficial to it. The interests of LIMI may differ from the interests of our
      other shareholders.




**The
      Interests Of The Existing Minority Shareholder In Shenghuo China May Diverge
      From Our Own Interests And This May Adversely Affect Our Ability To Manage
      Shenghuo China.**





Shenghuo
      China, our principal operating subsidiary, is an equity joint venture in which
      we directly own a 93.75% interest and SDIC Venture Capital Investment, Co.,
      Ltd., or SDIC, a state-owned investment company, owns the remaining 6.25%
      interest. SDIC’s interest may not be aligned with our interest at all times. If
      our interests diverge, SDIC may exercise its right under PRC laws to protect
      its
      own interest, which may be adverse to us and our investors. For example, under
      China’s joint venture regulations, unanimous approval of members of a joint
      venture’s (such as Shenghuo China) board of directors who are present at a board
      meeting is required for any amendment to the joint venture’s articles of
      association, the termination or dissolution of the joint venture company, an
      increase or decrease in the registered capital of the joint venture company
      or a
      merger or de-merger of the joint venture. Accordingly, SDIC has the ability
      to
      block any action that requires unanimous board approval. Further, should we
      wish
      to transfer our equity interest in Shenghuo China, in whole or in part, to
      a
      third-party, SDIC has a right of first refusal under China’s joint venture
      regulations.





In
      addition to our statutory rights as a minority shareholder, SDIC has additional
      rights under the joint venture contract and under the articles of association
      of
      Shenghuo China. The joint venture contract and articles of association require
      the consent of each of Shenghuo China’s shareholders and/or unanimous board
      approval on matters such as a major change in the business line of the company
      and expansion or amendment of the business scope of the company.





SDIC
      has
      thus far been cooperative with us in handling matters with respect to the
      business of Shenghuo China. There is no assurance, however, that SDIC will
      continue to act in a cooperative manner in the future.


25





**The
      Ability Of Our Chinese Operating Subsidiaries To Pay Dividends May Be Restricted
      Due To Our Corporate Structure.**




Substantially
      all of our operations are conducted in China and substantially all of our
      revenues are generated in China. As an equity joint venture, Shenghuo China
      is
      required to establish reserve funds and staff and workers’ bonus and welfare
      funds, each of which is appropriated from net profit after taxation but before
      dividend distributions in accordance with Chinese law. Shenghuo China is
      required to allocate at least 10% of our net profits to the reserve fund until
      the balance of this fund has reached 50% of Shenghuo China’s registered
      capital.





In
      addition, the profit available for distribution from our Chinese subsidiaries
      is
      determined in accordance with generally accepted accounting principles in China.
      This calculation may differ from the one performed under generally accepted
      accounting principles in the United States, or GAAP. As a result, we may not
      receive sufficient distributions from our Chinese subsidiaries to enable us
      to
      make dividend distributions to our stockholders in the future and limitations
      on
      distributions of the profits of Shenghuo China could negatively affect our
      financial condition and assets, even if our GAAP financial statements indicate
      that our operations have been profitable.





**We
      May Not Be Able To Achieve The Benefits We Expected To Result From The Share
      Exchange.**




On
      June
      30, 2006, we entered into the Exchange Agreement, as amended on August 11 and
      28, 2006, with the 93.75% shareholder of Shenghuo China pursuant to which we
      agreed to acquire 93.75% of the equity interest of Shenghuo China in exchange
      for shares of our common stock. On August 31, 2006, the Share Exchange closed,
      Shenghuo China became our 93.75%-owned subsidiary and our sole business
      operations became that of Shenghuo China. Also, the management and directors
      of
      Shenghuo China became the management and directors of us and we changed our
      corporate name to China Shenghuo Pharmaceutical Holdings, Inc.





The
      Share
      Exchange was effected for various reasons, including:





·
            access
                to the capital markets of the United
                States;




·
            the
                increased market liquidity expected to result from exchanging stock
                in a
                private company for securities of a public company that may eventually
                be
                traded;




·
            the
                ability to use registered securities to make acquisition of assets
                or
                businesses;




·
            increased
                visibility in the financial
                community;




·
            enhanced
                access to the capital markets;




·
            improved
                transparency of operations; and




·
            perceived
                credibility and enhanced corporate image of being a publicly traded
                company.





There
      can
      be no assurance that any of the anticipated benefits of the Share Exchange
      will
      be realized in respect to our new business operations. In addition, the
      attention and effort devoted to achieving the benefits of the Share Exchange
      and
      attending to the obligations of being a public company, such as reporting
      requirements and securities regulations, could significantly divert management’s
      attention from other important issues, which could materially and adversely
      affect our operating results or stock price in the future.





**If
      We Fail To Maintain Effective Internal Controls Over Financial Reporting Or
      Effective Disclosure Controls and Procedures, The Price Of Our Common Stock
      May
      Be Adversely Affected.**





Our
      internal control over financial reporting or disclosure controls and procedures
      may have weaknesses and conditions that need to be addressed, the disclosure
      of
      which may have an adverse impact on the price of our common stock. We are
      required to establish and maintain appropriate internal controls over financial
      reporting and disclosure controls and procedures. Failure to establish those
      controls, or any failure of those controls once established, could adversely
      impact our public disclosures regarding our business, financial condition or
      results of operations. In addition, management’s assessment of internal controls
      over financial reporting or disclosure controls and procedures may identify
      weaknesses and conditions that need to be addressed in our internal controls
      over financial reporting, disclosure controls and procedures or other matters
      that may raise concerns for investors. Any actual or perceived weaknesses and
      conditions that need to be addressed in our internal control over financial
      reporting or disclosure controls and procedures may have an adverse impact
      on
      the price of our common stock.


26





As
      of
      December 31, 2007, our Chief Executive Officer (CEO) and our Chief Financial
      Officer (CFO) performed an evaluation of our disclosure controls and procedures
      and concluded that our disclosure controls and procedures had significant
      deficiencies that resulted in a material weakness in our controls and
      procedures, resulting in them being ineffective. These deficiencies consisted
      of
      material adjustments related to the prior year audits were not recorded in
      the
      company’s accounting records that were necessary to reconcile the retained
      earnings to the prior year balances in accordance with US GAAP, the level of
      U.S
      GAAP expertise of our internal accounting staff, and our internal audit
      functions. We expect to expend a significant amount of funds to address these
      deficiencies, and there is no guarantee that we will be able to resolve these
      deficiencies, which may result in an adverse impact on the price of our common
      stock.





**Standards
      For Compliance With Section 404 Of The Sarbanes-Oxley Act Of 2002 Are Uncertain,
      And If We Fail To Comply In A Timely Manner, Our Business Could Be Harmed And
      Our Stock Price Could Decline.**




Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of our internal control over financial reporting,
      and
      attestation of this assessment by our company’s independent registered public
      accountants. The SEC extended the compliance dates for non-accelerated filers,
      as defined by the SEC. Accordingly, we believe that the annual assessment of
      our
      internal controls requirement will first apply to our annual report for the
      2007 fiscal year and the attestation requirement of management’s assessment by
      our company’s independent registered public accountants will first apply to our
      annual report for the 2008 fiscal year. The standards that must be met for
      management to assess the internal control over financial reporting as effective
      are new and complex, and require significant documentation, testing and possible
      remediation to meet the detailed standards. We may encounter problems or delays
      in completing activities necessary to make an assessment of our internal control
      over financial reporting. In addition, the attestation process by our
      independent registered public accountants is new and it may encounter problems
      or delays in completing the implementation of any requested improvements and
      receiving an attestation of our assessment by our independent registered public
      accountants. If we cannot assess our internal control over financial reporting
      as effective, or our independent registered public accountants are unable to
      provide an unqualified attestation report on such assessment, investor
      confidence and share value may be negatively impacted.




**Our
      Common Stock May Be Considered A “Penny Stock,” And Thereby Be Subject To
      Additional Sale And Trading Regulations That May Make It More Difficult To
      Sell.**




Our
      common stock may be considered to be a “penny stock” if it does not qualify for
      one of the exemptions from the definition of “penny stock” under Section 3a51-1
      of the Securities Exchange Act for 1934, as amended (the “Exchange Act”). Our
      common stock may be a “penny stock” if it meets one or more of the following
      conditions (i) the stock trades at a price less than $5.00 per share; (ii)
      it is
      not traded on a “recognized” national exchange; (iii) it is not quoted on the
      Nasdaq Capital Market, or even if so, has a price less than $5.00 per share;
      or
      (iv) is issued by a company that has been in business less than three years
      with
      net tangible assets less than $5 million.





The
      principal result or effect of being designated a “penny stock” is that
      securities broker-dealers participating in sales of our common stock will be
      subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
      promulgated under the Exchange Act. For example, Rule 15g-2 requires
      broker-dealers dealing in penny stocks to provide potential investors with
      a
      document disclosing the risks of penny stocks and to obtain a manually signed
      and dated written receipt of the document at least two business days before
      effecting any transaction in a penny stock for the investor’s account. Moreover,
      Rule 15g-9 requires broker-dealers in penny stocks to approve the account of
      any
      investor for transactions in such stocks before selling any penny stock to
      that
      investor. This procedure requires the broker-dealer to (i) obtain from the
      investor information concerning his or her financial situation, investment
      experience and investment objectives; (ii) reasonably determine, based on that
      information, that transactions in penny stocks are suitable for the investor
      and
      that the investor has sufficient knowledge and experience as to be reasonably
      capable of evaluating the risks of penny stock transactions; (iii) provide
      the
      investor with a written statement setting forth the basis on which the
      broker-dealer made the determination in (ii) above; and (iv) receive a signed
      and dated copy of such statement from the investor, confirming that it
      accurately reflects the investor’s financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult and time consuming for holders of our common stock to resell their
      shares to third parties or to otherwise dispose of them in the market or
      otherwise.





**We
      Do Not Foresee Paying Cash Dividends In The Foreseeable
      Future.**




We
      currently intend to retain any future earnings for funding growth. We do not
      anticipate paying any dividends in the foreseeable future. As a result, you
      should not rely on an investment in our securities if you require dividend
      income. Capital appreciation, if any, of our shares may be your sole source
      of
      gain for the foreseeable future. Moreover, you may not be able to resell your
      shares in our company at or above the price you paid for them.


27





**ITEM 2.**
            **DESCRIPTION
                OF PROPERTY**




We
      have
      land use rights to two parcels of land with a total area of approximately 66.7
      acres and own a 161,460 square foot factory. The land use rights for both
      parcels have terms of 50 years and end in 2048 and 2050. Our principal executive
      offices are located at No. 2, Jing You Road, Kunming National Economy &
Technology Developing District, People’s Republic of China 650217.




**ITEM 3.**
            **LEGAL
                PROCEEDINGS**




The
      Company was sued by a former employee for violation of his contract and the
      courts entered a judgment in favor of the employee in 2003 for $128,978, which
      included litigation costs. The Company accrued the liability for this loss at
      December 31, 2003 and paid the amount of the judgment on April 27, 2004. In
      2006, the plaintiff has asked the court to have the Company pay a penalty for
      not paying the judgment timely in the amount of $100,000. The court had frozen
      a
      bank account that had $105,284. During the fourth quarter of 2006, the court
      rejected the request for the penalty and released the funds back to the Company.
      The employee has now asserted claims for allegedly ruining the employee’s
      reputation and causing mental anguish. The lawsuit was settled in January of
      2008, which resulted in the payment of $65,136 by the Company.





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





None.




28


**PART
      II**




**ITEM 5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS **AND
                SMALL BUSINESS ISSUER PURCHASES OF EQUITY
                SECURITIES****





Commencing
      on June 14, 2007, our shares of common stock have been listed for trading on
      AMEX under the ticker symbol “KUN.” As of March 15, 2008, we had 49 registered
      shareholders.





From
      June
      14, 2007, which was our first day of trading, through December 31, 2007, the
      high and low sales price for our common stock on AMEX are as set forth below.
      The closing sales price of our common stock on March 28, 2008 was $3.56 per
      share.





**2007****High**
            
            **Low**4th
                Quarter
            
            $
            19.75
            
            $
            3.803rd
                Quarter
            
            
            6.65
            
            
            3.102nd
                Quarter (from listing on June 14, 2007)
            
            
            8.15
            
            
            3.50




The
      price
      of our common stock will likely fluctuate in the future. The stock market in
      general has experienced extreme stock price fluctuations in the past few years.
      In some cases, these fluctuations have been unrelated to the operating
      performance of the affected companies. Many companies have experienced dramatic
      volatility in the market prices of their common stock. We believe that a number
      of factors, both within and outside our control, could cause the price of our
      common stock to fluctuate, perhaps substantially. Factors such as the following
      could have a significant adverse impact on the market price of our common
      stock:





•
            Our
                ability to obtain additional financing and, if available, the terms
                and
                conditions of the financing;•
            Our
                financial position and results of operations;•
            Concern
                as to, or other evidence of, the reliability and efficiency of our
                products and services or our competitors’ products and
                services;•
            Announcements
                of innovations or new products or services by us or our
                competitors;•
            U.S.
                federal and state governmental regulatory actions and the impact
                of such
                requirements on our business;•
            The
                development of litigation against us;•
            Period-to-period
                fluctuations in our operating results;•
            Changes
                in estimates of our performance by any securities
                analysts;•
            The
                issuance of new equity securities pursuant to a future offering or
                acquisition;•
            Changes
                in interest rates;•
            Competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital commitments;•
            Investor
                perceptions of us; and•
            General
                economic and other national
                conditions.


29





**Dividend
      Policy**





We
      have
      not declared or paid any cash dividends on our common stock, and we currently
      intend to retain future earnings, if any, to finance the expansion of our
      business, and we do not expect to pay any cash dividends in the foreseeable
      future. The decision whether to pay cash dividends on our common stock will
      be
      made by our board of directors, in their discretion, and will depend on our
      financial condition, operating results, capital requirements and other factors
      that the board of directors considers significant. We currently intend to retain
      our earnings for funding growth and, therefore, do not expect to pay any
      dividends in the foreseeable future.





**Equity
      Compensation Plan**





As
      of
      December 31, 2007, we did not have an equity compensation plan.





****
            
            
            
            
            **# of securities remaining******
            
            
            
            
            **available for future****# of securities to be issued**
            
            
            **Weighted-average**
            
            **issuance under equity****upon exercise of**
            
            
            **exercise price of**
            
            **compensation plans****outstanding options,**
            
            
            **outstanding options,**
            
            **(excluding securities****warrants and rights**
            
            
            **warrants and rights**
            
            **reflected in column (a))**Equity
              compensation plans approved by security holders
            
            
            -
            
            
            
            -
            
            
            -Equity
                compensation plans not approved by securities holders
            
            
            6,000
            (1)
            
            $
            3.50
            
            
            -Total
            
            
            6,000
            
            
            $
            3.50
            
            
            -







(1)
      A
      total of 6,000 warrants were granted to two of our non-employee directors in
      2007.





**Recent
      sales of unregistered securities**





In
      June
      2007, upon the closing of our initial public offering, we issued to WestPark
      Capital, Inc. warrants to purchase up to 40,000 shares of our common stock
      in
      exchange for its underwriting services provided to us in connection with our
      initial public offering. The warrants are exercisable at a per share exercise
      price of $4.20, subject to standard anti-dilution adjustments for stock splits
      and similar transactions, and will expire after five years. The securities
      were
      issued to WestPark Capital in reliance upon exemptions from registration
      pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
      Rule
      506 promulgated thereunder.


30




**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**Forward-Looking
      Statements**





*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our financial statements and the related notes,
      and
      the other financial information included in this report.*





*This
      filing contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
      similar expressions are intended to identify forward-looking statements. These
      statements include, among others, information regarding future operations,
      future capital expenditures, and future net cash flow. Such statements reflect
      our management’s current views with respect to future events and financial
      performance and involve risks and uncertainties, including, without limitation,
      general economic and business conditions; changes in foreign, political, social,
      and economic conditions; our expansion into the retail distribution of our
      cosmetic products; regulatory initiatives and compliance with governmental
      regulations; the ability to achieve further market penetration and additional
      customers; and various other matters, many of which are beyond our control.
      Should one or more of these risks or uncertainties occur, or should underlying
      assumptions prove to be incorrect, actual results may vary materially and
      adversely from those anticipated, believed, estimated or otherwise indicated.
      Consequently, all of the forward-looking statements made in this report are
      qualified by these cautionary statements and there can be no assurance of the
      actual results or developments. Refer to the sections entitled “Risk Factors”
and “Special Note Regarding Forward-Looking Statements” contained in this
      report.*





**Overview**





We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is the root of the greyish-brown
      or
      greyish-yellow plant that only grows in a few geographic locations, among which
      is the Yunnan Province in southwest China, where we are located; this province
      accounts for 90% of the total global production. The main root of Panax
      notoginseng are cylindrical shaped and are most commonly one to six centimeters
      long and one to four centimeters in diameter. Panax notoginseng saponins (PNS),
      the active ingredients in Panax notoginseng, are extracted from the plant using
      high-tech equipment and in accord with Good Manufacturing Practice (GMP)
      standards. Our main product, Xuesaitong Soft Capsules, accounted for more than
      80% and 90% of our sales for the year ended December 31, 2006 and the year
      ended
      December 31, 2007, respectively.





We
      earn
      revenues mainly from the production and sale of our products and external
      processing. We hope to increase profits as a result of making new products
      and
      increasing sales, since the sale of products is our main source for generating
      cash. Our business involves a significant degree of risk as a result of the
      opportunities and challenges we face in selling our products. We have
      traditionally focused on research and development of products serving
      cardiovascular and cerebrovascular disease, peptic ulcer disease and health
      products markets, but we intend to devote additional resources to research
      and
      development and to continue to evaluate and develop additional product
      candidates to expand our pipeline where we perceive an unmet need and commercial
      potential, and to improve existing products to enhance their
      efficacy.





With
      intense price competition among many similar or identical products in the
      industry, we believe that building brand equity is the primary means to generate
      and sustain profitable growth in the future. Our brand strategy is centered
      on
“Lixuwang”—the brand under which most of our products are sold. We believe that
      our relationships within the Chinese pharmaceutical industry are key to building
      brand equity, and we believe we can benefit from developing and maintaining
      relationships with professionals within the industry, especially physicians
      and
      hospitals.





Xuesaitong
      Soft Capsules, which has been listed in the National Insurance Catalogue and
      is
      subject to wholesale and retail price controls by the Chinese government, are
      primarily sold in China, but the product is also sold in various developing
      countries, including Malaysia, Indonesia and Kyrgyzstan. Sales of the product
      in
      China are regulated by the SFDA as a prescription drug and therefore must be
      sold to consumers through hospital pharmacies and cannot be advertised, thus
      limiting the ability of the company to market the brand. Less than 5% sales
      of
      Xuesaitong Soft Capsules are sold to military hospitals through China’s military
      procurement system while over 95% of sales are made to non-military hospitals
      through distributors. Our three largest distributors are Yunnan Province
      Pharmaceutical, LTD.; Nanyang Jikang Medicine LTD; and Beijing Ai’xin Weiye
      Medicine, LTD, all of which accounted for 7.3%, 6.1% and 5.6% of our sales
      for
      the year ended December 31, 2007.





As
      of
      December 31, 2007, our marketing team maintains sales offices or agents in
      approximately 20 provinces throughout China. The sales network covers
      approximately 186 cities and is staffed by approximately 400 sales
      representatives. We intend to grow our internal marketing and sales function
      and
      increase our relationships with other national distributors to expand the
      distribution and presence of our non-prescription brands and
      cosmetics.





31


We
      hope
      to further expand sales beyond China into other countries where our products
      could be affordable treatment options. We intend to focus on the expansion
      of
      our cosmetics product line and devote additional marketing and sales resources
      to that end with the aim that our cosmetics products will account for a larger
      percentage of our revenue in the future.





We
      believe that among the most important economic or industry-wide factors relevant
      to our growth in the short term are reform of the medical system in China and
      the adjustment of medicine prices, which will affect the sale of our main
      product, Xuesaitong Soft Capsules, in hospitals. In order to increase long-term
      growth, we have applied for the designation of Xuesaitong Soft Capsules as
      a
      medicine with “good quality worthy of high price,” which we received in February
      2007. We believe this designation may help prevent future price reductions
      and
      possibly offset revenue decreases in case of declining future sales. Currently,
      the Chinese government supports the medical system in urban and rural
      communities. We hope to stabilize the sales channel into hospitals and widen
      the
      reach of sales in urban and rural communities at the same time. Large increases
      in medicine sales at an average lower price will ensure the growth of general
      medical sales over the next few years.





In
      September 2007, we expanded the geographic region in which our 12Ways cosmetic
      products were sold from our native Yunnan province to a number of cities and
      provinces outside our local region. We have opened a number of retail specialty
      counters to offer our cosmetic products at pharmacies throughout Eastern China,
      eventually expanding our retail presence across China. As of December 31, 2007,
      we have opened about 106 retail specialty counters in Beijing, Shanghai,
      Hangzhou, Dongwan, Shengzhen, and Shaoguang. In addition, we intend to open
      a
      12Ways Chinese Herbal Beauty Salon in Kunming that will feature approximately
      ten traditional Chinese medicine practitioners and beauticians that provide
      a
      variety of services, including acupuncture, body massage, foot massage and
      other
      services. All products used in the salon will be supplied by us. Management
      hopes that the opening of this salon and the opening of retail counters will
      allow us to increase our brand recognition and strengthen marketing. Our ability
      to effectively open and operate new retail locations depends on several factors,
      including, among others, our ability to identify suitable counter locations,
      the
      availability of which is outside our control; prepare counters for opening
      within budget; hire, train and retain personnel; secure required governmental
      permits and approvals; contain payroll costs; and generate sufficient operating
      cash flows or secure adequate capital on commercially reasonable terms to fund
      our expansion plans.


We
        do
        face certain challenges and risks, including our relatively high debt ratio,
        which is one of our main risks. If we fail to raise capital in overseas markets,
        we will encounter great difficulties as a result of the shortage of working
        capital which we expect to face when our new cosmetic and health products
        come
        onto the market. There is potential for growth in production and sales, due
        to
        the growth of new products and expansion of new channels into urban and rural
        communities. However, it will be uncertain which of our new products will
        pass
        the applicable tests and get clinical approval without difficulty because
        the
        uncertainty of test results and clinical approvals, which relates only to
        our
        new products. Over the last three years, the price of the main raw material
        we
        use - sanchi - has stabilized and is rising slightly, which will likely increase
        our cost of products sold.





**Company
      History**





We
      were
      incorporated in the State of Delaware on May 24, 2005. We were originally
      organized as a “blank check” shell company to investigate and acquire a target
      company or business seeking the perceived advantages of being a publicly held
      corporation. Our principal business operations from inception to August 31,
      2006, to closing of the Share Exchange, was to achieve long-term growth
      potential through a combination with a business rather than immediate,
      short-term earnings. On June 30, 2006, we entered into a Share Exchange
      Agreement (the “Exchange Agreement”) with Kunming Shenghuo Pharmaceutical
      (Group) Co., Ltd. (“Shenghuo China”) and Lan’s Int’l Medicine Investment Co.,
      Limited, a Hong Kong corporation and shareholder holding 93.75% of the equity
      interest of Shenghuo China (“LIMI”). On August 11, and 28, 2006, the parties
      entered into Amendment No. 1 and 2 to the Exchange Agreement, respectively.
      Pursuant to the Exchange Agreement, as amended, we agreed to issue an aggregate
      of 16,255,400 shares of our common stock to LIMI and its designees in exchange
      for 93.75% of the equity interest of Shenghuo China (the “Share Exchange”). The
      Share Exchange closed on August 31, 2006. Upon the closing of the Share
      Exchange, we (i) became the 93.75% parent of Shenghuo China, (ii) assumed the
      operations of Shenghuo China and its subsidiaries and (iii) changed our name
      from SRKP 8, Inc. to China Shenghuo Pharmaceutical Holdings, Inc.





32


Shenghuo
      China was formed in 1995 as a limited company under the laws of the People’s
      Republic of China (“PRC”) with an initial capitalization of approximately
      $602,000, with Kunming Nanguo Biology Source Development Institute (“Nanguo”)
      owning approximately 55% of its outstanding equity interests and Guangdong
      Maoming Huazhou Company (“Guangdong”) owning approximately 45% of its equity
      interests. In November 1999, Guangdong transferred all of its equity interests
      to Nanguo, which, as a result, became Shenghuo China’s 100% parent. Also in
      November 1999, Nanguo entered into an agreement with the Pharmaceutical
      Institute of Kunming Medical College (the “College”) to purchase the rights to
      the technology for the preparation of Sanchi, including the technology of
      extracting and separating the Sanchi from Panax notoginseng, analysis data,
      the
      conditions and methods of synthesize, manufacture and the quality-control.
      Terms
      of the agreement required an initial payment of approximately $217,000 and
      a
      final payment of approximately $3.9 million upon receiving governmental approval
      and protection for the developed techniques. In March 2000, Nanguo made an
      additional net investment of approximately $1.3 million and a new investor,
      Yunnan Yunwei (Group) Co., LTD (“Yunwei”) made a capital investment of
      approximately $3.7 million into Shenghuo China, and in May 2002, a new investor,
      SDIC Venture Capital Investment, Co., Ltd. (“SDIC”), made an investment of
      approximately $483,000. In August 2004, Nanguo sold the rights to the technology
      to Shenghuo China for approximately $3.5 million, and in January 2005, Nanguo
      purchased all of the equity interests held by Yunwei for approximately the
      same
      amount, resulting in Nanguo becoming Shenghuo China’s 93.75% parent, and SDIC’s
      percentage holding in Shenghuo China became 6.25% of Shenghuo China’s
      outstanding equity interests. In 2006, Nanguo transferred its 93.75% interest
      to
      Lan’s Int’l Medicine Investment Co., Ltd., a company formed under the laws of
      Hong Kong (“LIMI”), and Shenghuo China was restructured into Chinese Foreign
      Equity Joint Venture under the laws of the PRC. On August 31, 2006, pursuant
      to
      the terms of the Share Exchange Agreement, we issued an aggregate of 16,255,400
      shares of our common stock to LIMI and its designees in exchange for 93.75%
      of
      the equity interest of Shenghuo China.





The
      acquisition of Shenghuo China by us pursuant to the Share Exchange was accounted
      for as a recapitalization by us. The recapitalization was, at the time of the
      Share Exchange, the merger of a private operating company (Shenghuo China)
      into
      a non-operating public shell corporation (us) with nominal net assets and as
      such is treated as a capital transaction, rather than a business combination.
      As
      a result no goodwill is recorded. The transaction is the equivalent to the
      issuance of stock by the private company for the net monetary assets of the
      shell corporation. The pre-acquisition financial statements of Shenghuo China
      are treated as the historical financial statements of the consolidated
      companies.





**Recent
      Events**





On
      June
      19, 2007, we sold 460,000 shares of our common stock at a price of $3.50 per
      share in an initial public offering for gross proceeds of $1,610,000. We
      received an aggregate of $1,094,381 of net proceeds, after deducting
      underwriter’s fees and other expenses of $515,619 incurred in connection with
      the sale. In conjunction with the sale of common stock, we issued a warrant
      to
      the underwriter for services performed to purchase 40,000 shares of our common
      stock at an exercise price of $4.20 per share which expires on June 14, 2012.
      The proceeds were allocated to the warrant based upon its fair value of
      $206,268, and the remaining proceeds were allocated to the shares of common
      stock. The warrant holder has unlimited piggyback registration rights, as well
      as the ability to request, at our expense a single registration of the shares
      underlying the warrant.





On
      October 10, 2007, a warrant holder fully exercised warrants to purchase an
      aggregate of 100,000 shares of our common stock at a per share exercise price
      of
      $2.50. The exercise of the warrants was conducted in accordance with the warrant
      agreement entered into by the holder and us on August 31, 2006. As a result
      of
      the exercise, we issued the holder 100,000 shares of common stock and we
      received aggregate exercise proceeds of $250,000.




*The
        following discussion of our results of operations and financial condition
        has
        been updated to reflect changes related to the Restatement. See the Explanatory
        Note above and Note 1 of Notes* *to
        Consolidated Financial Statements* *.
        Other than such changes, the following information has not been updated from
        that provided in the Original Filing.*




**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      We believe the following are the critical accounting policies that impact the
      financial statements, some of which are based on management’s best estimates
      available at the time of preparation. Actual experience may differ from these
      estimates.





***Basis
      of Presentation and Translating Financial Statements*** - The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. The
      functional currency of the operating subsidiaries in the PRC is the Chinese
      Yuan
      Renminbi (“CNY”); however, the consolidated financial statements have been
      expressed in United States Dollars (“USD”). The accompanying consolidated
      balance sheets have been translated into USD at the exchange rates prevailing
      at
      each balance sheet date. The consolidated statements of operations have been
      translated using the average exchange rates prevailing during the operating
      periods of each statement.




***Cash
      and Cash Equivalents*** -
      Our
      cash and cash equivalents are maintained in bank deposit accounts. We have
      not
      experienced any losses with respect to these deposits. Cash and cash equivalents
      include interest bearing and non-interest bearing bank deposits, money market
      accounts, and short-term certificates of deposit with original maturities of
      three months or less. We do not have any restricted cash as of December 31,
      2007. We did not enter into any hedge contracts during any of the periods
      presented.





33


***Accounts
      Receivable, Employee Advances and Allowance for Doubtful Accounts –*** Trade
      receivables and employee advances are carried at original invoiced amounts
      less
      an allowance for doubtful accounts. An allowance for uncollectible accounts
      receivable is established by charges to operations for amounts required to
      maintain an adequate allowance, in management’s judgment, to cover anticipated
      losses from customer accounts and sales returns. Such accounts are charged
      to
      the allowance when collection appears doubtful. Any subsequent recoveries are
      credited to the allowance account. Employee advances consist of business
      advances to employees for travel and related expenses and various prepaid
      expenses mainly for market development. As time passes from when advances are
      made to employees, we will create an allowance for these older receivables
      as
      the likelihood of collection from each particular employees decreases as their
      respective advances age. We believe that the allowance for doubtful accounts
      is
      consistent with industry standards in the PRC based on the products that are
      being sold.





***Advances
      to Suppliers and Advances from Customers*** - As is
      customary in the PRC, we will often make advanced payments to suppliers for
      materials, which may include provisions that set the purchase price and delivery
      date of raw materials, or receive advance payments from customers.





***Basic
      and Diluted Earnings per Share –*** Basic
      and
      diluted earnings per share are calculated by dividing net earnings attributable
      to common stockholders by the weighted-average number of shares of common stock
      outstanding during the year. Diluted earnings per share are calculated to give
      effect to potentially issuable dilutive common shares. Potentially dilutive
      securities as of December 31, 2007 are comprised of warrants to purchase 40,000
      shares of common stock at an exercise price of $4.20 and warrants to purchase
      6,000 shares of common stock at an exercise price of $3.50. There were no
      potentially dilutive shares at December 31, 2006.





***Research
      and Development Expense –***  We
      expense research and development expenses as incurred.





***Advertising
      Expense –*** We
      expense advertising costs as incurred.





***Comprehensive
      Income*** ***-***
      Other comprehensive income presented in the consolidated financial statements
      consists of cumulative foreign currency translation adjustments.





**Results
      of Operations**





The
      following table sets forth our results of operations in dollars and as a
      percentage of revenues for the years ended December 31, 2007 and
      2006.


**Years Ended December 31,****2007**
                
                **2006**In Dollars
                
                Percent of
                  Revenues
                
                In Dollars
                
                Percent of
                  Revenues*(dollar amounts in thousands, except for share*
                  *and earnings per share data)***Sale
                    of Products**
                
                $
                19,974
                
                
                100.0
                %
                $
                19,960
                
                
                100.0
                %**Cost
                    of Products Sold**
                
                
                5,038
                
                
                25.2
                %
                
                6,400
                
                
                32.1
                %**Gross
                    Profit**
                
                
                14,936
                
                
                74.8
                %
                
                13,560
                
                
                67.9
                %**Operating
                    Expenses:**Selling
                    expense
                
                
                6,841
                
                
                34.2
                %
                
                5,256
                
                
                26.3
                %General
                    and administrative expense
                
                
                5,878
                
                
                29.4
                %
                
                3,903
                
                
                19.6
                %Research
                    and development expense
                
                
                272
                
                
                1.4
                %
                
                28
                
                
                0.1
                %**Total
                    Operating Expenses**
                
                
                12,991
                
                
                65.0
                %
                
                9,187
                
                
                46.0
                %**Income
                    from Operations**
                
                
                1,945
                
                
                9.8
                %
                
                4,373
                
                
                21.9
                %**Other
                    Income (Expense):**Interest
                    income
                
                
                22
                
                
                0.1
                %
                
                8
                
                
                0.0
                %Income
                    from research and development activities
                
                
                448
                
                
                2.2
                %
                
                105
                
                
                0.5
                %Interest
                    expense
                
                
                (946
                )
                
                -4.7
                %
                
                (757
                )
                
                -3.8
                %Non-operating
                    expenses
                
                
                (78
                )
                
                -0.4
                %
                
                (7
                )
                
                0.0
                %**Net
                    Other Expense**
                
                
                (554
                )
                
                -2.8
                %
                
                (652
                )
                
                -3.3
                %**Income
                    Before Income Taxes**
                
                
                1,391
                
                
                7.0
                %
                
                3,721
                
                
                18.6
                %Benefit
                    from (provision for) income taxes
                
                
                449
                
                
                2.2
                    .
                %
                
                (406
                )
                
                -2.0
                %Minority
                    interest in income of subsidiaries
                
                
                (120
                )
                
                -0.6
                %
                
                (313
                )
                
                -1.6
                %**Net
                    Income**
                
                $
                1,720
                
                
                8.6
                %
                $
                3,001
                
                
                15.0
                %**Net
                    Income**
                
                $
                1,720
                
                
                8.6
                %
                $
                3,001
                
                
                15.0
                %Foreign
                    currency translation adjustment
                
                
                709
                
                
                3.5
                %
                
                176
                
                
                0.9
                %**Comprehensive
                    Income**
                
                $
                2,429
                
                
                12.1
                %
                $
                3,178
                
                
                15.9
                %**Earnings
                    Per Share****Basic**
                
                $
                0.09
                
                
                
                
                $
                0.17**Diluted**
                
                $
                0.09
                
                
                
                
                $
                0.17**Weighted-Average
                    Shares Outstanding****Basic**
                
                
                19,387,619
                
                
                
                
                
                17,198,308**Diluted**
                
                
                19,439,077
                
                
                
                
                
                17,198,308





34


**Fiscal
      Years Ended December 31, 2007 and 2006**





***Sale
      of products:*** Sale
      of
      products for the year ended December 31, 2007 was approximately $19.97 million,
      which is approximately equal to our sale of products of approximately $19.96
      million for the year ended December 31, 2006. We experienced an increase in
      sales prices in some provinces, which was partially offset by the decrease
      of
      sales volume.





***Cost
      of products sold:*** Our
      costs of products sold for the year ended December 31, 2007 was approximately
      $5.04 million, a decrease of approximately $1.36 million, or 21.2%, from
      approximately $6.40 million for the year ended December 31, 2006. The production
      cost per unit in 2007 is higher than in 2006 because of the general increase
      in
      the price of material and utilities. However, the total costs of products sold
      in 2007 were less than in 2006 because about $6 million of sales of our primary
      product Xuesaitong Soft Capsules recognized in 2006 were manufactured in
      previous years by old machinery that manufactured products at about 30% higher
      production cost.





***Gross
      profit:*** Our
      gross profit for the year ended December 31, 2007 was approximately $14.94
      million as compared with approximately $13.56 million for the year ended
      December 31, 2006. Gross profit as a percentage of revenues was approximately
      74.8% for the year ended December 31, 2007, which is an increase as compared
      to
      67.9% for the year ended December 31, 2006. The lower margin in 2006 was due
      to
      the higher production costs as mentioned above.




***Selling
      expense:*** Selling
      expenses were approximately $6.84 million for the year ended December 31, 2007,
      an increase of $1.59 million, or 30.2%, from approximately $5.26 million for
      the
      year ended December 31, 2006. As a percentage of total revenue, selling expense
      was 34.3% for the year ended December 31, 2007, as compared to 26.3% for the
      year ended December 31, 2006. The primary reasons for the increase are (i)
      the
      higher commissions that we paid to sales representatives and sales offices
      in an
      effort to stimulate the sales market, (ii) an increase in marketing and
      advertising of new products, particularly in our cosmetics line, (iii) costs
      related to our restructuring an integration of our commercial channels. We
      analyzed and re-evaluated 328 distributor firms that we used throughout China
      on
      the basis of their operation scale, business reputation and strength, among
      other things, in an attempt to eliminate unqualified or small distributors,
      reducing our number of distributor firms to 80. We believe that this integration
      will improve the efficiency of our commercial channels, facilitate our
      management of distribution, accelerate a return on our funds provided to
      distributors, and reduce the occurrence of bad debts. We also amended our sale
      policies in an attempt to streamline our sales teams, re-aligning sales teams
      to
      specific hospitals as opposed to geographic regions. We believe this reform
      will
      re-focus our sales teams, reduce expenses in the long-term, and increase market
      share.





35


***General
      and administrative expense:*** General
      and administrative expenses were $5.87 million for the year ended December
      31,
      2007, an increase of approximately $1.97 million, or 9.8% of sale of products,
      from approximately $3.90 million for the year ended December 31, 2006. The
      increase was primarily a result of the increase in the provision for bad debts
      due to the aging of the accounts receivable and employee advances over one
      to
      two years.





***Research
      and development expense:*** Research
      and development expense for the year ended December 31, 2007 was approximately
      $272,000 as compared to approximately $28,000 for the year ended December 31,
      2006. The increase was primarily due to our efforts to enhance our product
      development during the year ended December 31, 2007, which we expect to continue
      over the next three years. We expended funds to enhance our production
      technology and manufacturing capabilities.





***Net
      other expense:*** Net
      other
      expense, which includes interest income, income from research and
      development activities, interest expense and non-operating expenses, was
      $554,000 for the year ended December 31, 2007 as compared to $652,000 for the
      year ended December 31, 2006, a decrease of approximately $98,000, or 15.03%.
      The decrease in net other expense was primarily due to the increase
      of income from research and development activities, partially offset by an
      increase in interest expense.





***Benefits
      from (Provision for) income taxes:*** Benefit
      from income taxes was approximately $449,198 million for the year ended December
      31, 2007 as compared to a provision for income tax of approximately $406,082
      for
      the year ended December 31, 2006. The increase in the benefits from income
      taxes
      was related to our receipt of a grant of relief from income taxes. On March
      15,
      2007, one of our major subsidiaries, Shenghuo Medicine Co., Ltd., was granted
      an
      approval of their application by the PRC government for relief of income taxes
      for the years ended December 31, 2006 and 2005. As a result, Shenghuo Medicine
      Co., Ltd. recognized an aggregate of approximately $976,000 in income taxes
      that
      are no longer payable as of March 15, 2007. The remaining amount of
      approximately $1.0 million is principally comprised of deferred tax benefits
      from net operating losses and adjustments of bad debt allowances.





***Net
      income:*** Net
      income decreased to $1.72 million for the year ended December 31, 2007 as
      compared to approximately $3.00 million for the year ended December 31, 2006,
      a
      decrease of $1.28 million, or 42.6%. Considering the foreign currency
      translation adjustments of approximately $709,000 and $176,000 for the years
      ended December 31, 2007 and 2006, respectively, comprehensive income of $2.43
      million and $3.18 million was realized for the years ended December 31, 2007
      and
      2006, respectively.





**Liquidity
      and Capital Resources**





***General
      -*** As
      of
      December 31, 2007, we had cash and cash equivalents of $2.80 million. We have
      historically financed our business operations through bank loans, in addition
      to
      equity offerings. As of December 31, 2007, we had borrowed from banks and other
      institutions and had amounts of approximately $5.33 million in short-term notes
      payable. As of December 31, 2007, we had also borrowed $ 4.10 million in our
      current portion of long-term debt. All loans are secured by land, buildings
      and
      machinery as collateral except the loan from the Agricultural Bank of China
      mentioned below which is secured by a pledge by Lan's International Medicine
      Investment Co Ltd. (“LIMI”) of its shareholding in China Shenghuo (KUN).
      For the year ended December 31, 2007, the net decrease in cash and cash
      equivalents was approximately $891,000. The gross proceeds that we received
      in
      June 2007 as a result of the sale of 460,000 shares of our common stock in
      an
      initial public offering were offset primarily by increases in receivables from
      related parties, accounts receivable and employee advances. In addition, we
      received gross proceeds of $250,000 in October 2007 from an exercise of warrants
      by a warrant holder to purchase 100,000 shares of our common stock at a per
      share exercise price of $2.50.




On
      August
      17, 2007, we received a loan for $6,651,094 (RMB 50 million) from Shuang Long
      Branch of Agricultural Bank of China with a term of two years. The loan bears
      interest at a rate of 7.722%, which is due quarterly. Principal payments for
      the
      loan were agreed to as follows:





2007
            
            $
            665,1092008
            
            
            1,995,3282009
            
            
            3,990,6576,651,094





36


The
      loan
      is for working capital and is guaranteed by Lan's International Medicine
      Investment Co Ltd. (“LIMI”). Gui Hua Lan, our Chief Executive Officer; Feng Lan,
      our President; and Zheng Yi Wang, our Executive Director of Exports, are
      directors and have voting and investment control over the shares owned by LIMI,
      which beneficially owns or controls approximately 77.3% of our outstanding
      shares. In addition, Gui Hua Lan, Feng Lan and Zheng Yi Wang owns 62.42%, 5.15%
      and 1.45%, respectively, of LIMI’s issued and outstanding shares. LIMI is not
      receiving any compensation for the guarantee of our loan.





The
      following table provides summary information about net cash flow for the year
      ended December 31, 2007 and 2006:





**Years ended December 31,****2007**
            
            **2006****(in thousands)**Net
                cash provided by (used in) operating activities
            
            $
            (5,037
            )
            $
            1,500Net
                cash provided by (used in) investing activities
            
            
            378
            
            
            (315
            )Net
                cash provided by financing activities
            
            
            3,563
            
            
            1,170**Cash
                and Cash Equivalents at End of Period**
            
            $
            2,801
            
            $
            3,691





**Operating
      Activities:** Net
      cash
      used in operating activities for the year ended December 31, 2007 was
      approximately $5 million, as compared to cash provided by operating activities
      of $1.50 million for the year ended December 31, 2006. The increase in cash
      used
      was primarily due to the following factors. First, there was a
      decrease in cash used for accounts and notes receivable, which is partially
      offset by the increase in cash used for employee advances during the
      year ended December 31, 2007 (see below for more information regarding employee
      advances), and an increase in cash used for inventory. Second, there was an
      increase in cash used in tax and related payables and a decrease in cash
      provided by stock issued for service.





**Investing
      Activities:** Net
      cash
      provided by investing activities was approximately $378,000 for the year ended
      December 31, 2007, as compared to net cash used in the amount of approximately
      $315,000 for the year ended December 31, 2006. The increase in net cash provided
      by investing activities was primarily a result of $487,000 in cash provided
      by a
      release of restricted cash for the year ended December 31, 2007, as compared
      to
      cash used for restricted cash in the amount of $76,000 for the same period
      in
      2006.




**Financing
      Activities:** Net
      cash
      provided by financing activities was approximately $3.56 million for the year
      ended December 31, 2007 compared to $1.17 million provided for the year ended
      December 31, 2006. The increase in cash provided was primarily due to our sale
      of stock in an initial public offering in June 2007 pursuant to which we sold
      460,000 shares of our common stock at a price of $3.50 per share in an initial
      public offering for gross proceeds of $1,610,000. We received an aggregate
      of
      $1.1 million of net proceeds, after deducting underwriter’s fees and other
      expenses of approximately $516,000 incurred in connection with the sale. In
      addition, net proceeds from short and long-term loans increased by
      approximately $2.4 million as compared to the same period in 2006.





***Working
      Capital***





As
      of
      December 31, 2007, our accounts receivable and notes receivable (less allowance
      for doubtful accounts of $3.2 million) were $10.57 million, an increase of
      $0.66
      million, or 6%, as compared to our accounts receivable of $ 9.91 million (net
      of
      allowance for doubtful accounts of $794,468) as of December 31, 2006. The
      collection period typically runs from nine months to one year, consistent
      with the relatively long collection period in our industry.





Our
      company normally requires one to two months to deliver products once the order
      is placed. Inventory increased during the year ended December 31, 2007 by
      approximately $1.54 million, an increase of 59.8% over inventory as of December
      31, 2006. The increase in inventory was primarily due to the increase in work
      in
      progress. We purchased a significant amount of Sanchi, which is our main raw
      material for products. In order to avoid a risk of spoilage by storing the
      Sanchi in our warehouse, our production department purified the Sanchi into
      powder for storage. As a result, inventory increased. Moreover, our payment
      cycle is considerably shorter than our receivable cycle, since we typically
      pay
      our suppliers all or a portion of the purchase price in advance and for some
      suppliers we must maintain a deposit for future orders. As of December 31,
      2007,
      our advance payments to our suppliers totaled approximately $670,000. We require
      our customers to pay a certain percentage of the sales price as deposit before
      we ship products to them. The percentage varies from customer to customer.
      During the course of business, we reduce the deposit requirement for some
      customers with good credit.





37


To
      the
      extent that we cannot satisfy our cash needs, whether from operations or from
      a
      financing source, our business would be impaired in that it may be difficult
      for
      us to obtain products which could, in turn, impair our ability to generate
      sales. We have implemented new policies aimed at improving collection of
      accounts receivable in the future, including more detailed reporting from and
      increased control over provincial sales offices and representatives, incentives
      for sales representatives more closely tied to timely collection and more
      stringent enforcement of payment terms with distributors.





We
      are
      confident that our available funds and cash generated from operations will
      provide us with sufficient capital for a sustainable operation; however, we
      may
      require additional capital for acquisitions or for the operation of the combined
      companies. We cannot assure that such funding will be available. As of the
      date
      of this report, we have no material commitments for capital expenditures.





We
      make
      significant cash advances to our sales representatives to assist and encourage
      them to expand the marketing and sales of our products into new markets and
      gain
      new customers. We believe the sales representatives are able to expand into
      new
      markets and obtain new customers if they have advanced funds for their travel,
      meals, and other incidental expenses that arise over the time they perform
      their
      functions as sales representatives. Because recently the Chinese economy has
      grown quickly and because competition in the pharmaceutical industry is intense,
      prior to September 2006, we did not ask sales representatives to pay off
      advances immediately. Instead, we encouraged sales representatives to expand
      their markets and gain more customers. However, beginning in September of 2006,
      we began to more vigorously pursue collection of all employee advances.
      Nonetheless, there are some employee advances that have aged significantly
      that,
      based on prior experience, we do not expect to collect on every outstanding
      advance and have estimated the uncollectible balance based on the age of the
      advances. When we makes advances to sales representatives, we require that
      our
      selling offices sign advance agreements with sales representatives to arrange
      the specific purpose of the advance, the amount of the advance, and the term
      of
      the advance. Our finance department records the detail of advances and checks
      the remaining balance with sales representatives every month. We also supervise
      the repayment of the advances. For sales representatives who refuse to pay
      off
      the advances, we attempt to collect on the advances and decrease the risk of
      bad
      debt as much as possible by withholding sales commissions, prosecuting
      delinquent sales representatives, and by other valid means of collection. On
      January 1, 2007, we added punitive measures for overdue advances to the advance
      agreement.





Current
      and long-term employee advances were approximately $8.76 million at December
      31,
      2007 and $3.13 million as of December 31, 2006, an increase of $5.63 million,
      or
      179%. The large increase was due to us advancing more money to sales
      representatives to encourage them to expand their markets and increase sales.
      As
      of December 31, 2007, the gross amount of employee advances was $11.21 million
      and as of December 31, 2006 it was $4.56 million, an increase of $6.65 million
      in that year period. Additionally, beginning September 2006, we began to employ
      more sales representatives, and, as a result, we made more advances to sales
      representatives in an attempt to encourage and assist sales representatives
      to
      expand into new selling markets and gain new customers. Because of the increase
      in the balance of employee advances, we, in compliance with our established
      policy to reserve an allowance for specific percentages of our aged receivables,
      accrued a larger allowance for the increased employee advances in order to
      consistently apply our established allowance policy.




The
      table
      below sets forth the outstanding gross and net amount of outstanding balances
      of
      employee advances for the years ended December 31, 2007 and 2006.




**For the year ended**
              **December 31, 2006**
            
            **For
                the year ended**
              **December
                31,
                2007**Gross
                amount of employee advances
            
            $
            4,559,471
            
            $
            11,210,881Allowance
                for doubtful accounts
            
            
            1,429,426
            
            
            2,447,033Net
                amount
            
            $
            3,130,045
            
            $
            8,763,848




38


As
      of
      December 31, 2007, we had accrued taxes that included approximately $736,000
      million in Value Added Taxes, or VAT taxes. In China, companies are required
      to
      file income tax returns for the current year before April 15 of the following
      year and file VAT tax returns for the current month within ten days of the
      end
      of the month. In the past, we filed VAT tax returns every month after getting
      VAT invoices; however, because some customers did not immediately process these
      invoices, we did not include on a timely basis those invoices in the income
      and
      VAT tax returns for our returns. In June 2006, we became aware that there were
      some income taxes and VAT taxes that were not included on a timely basis on
      our
      tax returns and we requested that these customers process all invoices from
      us.
      On March 15, 2007, one of our majority owned subsidiaries was granted an
      exemption from income taxes for the years ended December 31, 2006 and 2005.
      The
      approval of this exemption by the government of the PRC reduced the amount
      of
      prior income tax payable during 2007 by approximately $976,000. During 2008,
      we believe that we will have sufficient cash flows from operations to
      meet the accrued tax liabilities. Further, the income tax exemption granted
      to
      one of our majority owned subsidiaries will reduce the cash required to relieve
      these liabilities.





**Off-Balance
      Sheet Arrangements**





None.





**Foreign
      Currency Risk**





Since
      all
      of our operations are conducted in the PRC, we are subject to special
      considerations and significant risks not typically associated with companies
      operating in the United States of America. These risks include, among others,
      the political, economic and legal environments and foreign currency exchange
      rate fluctuations. Our operational results may be adversely affected by changes
      in the political and social conditions in the PRC, and by changes in
      governmental policies with respect to medical reforms and other laws and
      regulations, anti-inflationary measures, currency conversion and remittance
      abroad, and rates and methods of taxation, among other things. Exchange rate
      fluctuations may adversely affect the value, in U.S. dollar terms, of our net
      assets and income derived from its operations in the PRC. In addition, all
      of
      our revenue is denominated in the Chinese Yuan Renminbi (“CNY”), which must be
      converted into other currencies before remittance out of the PRC. Both the
      conversion of CNY into foreign currencies and the remittance of foreign
      currencies abroad require approval of the PRC government. The effect of the
      fluctuations of exchange rates is not considered to be material to our business
      operations.





**Interest
      Rate Risk**





We
      do not
      have significant interest rate risk, as our debt obligations are primarily
      fixed
      interest rates.





**ITEM 7.**
            **FINANCIAL
                STATEMENTS**




The
      information required by this Item 7 is incorporated by reference to the Index
      to
      Consolidated Financial Statements beginning at page F-1 at the end of this
      Form
      10-KSB/A.





**ITEM 8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





None.





**ITEM 8A(T).**
            **CONTROLS
                AND PROCEDURES**





***Disclosure
      Controls and Procedures***





As
      required by Rule 13a-15 under the Exchange Act, our management, including Lan
      Gui Hua our Principal Executive Officer, and Qionghua Gao, our Principal
      Financial Officer, evaluated the effectiveness of the design and operation
      of
      our disclosure controls and procedures as of December 31, 2007.




39


Disclosure
      controls and procedures refer to controls and other procedures designed to
      ensure that information required to be disclosed in the reports we file or
      submit under the Securities Exchange Act is recorded, processed, summarized
      and
      reported within the time periods specified in the rules and forms of the SEC
      and
      that such information is accumulated and communicated to our management,
      including our chief executive officer and chief financial officer, as
      appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating our disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management is required to apply its judgment in evaluating
      and
      implementing possible controls and procedures.




Management
      conducted its evaluation of disclosure controls and procedures under the
      supervision of our principal executive officer and our principal financial
      officer. Based on that evaluation, management concluded that because of the material weakness
      in internal control
      over financial reporting described below, our disclosure controls and procedures
      were not effective as of December 31, 2007.




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





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act.  Our management is also required to
      assess and report on the effectiveness of our internal control over financial
      reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
      (“Section 404”).  Management assessed the effectiveness of our internal
      control over financial reporting as of December 31, 2007.  In making
      this assessment, we used the criteria set forth by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO) in Internal Control -
      Integrated Framework.  During our assessment of the effectiveness of
      internal control over financial reporting as of December 31, 2007,
      management identified significant deficiencies which related to our material
      weakness as follows:




§
            Material
                audit adjustments related to the prior year audits were not recorded
                in
                the company’s local accounting records that were necessary to reconcile
                the retained earnings to the prior year balances in accordance with
                US
                GAAP.




§
            The
                U.S. GAAP expertise of our internal accounting
                staff




§
            Our
                internal audit functions




Although
      our accounting staff is professional and experienced in accounting requirements
      and procedures generally accepted in the PRC, management has determined that
      they require additional training and assistance in U.S. GAAP matters.
 Management has determined that our internal audit function is also
      significantly deficient.





In
      order
      to correct the foregoing material weaknesses, we have taken the following
      remediation measures:




§
            We
                will maintain a separate, independent set of accounting records to
                record
                all US GAAP audit adjustments along with the local GAAP accounting
                records
                so as to reconcile our records according to US GAAP.




§
            We
                will arrange necessary training and engage with external professional
                accounting or consultancy firms to assist us in the preparation of
                the US
                GAAP accounts.




§
            We
                have recently established an internal audit function to strengthen
                the
                overall internal control environment, and the current skill and experience
                mix of the internal audit staff. However, this may not ensure an
                effective
                internal audit function. To ensure that it becomes an effective monitoring
                component of internal control framework of the Company, we will focus
                on
                preparing internal audit manual, audit planning and provide for sufficient
                training and development of the internal audit team. Moreover, the
                Company
                has begun the recruitment process to strengthen the overall effectiveness
                of the team and to oversee the implementation of our internal controls
                over financial reporting. The internal audit department is independent
                and
                reports directly to the audit committee.




In
      addition, we have allocated significant financial and human resources to
      strengthen the internal control structure. As part of our efforts to comply
      with
      Section 404 of the Sarbanes-Oxley Act for fiscal year 2008, we are actively
      working with external consultants to assess our data collection, financial
      reporting, and control procedures and to strengthen our internal controls over
      financial reporting.





40


We
      believe that the foregoing steps will remediate the material weakness identified
      above, and we will continue to monitor the effectiveness of these steps and
      make
      any changes that our management deems appropriate.





A
      material weakness (within the meaning of PCAOB Auditing Standard No. 5) is
      a
      deficiency, or a combination of deficiencies, in internal control over financial
      reporting, such that there is a reasonable possibility that a material
      misstatement of our annual or interim financial statements will not be prevented
      or detected on a timely basis. A significant deficiency is a deficiency, or
      a
      combination of deficiencies, in internal control
      over financial reporting that is less severe than a material weakness,
      yet important enough to merit attention by those responsible for oversight
      of
      the company's financial reporting.





Our
      management is not aware that the material weakness in our internal control
      over
      financial reporting causes them to believe that any material inaccuracies or
      errors existed in our financial statement as of December 31, 2007.  The
      reportable conditions and other areas of our internal control over financial
      reporting identified by us as needing improvement have not resulted in a
      material restatement of our financial statements. Nor are we aware of any
      instance where such reportable conditions or other identified areas of weakness
      have resulted in a material misstatement of omission in any report we have
      filed
      with or submitted to the Commission.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies and procedures may deteriorate.





***Auditor
      Attestation***





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





***Changes
      in Internal Controls over Financial Reporting***





Except
      as
      described above, there were no changes in our internal controls over financial
      reporting during the fourth quarter of fiscal year 2007 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.





**ITEM 8B.**
            **OTHER
                INFORMATION**




None.




41


**PART
      III**




**ITEM 9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(A) OF THE EXCHANGE ACT**





**Executive
      Officers, Directors and Key Employees**





The
      following individuals constitute our board of directors and executive
      management:




**Name**
            
            **Age**
            
            **Position**Gui
                Hua Lan
            
            
            65
            
            
            Chief
                Executive Officer and Chairman of the BoardFeng
                Lan
            
            
            35
            
            
            President
                and DirectorLei
                Lan
            
            
            33
            
            
            Executive
                Director of SalesQiong
                Hua Gao
            
            
            41
            
            
            Chief
                Financial OfficerPeng
                Chen
            
            
            33
            
            
            Chief
                Technological OfficerZheng
                Yi Wang
            
            
            62
            
            
            Executive
                Director of Exports, Corporate Secretary and DirectorYunhong
                Guan
            
            
            39
            
            
            DirectorMingyang
                Liao
            
            
            57
            
            
            DirectorGene
                Michael Bennett
            
            
            60
            
            
            Director





***Gui
      Hua Lan*** has
      been
      Chief Executive Officer and Chairman of the Board since 1995. Mr. Lan was
      born in Yulin, Guangxi Province and has a Bachelor’s degree in engineering. He
      also studied at the Chongqing School of Banking and the University of Yunnan
      from 1959 to 1966. After graduation, Mr. Lan worked in the fields of finance,
      media, and government in China. In 1980, Mr. Lan established his own
      enterprise devoted to research on traditional Chinese medicine. From 1995 to
      1999, Mr. Lan served as President of the company. Over the last
      25 years, he has overseen the successful commercial development of a large
      number of traditional Chinese medicine-based drugs and nutritional supplements.
      He owns over 20 national and international patents and has written and published
      numerous articles and reports on economics, many of which have been recognized
      by the World Organization for Traditional Chinese Medicine, Chinese economics
      and management institutions, and the Chinese Academy of Social Sciences.
      Mr. Lan also serves as President and Chairman of Kunming Nanguo Biological
      Resources Development Corp., Ltd., a pharmaceutical research company in China,
      and President and Chairman of Lan’s International Medicine Investment Co.,
      Limited, the controlling shareholder of our company. Mr. Lan also holds a
      number of prominent political posts, including: Political Commissar of Yunnan
      Province, committee of special economy association, committee of business
      association in Yunnan province, Standing Director of Chinese Entrepreneurs,
      Vice-chairman of the Yunnan Institution of Chinese International Trade Academics
      Association, Vice-chairman of Yunnan Technique Enterprises Association,
      president of the chamber of commerce for pharmaceuticals and health foods.





***Feng
      Lan*** has
      been
      President and Director since March 2002. Mr. Lan has a Bachelor’s
      degree in engineering. Mr. Lan graduated from Yunnan traditional Chinese
      Medicine College in 1996, where he majored in pharmacology. He also completed
      graduate studies in pharmacology at the Kunming Medicine College in 2002.
      Mr. Lan is a senior engineer and an academic leader in Kunming. He joined
      Kunming in 1996, and was Secretary of the Technical Department from
      September 1996 to December 1999 and General Engineer from
      March 2000 to March 2005. In October 2004, he was elected as the
      new General Manager of the group and also the General Manager of the
      pharmaceutical company. During his tenure, he has achieved successes such as
      developing Xuesaitong Soft Capsule and improved production techniques and
      quality control systems. Mr. Lan also serves as a Director of Lan’s
      International Medicine Investment Co., Limited, the controlling shareholder
      of
      our company. In 1999, he received an engineering certificate. He was awarded
      third prize of Science and Technology Progress in Yunnan province. In 2002,
      he
      was awarded the title of Technician Making Outstanding Contributions to Kunming
      city.





***Lei
      Lan*** has
      been
      Executive Director of Sales since October 2004 and served as a Director
      from November 2004 to June 2007. Mr. Lan joined us in 1995 and
      served as a vice manager of sales from July 1997 to June 1999. He also
      served as manager of the Yunnan Department from July 1997 to June 1999,
      where he managed sales within the province. Controller, Marketing Manager,
      and
      he also served as Vice General Manager of Sales from June 1999 to
      January 2002 and he served as Marketing Manager and Controller from
      June 1999 to January 2002. Mr. Lan graduated from Yunnan Ethnic
      Academy in July 2005 with a major in economics and management.





***Qiong
      Hua Gao*** has
      been
      Chief Financial Officer since January 2005. Ms. Gao has been with us
      since 2000. From December 2001 to January 2005, Ms. Gao served as
      the minister of the finance department. From July 2001 to
      December 2001, she served as a district accountant for sales, and from
      July 2000 to July 2001, she served as an accountant in our Yunnan
      Market Department. From October 1991 to April 2000, Ms. Gao was
      principal accountant of Kunming Panlong Commercial Building. Ms. Gao
      graduated from Yunnan finance and trade institute, with an accounting degree.
      She joined the group in 1997, and has been in positions such as section chief
      of
      financial department, financial secretary of sales, and financial secretary
      of
      pharmaceuticals.





42


***Peng
      Chen*** has
      been
      Chief Technological Officer since January 2005. Ms. Chen joined us in
      1996 and served as manager of the technology department from October 2001
      to December 2004. Ms. Chen has also served as manager of quality
      control. Ms. Chen graduated from Yunnan traditional Chinese Medicine
      College in 1996 with a major in pharmacology and completed her graduate study
      at
      the Kunming Medicine College in 2002. Ms. Chen is also vice chief physician
      and has been in positions like section chief of quality control department,
      vice
      secretary and secretary of the techniques department.





***Zheng
      Yi Wang*** has
      served as Executive Director of Exports since November 2005 and he served
      as Corporate Secretary and a Director since August 2004. From
      June 1999 to July 2004, Mr. Wang served as our vice manager of
      the pharmaceuticals department, where he oversaw the manufacturing operations.
      Mr. Wang also served as director of the enterprise management department
      from August 2004 to April 2006 and has served as director of the
      administration center from May 2006, where he assists in management and
      executive affairs. Since August 2004, Mr. Wang has been a dispatching
      director of National Investment Entrepreneur Limited, a bio-resource company.
      Mr. Wang also serves as a director of Kunming Nanguo Biological Resources
      Development Corp., Ltd., a pharmaceutical research company, and a director
      of
      Lan’s International Medicine Investment Co., Limited, the controlling
      shareholder of our company. Mr. Wang graduated from the Kunming Medicine
      College in July 1968 with a major in medical treatment.





***Yunhong
      Guan*** has
      served as a Director and as Chairman of the Audit Committee since
      June 2007. Since May 1998, Mr. Guan has served as a partner of Ya
      Tai Zhong Hui Certificated Public Accounting Co., Ltd., a company providing
      auditing services. Since March 2006, Mr. Guan has also served as a
      lawyer at the Yunnan Weizhen Law Firm. From July 1993 to April 1998,
      Mr. Guan served as a secretary in the secretary office of the board of
      directors of Kunming Machine Tools Co., Ltd., a company that designs, produces
      and sells a series of machine tools and parts and technology products such
      as
      computers and products which integrate optical, electrical and mechanical
      components. Since November 2005, Mr. Guan has served as a director and
      as a member of the audit committee of Yunnan Jinggu Forestry Share Co., Ltd.,
      a
      company providing forestry processing services. Mr. Guan has a degree in
      Mechanical Quantity Measuring from China Jiliang University and is a certified
      public accountant.





***Mingyang
      Liao*** has
      served as a Director since June 2007. Since June 1998, Mr. Liao
      has served as a professor at the Beijing Institute of Pharmacology and
      Toxicology (the “Institute”). Mr. Liao also served as a vice professor at
      the Institute from June 1993 to June 1998 and as a researcher at the
      Institute from December 1975 to June 1993. Mr. Liao holds a
      bachelor’s degree in medicine from the Tianjiog Medical University and a
      master’s degree in pharmacology toxicology from the Institute.





***Gene
      Michael Bennett*** has
      served as a Director and as a member of the Audit Committee since June 2007.
      Since June 2004, Mr. Bennett has been a partner at Nexis Investment
      Consulting Corporation, which assists companies in raising funds and in finding
      appropriate investments and merger and acquisition candidates. From
      May 2000 to June 2004, Mr. Bennett served as a partner of ProCFO,
      a provider of contract chief financial officer services. From 1998 to 2000,
      Mr. Bennett taught courses in accounting, tax and auditing as a professor
      and lecturer at the University of Hawaii and Chaminade of Honolulu.
      Mr. Bennett served as the Chief Financial Officer and as a member of the
      board of Argonaut Computers, a provider of “information controller” equipment,
      from 1993 to 1998. Since April 2007, Mr. Bennett has also served as a
      director and as Chairman of the audit committee of Duo Yuan Technologies, Inc.,
      a company that researches, manufactures, sells and services printing equipment,
      and China Fire & Security Group, Inc., a company that develops,
      manufactures, and sells products related to fire protection. Mr. Bennett
      holds a degree in accounting and an MBA in finance from Michigan State
      University and is an inactive certified public accountant.





**Family
      Relationships**





Gui
      Hua
      Lan is the father of Lei Lan and Feng Lan, who are brothers. Feng Lan is the
      spouse of Peng Chen.





**Involvement
      in Certain Legal Proceedings**





To
      the
      best of our knowledge, during the past five years, none of the following
      occurred with respect to any of our directors, executive officers or control
      persons: (1) any bankruptcy petition filed by or against any business of
      which such person was a general partner or executive officer either at the
      time
      of the bankruptcy or within two years prior to that time; (2) any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor offenses);
      (3) being subject to any order, judgment or decree, not subsequently
      reversed, suspended or vacated, of any court of any competent jurisdiction,
      permanently or temporarily enjoining, barring, suspending or otherwise limiting
      his involvement in any type of business, securities or banking activities;
      and
      (4) being found by a court of competent jurisdiction (in a civil action),
      the Securities and Exchange Commission or the Commodities Futures Trading
      Commission to have violated a Federal or state securities or commodities law,
      and the judgment has not been reversed, suspended or vacated.





**Section 16(a)
      Beneficial Ownership Reporting Compliance**





Section 16(a)
      of the Securities Exchange Act of 1934, as amended, requires our directors
      and
      officers, and persons who beneficially own more than 10% of our common stock,
      to
      file with the Securities and Exchange Commission an initial report of ownership
      of our common stock on Form 3 and reports of changes in ownership of our
      common stock on Form 4 or Form 5, as applicable. Officers, directors
      and 10% beneficial owners are required by Securities and Exchange Commission
      regulation to furnish us with copies of all Section 16(a) reports that they
      file.





43


Based
      solely upon review of the copies of such reports furnished to us and
      representations from certain of our executive officers and directors that no
      other such reports were required, we believe that during the period from
      January 1, 2007 through December 31, 2007, all of our executives
      officers, directors and 10% beneficial owners filed the required Section 16(a)
      reports on a timely basis with the exception of the following: one Form 4
      filed by each of Messrs. Bennett and Guan.





**Code
      of Ethics**





On
      June 7, 2007, our Board of Directors adopted the China Shenghuo
      Pharmaceutical Holdings, Inc. Code of Business Conduct and Ethics (the “Code of
      Ethics”) that applies to our directors, officers and employees, including our
      principal executive officers, principal financial officer, principal accounting
      officer, controller or persons performing similar functions. The Code of Ethics
      is filed as Exhibit 14.1 on Item 13 to this Form 10-KSB/A.





**The
      Board of Directors and Committees**





***Board
      Composition***


Subject
      to certain exceptions, under the listing standards of the AMEX, a listed
      company’s board of directors must consist of a majority of independent
      directors. We are exempt from this requirement because we are considered a
      “controlled company” pursuant to Section 801(a) of the AMEX Company Guide
      because one of our shareholders, Lan’s International Medicine Investment Co.,
      Limited (“LIMI”), owns more than 50% of our voting securities. In addition,
      small business issuers are permitted to maintain a board of directors comprised
      of at least 50% independent directors. Currently, our Board of Directors has
      determined that three of the six members of our Board of Directors are
      independent under the listing standards of the AMEX, as follows: Yunhong Guan,
      Mingyang Liao and Gene Michael Bennett.





***Audit
      Committee***


We
      established our Audit Committee in June 2007. The Audit Committee consists
      of Yunhong Guan and Gene Michael Bennett, each of whom is an independent
      director. Mr. Guan, Chairman of the Audit Committee, is an “audit committee
      financial expert” as defined under Item 407(d) of Regulation S-B. The
      purpose of the Audit Committee is to represent and assist our Board of Directors
      in its general oversight of our accounting and financial reporting processes,
      audits of the financial statements and internal control and audit functions.
      The
      Audit Committee’s responsibilities include:





**•**
            
            The
                appointment, replacement, compensation, and oversight of work of
                the
                independent auditor, including resolution of disagreements between
                management and the independent auditor regarding financial reporting,
                for
                the purpose of preparing or issuing an audit report or performing
                other
                audit, review or attest services.**•**
            
            Reviewing
                and discussing with management and the independent auditor various
                topics
                and events that may have significant financial impact on our company
                or
                that are the subject of discussions between management and the independent
                auditors.





Our
      Board
      of Directors does not maintain a separate nominating or compensation committee.
      Functions and duties customarily performed by such committees are performed
      by a
      majority of our independent directors in compliance with the requirements for
      listing on AMEX. Such responsibilities include:





**•**
            
            The
                design, review, recommendation and approval of compensation arrangements
                for our directors, executive officers and key employees, and for
                the
                administration of any equity incentive plans, including the approval
                of
                grants under any such plans to our employees, consultants and
                directors.**•**
            
            The
                review and determination of compensation of our executive officers,
                including our Chief Executive Officer.**•**
            
            The
                selection of director nominees, the approval of director nominations
                to be
                presented for shareholder approval at our annual general meeting
                and
                filling of any vacancies on our board of directors, the consideration
                of
                any nominations of director candidates validly made by shareholders,
                and
                the review and consideration of developments in corporate governance
                practices.




**ITEM 10.**
            **EXECUTIVE
                COMPENSATION**




**Executive
      Compensation**







The
      following table summarizes all compensation that we have recorded in each of
      the
      last two completed fiscal years for our principal executive officer, our two
      most highly compensated executive officers other than our principal executive
      officer whose annual compensation exceeded $100,000, and up to two additional
      individuals for whom disclosure would have been made in this table but for
      the
      fact that the individual was not serving as an executive officer of our company
      at December 31, 2007.




44


**Annual Compensation****Name and Position**
                
                **Year**
                
                **Salary($)**
                
                **Bonus ($)**
                
                **Total($)**Gui
                    Hua Lan
                
                
                2007
                (1)
                $
                12,808
                
                $
                2,112
                
                $
                14,920Chief
                    Executive Officer and
                
                
                2006
                (2)
                $
                7,656
                
                $
                1,531
                
                $
                9,187Chairman
                    of the BoardRichard
                    Rappaport(3)
                
                
                2007
                
                
                —
                
                
                —
                
                
                —Former
                    President and Director
                
                
                2006
                
                
                —
                
                
                —
                
                
                —




(1)
            
            For
                the fiscal year ended December 31, 2007, annual compensation was
                equal to a salary of 90,936.80 Renminbi (“RMB”) (approximately $12,808)
                and bonus of RMB 14,995.20 (approximately $2,112), for a total annual
                compensation of RMB 105,932 (approximately
                $14,920).(2)
            
            For
                the fiscal year ended December 31, 2006, annual compensation was
                equal to a salary of RMB 59,717 (approximately $7,656) and bonus of
                RMB 11,942 (approximately $1,531), for a total annual compensation of
                RMB 71,659 (approximately $9,187).(3)
            
            Mr. Rappaport
                resigned from all positions with the Company upon the close of the
                Share
                Exchange on August 31, 2006.





**Grants
      of Plan-Based Awards in 2007**





There
      were no option grants in 2007.





**Outstanding
      Equity Awards at 2007 Fiscal Year-End**





There
      were no option exercises or options outstanding in 2007.





**Option
      Exercises and Stock Vested in Fiscal 2007**





There
      were no option exercises or stock vested in 2007.





**Employment
      Agreements**





Each
      of
      Gui Hua Lan, Feng Lan, Qiong Hua Gao, Lei Lan, Peng Chen and Zheng Yi Wang
      are
      parties to five year employment agreements with us expiring in
      December 2009 further to which each employee is paid an annual salary of
      approximately $7,753, $6,340, $5,024, $4,733, $5,165, and $5,516, respectively,
      subject to change in annual salary level as set forth in the agreement. None
      of
      the agreements provide for severance upon termination.





**Director
      Compensation**


**Change
                  in****Fees**
              
              
              
              
              
              
              
              **Pension
                  Value****Earned**
              
              
              
              
              
              
              
              **and****or**
              
              
              
              
              
              **Non-Equity**
              
              **Nonqualified****Paid
                  in**
              
              **Stock**
              
              **Option**
              
              **Incentive
                    Plan**
              
              **Deferred**
              
              **All
                    Other****Cash**
              
              **Awards**
              
              **Awards**
              
              **Compensation**
              
              **Compensation**
              
              **Compensation**
              
              **Total****Name**
              
              **($)**
              
              **($)**
              
              **($)**
              
              **($)**
              
              **Earnings**
              
              **($)**
              
              **($)**Gui
                  Hua Lan
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Feng
                  Lan
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Zheng
                  Yi Wang
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Yunhong
                  Guan(1)
              
              
              2,762
              (4)
              
              —
              
              
              9,984
              
              
              —
              
              
              —
              
              
              —
              
              
              12,746Mingyang
                  Liao(2)
              
              
              2,762
              (4)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,762Gene
                  Michael Bennett(3)
              
              
              10,000
              
              
              —
              
              
              9,984
              
              
              —
              
              
              —
              
              
              —
              
              
              19,984


45




(1)
            
            Under
                the terms of the Independent Director’s Agreement with Yunhong Guan (the
                “Guan Agreement”), Mr. Guan will receive an annual compensation of
                RMB 42,000 (approximately $5,524), or RMB 3,500 (approximately $460)
                per
                month. In addition, Mr. Guan has received a five-year warrant to
                purchase 3,000 shares of our common stock at an exercise price of
                $3.50
                per share. Mr. Guan will also receive 3,000 options to purchase
                shares of our common stock on an annual basis once the Company adopts
                a
                stock option plan. No options have been granted as of December 31,
                2007.(2)
            
            Under
                the terms of the Independent Director’s Agreement with Mingyang Liao (the
                “Liao Agreement”), Mr. Liao will receive an annual compensation of
                RMB 42,000 (approximately $5,524), or RMB 3,500 (approximately $460)
                per
                month.(3)
            
            Under
                the terms of the Independent Director’s Agreement with Gene Michael
                Bennett (the “Bennett Agreement”), Mr. Bennett’s annual compensation
                from us will be $12,000 for service as a member of our Board of Directors
                and $8,000 for service as a member of the Audit Committee.
                Mr. Bennett has received a five-year warrant to purchase 3,000 shares
                of our common stock at an exercise price of $3.50 per share.
                Mr. Bennett will also receive 3,000 options to purchase shares of our
                common stock on an annual basis once the Company adopts a stock option
                plan. No options have been granted
                as of December 31, 2007. The Bennett Agreement also provides that
                Mr. Bennett will receive $1,000 for each board meeting he attends in
                person.(4)
            
            Total
                amount of fees paid in cash is equal to RMB 21,000 (approximately
                $2,762).








**Indemnifications
      of Directors And Executive Officers And Limitations of
      Liability**





Under
      Section 145 of the General Corporation Law of the State of Delaware, we can
      indemnify our directors and officers against liabilities they may incur in
      such
      capacities, including liabilities under the Securities Act of 1933, as amended
      (the “Securities Act”). Our certificate of incorporation provides that, pursuant
      to Delaware law, our directors shall not be liable for monetary damages for
      breach of the directors’ fiduciary duty of care to us and our stockholders. This
      provision in the certificate of incorporation does not eliminate the duty of
      care, and in appropriate circumstances equitable remedies such as injunctive
      or
      other forms of non-monetary relief will remain available under Delaware law.
      In
      addition, each director will continue to be subject to liability for breach
      of
      the director’s duty of loyalty to us or our stockholders, for acts or omissions
      not in good faith or involving intentional misconduct or knowing violations
      of
      the law, for actions leading to improper personal benefit to the director,
      and
      for payment of dividends or approval of stock repurchases or redemptions that
      are unlawful under Delaware law. The provision also does not affect a director’s
      responsibilities under any other law, such as the federal securities laws or
      state or federal environmental laws.





Our
      bylaws provide for the indemnification of our directors to the fullest extent
      permitted by the Delaware General Corporation Law. Our bylaws further provide
      that our Board of Directors has discretion to indemnify our officers and other
      employees. We are required to advance, prior to the final disposition of any
      proceeding, promptly on request, all expenses incurred by any director or
      executive officer in connection with that proceeding on receipt of an
      undertaking by or on behalf of that director or executive officer to repay
      those
      amounts if it should be determined ultimately that he or she is not entitled
      to
      be indemnified under the bylaws or otherwise. We are not, however, required
      to
      advance any expenses in connection with any proceeding if a determination is
      reasonably and promptly made by our Board of Directors by a majority vote of
      a
      quorum of disinterested Board members that (i) the party seeking an advance
      acted in bad faith or deliberately breached his or her duty to us or our
      stockholders and (ii) as a result of such actions by the party seeking an
      advance, it is more likely than not that it will ultimately be determined that
      such party is not entitled to indemnification pursuant to the applicable
      sections of our bylaws.





We
      have
      been advised that in the opinion of the Securities and Exchange Commission,
      insofar as indemnification for liabilities arising under the Securities Act
      may
      be permitted to our directors, officers and controlling persons pursuant to
      the
      foregoing provisions, or otherwise, such indemnification is against public
      policy as expressed in the Securities Act and is therefore unenforceable. In
      the
      event a claim for indemnification against such liabilities (other than our
      payment of expenses incurred or paid by our director, officer or controlling
      person in the successful defense of any action, suit or proceeding) is asserted
      by such director, officer or controlling person in connection with the
      securities being registered, we will, unless in the opinion of our counsel
      the
      matter has been settled by controlling precedent, submit to a court of
      appropriate jurisdiction the question of whether such indemnification by us
      is
      against public policy as expressed in the Securities Act and will be governed
      by
      the final adjudication of such issue.





We
      may
      enter into indemnification agreements with each of our directors and officers
      that are, in some cases, broader than the specific indemnification provisions
      permitted by Delaware law, and that may provide additional procedural
      protection. As of the effective time of the Share Exchange, we had not entered
      into any indemnification agreements with our directors or officers, but may
      choose to do so in the future. Such indemnification agreements may require
      us,
      among other things, to:




**•**
            
            indemnify
                officers and directors against certain liabilities that may arise
                because
                of their status as officers or directors;**•**
            
            advance
                expenses, as incurred, to officers and directors in connection with
                a
                legal proceeding, subject to limited exceptions; or**•**
            
            obtain
                directors’ and officers’ insurance.





46


At
      present, there is no pending litigation or proceeding involving any of our
      directors, officers or employees in which indemnification is sought, nor are
      we
      aware of any threatened litigation that may result in claims for
      indemnification.





**ITEM 11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**




**EQUITY
      COMPENSATION PLAN INFORMATION**





See
      “Item 5. Market for Common Equity and Related Stockholder Matters - Equity
      Compensation Plan.”








**BENEFICIAL
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission. In computing the number of shares beneficially owned by
      a
      person and the percentage of ownership of that person, shares of common stock
      subject to options and warrants held by that person that are currently
      exercisable or become exercisable within 60 days of the date of this report
      are deemed outstanding even if they have not actually been exercised. Those
      shares, however, are not deemed outstanding for the purpose of computing the
      percentage ownership of any other person.





The
      following table sets forth certain information with respect to beneficial
      ownership of our common stock based on 19,679,400 issued and outstanding shares
      of common stock, by:





**•**
            
            Each
                person known to be the beneficial owner of 5% or more of the outstanding
                common stock of our company;**•**
            
            Each
                executive officer;**•**
            
            Each
                director; and**•**
            
            All
                of the executive officers and directors as a
                group.





Unless
      otherwise indicated, the persons and entities named in the table have sole
      voting and sole investment power with respect to the shares set forth opposite
      the stockholder’s name, subject to community property laws, where applicable.
      Unless otherwise indicated, the address of each stockholder listed in the table
      is c/o China Shenghuo Pharmaceutical Holdings, Inc., No. 2, Jing You Road,
      Kunming National Economy & Technology Developing District, Peoples Republic
      of China 650217.


**Name
                  and Address**
              
              
              
              **Beneficially**
              
              **Percent
                  of Class****of
                  Beneficial Owner**
              
              **Title**
              
              **Owned**
              
              **Beneficially
                  Owned*****Directors
                  and Executive Officers***Gui
                  Hua Lan
              
              
              Chief
                  Executive Officer and
                Chairman
                  of the Board
              
              
              15,213,000(1
              )
              
              77.3
              %Feng
                  Lan
              
              
              President
                  and Director
              
              
              15,213,000(1
              )
              
              77.3Qiong
                  Hua Gao
              
              
              Chief
                  Financial Officer
              
              
              —(2
              )
              
              —Lei
                  Lan
              
              
              Executive
                  Director of Sales
              
              
              —(2
              )
              
              —Peng
                  Chen
              
              
              Chief
                  Technological Officer
              
              
              15,213,000(3
              )
              
              77.3Zheng
                  Yi Wang
              
              
              Executive
                  Director of Exports,
                Corporate
                  Secretary and Director
              
              
              15,213,000(1
              )
              
              77.3Yunhong
                  Guan
              
              
              Director
              
              
              3,000(4
              )
              
              *Mingyang
                  Liao
              
              
              Director
              
              
              —
              
              
              —Gene
                  Michael Bennett
              
              
              Director
              
              
              3,000(4
              )
              
              *Officers
                  and Directors as a Group (total of 9 persons)
              
              
              
              
              
              15,219,000(1
              )
              
              77.3***5%
                  or more Stockholders***Lan’s
                  International Medicine Investment Co., Limited
              
              
              
              
              
              15,213,000(1
              )
              
              77.3




47




*
            
            Less
                than 1%.(1)
            
            Represents
                shares of common stock in the Company held by LIMI, of which Gui
                Hua Lan,
                Feng Lan and Zheng Yi Wang are directors and have voting and investment
                control over the shares owned by LIMI. In addition, Gui Hua Lan,
                Feng Lan
                and Zheng Yi Wang own 62.2%, 5.0% and 1.3%, respectively, of LIMI’s issued
                and outstanding shares. Each of the foregoing persons disclaims beneficial
                ownership of the shares held by LIMI except to the extent of his
                pecuniary
                interest.(2)
            
            Excludes
                shares of common stock of the Company held by LIMI. Lei Lan and Qiong
                Hua
                Gao own 9.2% and 1.3%, respectively, of LIMI’s issued and outstanding
                shares; however, Mr. Lan and Ms. Gao do not have voting and
                investment control over the shares of the Company’s common stock held by
                LIMI.(3)
            
            Represents
                shares of common stock in the Company held by LIMI. Mrs. Chen is
                the
                spouse of Feng Lan, who is a director of LIMI. Mrs. Chen may
                therefore be deemed to be the beneficial owner of the shares held
                by LIMI.
                Mrs. Chen disclaims beneficial ownership of the shares held by LIMI
                except to the extent of her pecuniary interest.(4)
            
            Represents
                3,000 shares of common stock that are subject to a warrant and are
                exercisable within 60 days of the data of this
                report.





**ITEM 12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**





**CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





**Kunming
      Shenghuo Pharmaceutical (Group) Co., Ltd.**





Kunming
      Shenghuo Pharmaceutical (Group) Co., Ltd. (“Shenghuo China”) is a 93.75%-owned
      subsidiary of our company, which has interlocking executive and director
      positions with Shenghuo China.





**August 2006
      Share Exchange**





In
      August 2006, we completed the Share Exchange with Shenghuo China. Shenghuo
      China’s 93.75% shareholder, LIMI, exchanged 93.75% of the equity interest of
      Shenghuo China for the issuance of an aggregate of 16,255,400 shares of our
      common stock to LIMI and its designees. As of the close of the Share Exchange,
      LIMI owned 80.5% of our issued and outstanding stock. Gui Hua Lan, Feng Lan
      and
      Zheng Yi Wang are directors of LIMI, are officers and directors of Shenghuo
      China, and were also appointed as executive officers and directors of our
      company upon closing of the Share Exchange. In addition, Gui Hua Lan, Feng
      Lan
      and Zheng Yi Wang owns 62.2%, 5.0% and 1.3%, respectively, of LIMI’s issued and
      outstanding shares. Each of the foregoing persons disclaims beneficial ownership
      of the shares held by LIMI except to the extent of his pecuniary interest.
      Moreover, Lei Lan, the Company’s Executive Director of Sales, and Qiong Hua Gao,
      our Chief Financial Officer, owns 9.2% and 1.3%, respectively, of LIMI’s issued
      and outstanding shares. Gui Hua Lan was appointed as our Chief Executive Officer
      and Chairman of the Board, Feng Lan was appointed as our President and Director,
      and Zheng Yi Wang was appointed as our Executive Director of Exports, Corporate
      Secretary and Director.





**WestPark
      Capital, Inc. and SRKP 8, Inc.**





Westpark
      Capital, Inc. (“WestPark”) acted as the placement agent for our August 2006
      private placement transaction (the $1,800,000 equity financing conducted by
      us
      on the close of the Share Exchange). For its services as placement agent,
      WestPark was paid a commission equal to 9.0% of the gross proceeds from the
      financing, in addition to a 2% non-accountable expense fee, for an aggregate
      amount fee of $198,000. Richard Rappaport, our President and one of our
      controlling stockholders prior to the Share Exchange, indirectly holds a 100%
      interest in WestPark, an NASD member. Anthony C. Pintsopoulos, one of our
      controlling stockholders and an officer and director prior to the Share
      Exchange, is the Chief Financial Officer of WestPark. Debbie Schwartzberg,
      one
      of our controlling stockholders prior to the Share Exchange, is a noteholder
      of
      the parent company of WestPark; her note entitles her to a 1.5% interest in
      the
      net profits of the parent company of WestPark. Each of Messrs. Rappaport
      and Pintsopoulos resigned from all of their executive and director positions
      with us upon the closing of the Share Exchange. In addition, on May 26,
      2005, the Company issued 2,700,000 shares of common stock to five accredited
      investors for aggregate cash consideration of $25,000. These five investors
      included Richard Rappaport, Anthony Pintsopolous, and Debbie Schwartzberg.
      It
      should be noted that any shares held by promoters of the Company may not be
      sold
      by such promoters, or their transferees, pursuant to Rule 144 of the
      Securities Act. This is true for any such sale either before or after the Share
      Exchange, regardless of technical compliance with the rule.





48


WestPark
      also acted as the managing underwriter for our initial public offering. Upon
      the
      closing of the offering in June 2007, we issued to WestPark warrants to
      purchase up to 40,000 shares of our common stock. The warrants are exercisable
      at a per share exercise price of $4.20, subject to standard anti-dilution
      adjustments for stock splits and similar transactions, and will expire after
      five years. The holders of shares of common stock acquired upon exercise of
      the
      warrants have the right to include such shares in any future registration
      statements filed by us and to demand one registration for the shares. In
      addition, we agreed to indemnify the underwriters against some liabilities,
      including liabilities under the Securities Act and to contribute to payments
      that the underwriters may be required to make in respect thereof. We paid
      WestPark a non-accountable expense allowance of $42,000 and an underwriters’
discount of $161,000. We also agreed to retain WestPark at a rate of $3,000
      per
      month as a consultant to assist us with shareholder and investor matters. The
      consulting arrangement will be for a period of 12 months from the closing
      of the offering.





**Sale
      of Technology from Nanguo to Shenghuo China**





Our
      subsidiary, Shenghuo China, was formed in 1995 as a limited company under the
      laws of the People’s Republic of China (“PRC”), with Kunming Nanguo Biology
      Source Development Institute (“Nanguo”) owning approximately 55% of our
      outstanding equity interests and Guangdong Maoming Huazhou Company (“Guangdong”)
      owning approximately 45% of our equity interests. In November 1999,
      Guangdong transferred all of its equity interests to Nanguo, which, as a result,
      became our 100% parent. Also in November 1999, Nanguo entered into an
      agreement with the Pharmaceutical Institute of Kunming Medical College (the
      “College”) to purchase the rights to the technology for the preparation of
      Sanchi, including the technology of extracting and separating the Sanchi from
      Panax notoginseng, analysis data, the conditions and methods of synthesize,
      manufacture and the quality-control. Terms of the agreement required an initial
      payment of approximately $217,000 and a final payment of approximately
      $3.9 million upon receiving governmental approval and protection for the
      developed techniques. In March 2000, Nanguo made an additional net
      investment of approximately $1.3 million and a new investor, Yunnan Yunwei
      (Group) Co., LTD (“Yunwei”), made a capital investment of approximately
      $3.7 million into our company, and in May 2002, a new investor, SDIC
      Venture Capital Investment, Co., Ltd. (“SDIC”), made an investment of
      approximately $483,000. In August 2004, Nanguo sold the rights to the
      technology to our company for approximately $3.5 million, and in
      January 2005, Nanguo purchased all of the equity interests held by Yunwei
      for approximately the same amount, resulting in Nanguo becoming our 93.75%
      parent, and SDIC’s percentage holding in our company became 6.25% of our
      outstanding equity interests. In 2006, Nanguo transferred its 93.75% interest
      to
      LIMI, and we were restructured into Chinese Foreign Equity Joint Venture under
      the laws of the PRC. LIMI transferred its 93.75% interest in Shenghuo China
      to
      us pursuant to the Share Exchange, which was completed on August 31, 2006.





**Purchase
      of Interests in Subsidiaries**





On
      August 30, 2006, one of our officers agreed to transfer to us a majority of
      the officer’s equity interest in our subsidiary Kunming Shenghuo Medicine Co.,
      Ltd. (“Medicine”) and another officer agreed to transfer to us a majority of the
      officer’s equity interest in our subsidiary Kunming Pharmaceutical Importation
      and Exportation Co., Ltd. (“Import/Export”), leaving each of them with a 1%
      interest in the subsidiaries, respectively. We paid $24,980 for transfer of
      the
      interest of Import/Export and $249,800 for the interest of Medicine. Taking
      into
      account the transfers, we own 99% of the equity interests in Import/Export
      and
      Medicine.





**August 2007
      Guarantee**





On
      August 17, 2007, we entered into a loan agreement for RMB 50 million
      (approximately $6,651,094) with Shuang Long Branch of Agricultural Bank of
      China
      with a term of two years. The loan bears interest at a rate of 7.722% and which
      is due quarterly. The purpose of the loan is for working capital and is
      guaranteed by LIMI. Gui Hua Lan, our Chief Executive Officer; Feng Lan, our
      President; and Zheng Yi Wang, our Executive Director of Exports, are directors
      and have voting and investment control over the shares owned by LIMI, which
      beneficially owns or controls approximately 77% of our outstanding shares.
      In
      addition, Gui Hua Lan, Feng Lan and Zheng Yi Wang owns 62.2%, 5.0% and 1.3%,
      respectively, of LIMI’s issued and outstanding shares. LIMI is not receiving any
      compensation for the guarantee of our loan.





**Loans
      to and from Insiders**





As
      of
      December 31, 2007 and December 31, 2006, we had receivables due from
      officers relating to travel advances in the amount of $27,555 and $76,751,
      respectively. At December 31, 2007 and December 31, 2006, we had
      payables due to officers in the amount of $94,939 and $288,463, respectively.
      Also at December 31, 2007 and December 31, 2006, the amounts payable
      to our former parent company were $0 and $104,750, respectively. These amounts
      are due on demand and do not accrue interest.





49


**Independent
      Director Agreements**





In
      2007,
      we entered into an Independent Director’s Agreement with each of Gene Michael
      Bennett, Mingyang Liao, and Yunhong Guan, each of whom are directors of the
      Company.




Under
      the
      terms of the Bennett Agreement, Mr. Bennett’s annual compensation from the
      Company will be $12,000 for service as a member of our Board of Directors and
      $8,000 for service as a member of the audit committee. Mr. Bennett has
      received a five-year warrant to purchase 3,000 shares of the our common stock
      at
      an exercise price of $3.50 per share. Mr. Bennett will also receive 3,000
      options to purchase shares of our common stock on an annual basis once the
      Company adopts a stock option plan. No options have been granted to date. The
      Bennett Agreement also provides that Mr. Bennett will receive $1,000 for each
      board meeting he attends in person.





Under
      the
      terms of the Liao Agreement and the Guan Agreement, each of Messrs. Liao
      and Guan will receive an annual compensation of RMB 42,000 (approximately
      $5,524), or RMB 3,500 (approximately $460) per month. In addition,
      Mr. Guan will receive a five-year warrant to purchase 3,000 shares of the
      Company’s common stock at an exercise price of $3.50 per share. Mr. Guan
      will also receive 3,000 options to purchase shares of common stock on an annual
      basis once the Company adopts a stock option plan. No options have been granted
      to date.








**DIRECTOR
      INDEPENDENCE**




Subject
      to certain exceptions, under the listing standards of the AMEX, a listed
      company’s board of directors must consist of a majority of independent
      directors. We are exempt from this requirement because we are considered a
      “controlled company” pursuant to Section 801(a) of the AMEX Company Guide
      because one of our shareholders, LIMI, owns more than 50% of our voting
      securities. In addition, small business issuers are permitted to maintain a
      board of directors comprised of at least 50% independent directors. Currently,
      our Board of Directors has determined that three of the six members of our
      Board
      of Directors are independent under the listing standards of the AMEX, as
      follows: Guan Yunhong, Mingyang Liao and Gene Michael Bennett.




50




**ITEM
      13.**  **EXHIBITS**


**Exhibit**
                **Number**
              
              **Description
                of Exhibit**2.1
              
              Share
                  Exchange Agreement, dated as of June 30, 2006, by and among the
                  Company,
                  Kunming Shenghuo Pharmaceutical (Group) Co., Ltd., and Lan’s International
                  Medicine Investment Co., Limited (incorporated by referenced from
                  Exhibit
                  2.1 to the Quarterly Report on Form 10-QSB filed with the Securities
                  and
                  Exchange Commission on July 28, 2006).2.1(a)
              
              Amendment
                  No. 1 to the Share Exchange Agreement, dated as of August 11, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(a) to the Registration Statement on
                  Form SB-2
                  filed with the Securities and Exchange Commission on December 21,
                  2006).2.1(b)
              
              Amendment
                  No. 2 to the Share Exchange Agreement, dated as of August 28, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(b) to Current Report on Form 8-K filed
                  with the
                  Securities and Exchange Commission on September 1,
                  2006).3.1
              
              Certificate
                  of Incorporation of the Company (incorporated by reference from
                  Exhibit
                  3.1 to Registration Statement on Form 10-SB filed with the Securities
                  and
                  Exchange Commission on August 3, 2005).3.2
              
              Bylaws
                  of the Company (incorporated by reference from Exhibit 3.2 to Registration
                  Statement on Form 10-SB filed with the Securities and Exchange
                  Commission
                  on August 3, 2005, and incorporated herein by
                  reference).3.3
              
              Articles
                  of Merger Effecting Name Change (incorporated by reference from
                  Exhibit
                  3.3 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).10.1
              
              Form
                  of Subscription Agreement dated August 31, 2006 (incorporated by
                  reference
                  from Exhibit 10.1 to Current Report on Form 8-K filed with the
                  Securities
                  and Exchange Commission on September 1, 2006).10.2*
              
              Employment
                  Agreement dated December 3, 2004 by and between Gui Hua Lan and
                  the
                  Company (translated to English) (incorporated by reference from
                  Exhibit
                  10.2 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).10.3*
              
              Employment
                  Agreement dated December 3, 2004 by and between Feng Lan and the
                  Company
                  (translated to English) (incorporated by reference from Exhibit
                  10.3 to
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on September 1, 2006).10.4*
              
              Employment
                  Agreement dated December 3, 2004 by and between Lei Lan and the
                  Company
                  (translated to English) (incorporated by reference from Exhibit
                  10.4 to
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on September 1, 2006).10.5*
              
              Employment
                  Agreement dated December 3, 2004 by and between Qiong Hua Gao and
                  the
                  Company (translated to English) (incorporated by reference from
                  Exhibit
                  10.5 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).10.6*
              
              Employment
                  Agreement dated December 3, 2004 by and between Peng Chen and the
                  Company
                  (translated to English) (incorporated by reference from Exhibit
                  10.6 to
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on September 1, 2006).10.7*
              
              Employment
                  Agreement dated December 3, 2004 by and between Zheng Yi Wang and
                  the
                  Company (translated to English) (incorporated by reference from
                  Exhibit
                  10.7 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).10.8
              
              Joint
                  Establishment Agreement of Kunming Beisheng Science & Technology
                  Development Co., Ltd. dated January 1, 2006 entered into by and
                  between
                  the Company and Beijing University Shijia Research Center (translated
                  to
                  English) (incorporated by reference from Exhibit 10.8 to the Registration
                  Statement on Form SB-2 filed with the Securities and Exchange Commission
                  on December 21, 2006).
  51
  **Exhibit**
                  **Number**
                
                **Description
                  of Exhibit**
 10.9
              
              Joint
                  Venture Agreement for Kunming Shenghuo Pharmaceutical Group Co.,
                  Ltd.
                  dated May 22, 2006 entered into by and between Lan’s International
                  Medicine Investment Co., Limited and SDIC Venture Capital Investment,
                  Co.,
                  Ltd. (translated to English) (incorporated by reference from Exhibit
                  10.9
                  to the Registration Statement on Form SB-2 filed with the Securities
                  and
                  Exchange Commission on December 21, 2006).10.10
              
              Form
                  of Lock Up Agreement for Investors in the August 2006 Private Placement
                  (incorporated by reference from Exhibit 10.10 to the Registration
                  Statement on Form SB-2 filed with the Securities and Exchange Commission
                  on December 21, 2006).10.11
              
              Loan
                  Agreement, by and between the Company and Shuang Long Branch of
                  Agricultural Bank of China (incorporated by reference from Exhibit
                  10.1 to
                  the Quarterly Report on Form 10-QSB filed with the Securities and
                  Exchange
                  Commission on November 15, 2007).10.12*
              
              Form
                  of Independent Director’s Agreement, entered into by the Company with each
                  of Gene Michael Bennett, Mingyang Liao, and Yunhong Guan (incorporated
                  by
                  reference from Exhibit 10.1 to the Current Report on Form 8-K filed
                  with
                  the Securities and Exchange Commission on September 26,
                  2007).10.13*
              
              Form
                  of Warrant Agreement, entered into by the Company with each of
                  Gene
                  Michael Bennett and Yunhong Guan (incorporated by reference from
                  Exhibit
                  10.2 to the Current Report on Form 8-K filed with the Securities
                  and
                  Exchange Commission on September 26, 2007).10.14
              
              Form
                  of Warrant to be issued to be issued to the Underwriter, entered
                  into by
                  the Company and Westpark Capital Inc. (incorporated by reference
                  from
                  Exhibit 4.1 to the Registration Statement on Form SB-2 filed with
                  the
                  Securities and Exchange Commission on June 11, 2007).14.1**
              
              China
                  Shenghuo Pharmaceutical Holdings, Inc. Code of Business Conduct
                  and Ethics
                  (incorporated by reference from Exhibit 99.1 to the Current Report
                  on Form
                  8-K filed with the Securities and Exchange Commission on June 12,
                  2007).21.1
              
              List
                  of Subsidiaries (incorporated by reference from Exhibit 21.1 to
                  the
                  Registration Statement on Form SB-2 on Form S-3 filed with the
                  Securities
                  and Exchange Commission on September 18, 2007).23.1
              
              Consent
                  of Hansen, Barnett & Maxwell, P.C.31.1
              
              Rule
                  13a-14(a) Certification of the Chief Executive Officer of China
                  Shenghuo
                  Pharmaceutical Holdings, Inc. in accordance with Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Rule
                  13a-14(a) Certification of the Chief Financial Officer of China
                  Shenghuo
                  Pharmaceutical Holdings, Inc. in accordance with Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.32.1**
              
              Section
                  1350 Certification of the Chief Executive Officer and Chief Financial
                  Officer of China Shenghuo Pharmaceutical Holdings, Inc. in accordance
                  with
                  Section 906 of the Sarbanes-Oxley Act of
                  2002.








*
            
            Indicates
              management contract or compensatory plan or arrangement.**
            
            This
                exhibit shall not be deemed “filed” for purposes of Section 18 of the
                Securities Exchange Act of 1934, as amended, or otherwise subject
                to the
                liabilities of that Section, nor shall it be deemed incorporated
                by
                reference in any filing under the Securities Act of 1933, as amended,
                or
                the Securities Exchange Act of 1934, as amended, whether made before
                or
                after the date hereof and irrespective of any general incorporation
                language in any filings.




52




**ITEM 14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





During
      the fiscal years ended December 31, 2007 and 2006, we retained Hansen,
      Barnett & Maxwell, P.C. to provide services as follows:


**Fees for the Year Ended December 31****Services**
              
              **2007**
              
              **2006**Audit
                  fees
              
              $
              282,433
              
              $
              182,700Audit-related
                  fees
              
              
              —
              
              
              —Tax
                  fees
              
              
              —
              
              
              —All
                  other fees
              
              
              —
              
              
              —Total
                  audit and non-audit fees
              
              $
              282,433
              
              $
              182,700




Audit
        Fees. Consists of fees billed for professional services rendered for the
        audits
        of the Company’s consolidated financial statements, reviews of our interim
        consolidated financial statements included in quarterly reports, services
        performed in connection with filings with the Securities and Exchange Commission
        and related comfort letters and other services that are normally provided
        by
        Hansen, Barnett & Maxwell, P.C. in connection with statutory and regulatory
        filings or engagements.





Audit-Related
      Fees. Consists of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of the Company’s
      consolidated financial statements and are not reported under “Audit Fees.”




Tax
      Fees.
      Consists of fees billed for professional service for tax compliance, tax advice
      and tax planning. These services include assistance regarding federal, state
      and
      local tax compliance and consultation in connection with various transactions
      and acquisitions.





**Pre-Approval
      Policies and Procedures**





Prior
      to
      our initial public offering in June 2007, our Board of Directors as a whole
      pre-approved all services provided by Hansen, Barnett & Maxwell, P.C. and
      has concluded that such services are compatible with Hansen, Barnett &
Maxwell, PC’s independence as our auditors.




53





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




**CHINA
                SHENGHUO PHARMACEUTICAL**
              **HOLDINGS,
                INC.**
              (Company)November
                14, 2008
            By:
            /s/
                Gui Hua LanGui
                Hua LanChief
                Executive Officer and Chairman of theBoard




In
      accordance with the Securities Exchange Act of 1934, this report has been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




/s/
                Gui Hua LanDate:
                November 14, 2008
            
            Gui
                Hua Lan, Chief Executive Officer and
              Chairman
                of the Board (Principal Executive
              Officer)/s/
                Wendy FuDate:
                November 14, 2008
            
            Wendy
                Fu, Chief Financial Officer
              (Principal
                Financial and Accounting Officer)/s/
                Feng LanDate:
                November 14, 2008
            
            Feng
                Lan, President and DirectorDate:
                November 14, 2008
            
            Zheng
                Yi Wang, Executive Director of Exports,
              Corporate
                Secretary and Director/s/
                Yunhong GuanDate:
                November 14, 2008
            
            Yunhong
                Guan, DirectorDate:
                November 14, 2008
            
            Mingyang
                Liao, Director/s/
                Jason Yuanxin ZhangDate:
                November 14, 2008
            
            Jason
                Yuanxin Zhang, Director




54




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**AND
      SUBSIDIARIES**





**TABLE
      OF CONTENTS**





Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-2Consolidated
                Statements of Operations and Comprehensive Income for the Years Ended
                December 31, 2007 and 2006
            F-3Consolidated
                Statements of Stockholders’ Equity for the Years Ended December 31, 2006
                and 2007
            F-4Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
            F-5Notes
                to the Consolidated Financial Statements
            F-7







******HANSEN,
                BARNETT&
                MAXWELL,
                P.C.**A
                Professional Corporation
            
            **Registered
                with the Public Company**CERTIFIED
                PUBLIC ACCOUNTANTS
            
            **Accounting
                Oversight Board**5
                Triad Center, Suite 750Salt
                Lake City, UT 84180-1128Phone:
                (801) 532-2200Fax:
                (801) 532-7944www.hbmcpas.com





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders


China
      Shenghuo Pharmaceutical Holdings, Inc.





We
      have
      audited the accompanying consolidated balance sheets of China Shenghuo
      Pharmaceutical Holdings, Inc. and subsidiaries as of December 31, 2007 and
      2006,
      and the related consolidated statements of operations and comprehensive income,
      stockholders’ equity, and cash flows for the years then ended. These financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of China Shenghuo
      Pharmaceutical Holdings, Inc. and subsidiaries as of December 31, 2007 and
      2006
      and the results of its operations and its cash flows for the years then ended,
      in conformity with accounting principles generally accepted in the United States
      of America.





As
      discussed in Note 1, to the accompanying consolidated financial statements,
      the
      Company has restated the accompanying 2007 consolidated financial
      statements.


**HANSEN,
                  BARNETT & MAXWELL, P.C.**


Salt
      Lake
      City, Utah


March
      28,
      2008 except for Note 1 regarding the restatement of financial statements, Note
      2
      regarding business condition and Note 13 as to which the date is November 13,
      2008.


F-1


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**


**December 31,****2007**
              
              **2006****ASSETS:**
              
              
              **As
                  Restated****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              2,800,641
              
              $
              3,691,438Restricted
                  cash
              
              
              -
              
              
              474,576Accounts
                  and notes receivable, less allowance for doubtful accounts of $3,218,661
                  and $794,468, respectively
              
              
              10,567,672
              
              
              9,907,184Employee
                  advances, less allowance for doubtful accounts of $729,955 and
                  $1,429,426,
                  respectively
              
              
              8,249,806
              
              
              3,130,045Advances
                  to suppliers
              
              
              669,858
              
              
              46,620Inventory,
                  net of reserve for obsolescence of $136,359 and $111,128,
                  respectively
              
              
              4,125,193
              
              
              2,581,519Receivable
                  from related parties
              
              
              27,555
              
              
              76,751Other
                  current assets
              
              
              159,657
              
              
              17,454**Total
                  Current Assets**
              
              
              **26,600,382**
              
              
              **19,925,587**Property,
                  plant and equipment, net of accumulated depreciation of $4,247,993
                  and
                  $3,333,305, respectively
              
              
              7,573,204
              
              
              7,554,747Intangible
                  assets, net of accumulated amortization of $42,957 and $22,569,
                  respectively
              
              
              648,090
              
              
              624,426Long-term
                  employee advances, less allowance for doubtful accounts of $1,717,078
                  and
                  $0, respectively
              
              
              514,042
              
              
              -Deferred
                  income taxes
              
              
              -
              
              
              655,223**TOTAL
                  ASSETS**
              
              **$**
              **35,335,718**
              
              **$**
              **28,759,983****LIABILITIES
                  AND STOCKHOLDERS' EQUITY:****Current
                  Liabilities:**Accounts
                  payable
              
              $
              745,514
              
              $
              764,636Accrued
                  expenses
              
              
              2,017,748
              
              
              1,966,822Deposits
              
              
              3,439,892
              
              
              1,573,426Payable
                  to related parties
              
              
              94,939
              
              
              393,213Short-term
                  notes payable
              
              
              5,334,260
              
              
              12,758,426Advances
                  from customers
              
              
              119,287
              
              
              342,531Taxes
                  and related payables
              
              
              855,084
              
              
              3,057,471Current
                  portion of long-term debt
              
              
              4,101,667
              
              
              -**Total
                  Current Liabilities**
              
              
              **16,708,391**
              
              
              **20,856,525****Long-Term
                  Debt**
              
              
              **6,836,111**
              
              
              **-****Total
                  Liabilities**
              
              
              **23,544,502**
              
              
              **20,856,525****Minority
                  Interest in Net Assets of Subsidiaries**
              
              
              **479,318**
              
              
              **385,067****Stockholders'
                  Equity:**Preferred
                  stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $0.0001 par value, 100,000,000 shares authorized, 19,679,400
                  and
                  19,119,400 outstanding, respectively
              
              
              1,968
              
              
              1,912Additional
                  paid-in capital
              
              
              6,193,927
              
              
              4,829,633Statutory
                  reserves
              
              
              147,023
              
              
              147,023Retained
                  earnings
              
              
              4,039,337
              
              
              2,318,950Accumulated
                  other comprehensive income, foreign currency translation
              
              
              929,643
              
              
              220,873**Total
                  Stockholders' Equity**
              
              
              **11,311,898**
              
              
              **7,518,391****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **35,335,718**
              
              **$**
              **28,759,983**


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


F-2


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **AND
        COMPREHENSIVE INCOME**





**Years Ended****December 31,****2007**
            
            **2006****As Restated****Sale
                of Products**
            
            $
            19,973,918
            
            $
            19,959,971**Cost
                of Products Sold**
            
            
            5,038,290
            
            
            6,400,234**Gross
                Profit**
            
            
            14,935,628
            
            
            13,559,737**Operating
                Expenses:**Selling
                expense
            
            
            6,840,824
            
            
            5,255,907General
                and administrative expense
            
            
            5,877,948
            
            
            3,903,287Research
                and development expense
            
            
            272,295
            
            
            28,001**Total
                Operating Expenses**
            
            
            12,991,067
            
            
            9,187,195**Income
                from Operations**
            
            
            1,944,561
            
            
            4,372,542**Other
                Income (Expense):**Interest
                income
            
            
            22,431
            
            
            7,791Income
                from research and development activities
            
            
            448,254
            
            
            105,053Interest
                expense
            
            
            (946,456
            )
            
            (757,432
            )Non-operating
                expenses
            
            
            (78,164
            )
            
            (6,932
            )**Net
                Other Expense**
            
            
            (553,935
            )
            
            (651,520
            )**Income
                Before Income Taxes**
            
            
            1,390,626
            
            
            3,721,022Benefit
                from (provision for) income taxes
            
            
            449,198
            
            
            (406,082
            )Minority
                interest in income of subsidiaries
            
            
            (119,437
            )
            
            (313,444
            )**Net
                Income**
            
            $
            1,720,387
            
            $
            3,001,496Foreign
                currency translation adjustment
            
            
            708,770
            
            
            176,060**Comprehensive
                Income**
            
            $
            2,429,157
            
            $
            3,177,556**Earnings
                Per Share****Basic**
            
            $
            0.09
            
            $
            0.17**Diluted**
            
            $
            0.09
            
            $
            0.17**Weighted-Average
                Shares Outstanding****Basic**
            
            
            19,387,619
            
            
            17,198,308**Diluted**
            
            
            19,439,077
            
            
            17,198,308





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


F-3


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**





**Accumulated****Additional**
            
            
            
            **Retained**
            
            **Other**
            
            **Total****Common Stock**
            
            **Paid-in**
            
            **Statutory**
            
            **Earnings**
            
            **Comprehensive**
            
            **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Reserves**
            
            **(Deficit)**
            
            **Income**
            
            **Equity****Balance,
                December 31, 2005**
            
            
            16,227,200
            
            $
            1,626
            
            $
            2,659,134
            
            $
            147,023
            
            $
            (682,546
            )
            $
            44,813
            
            $
            2,170,050Conversion
                of common shares to minority interest
            
            
            (1,014,200
            )
            
            (101
            )
            
            (223,211
            )
            
            -
            
            
            -
            
            
            -
            
            
            (223,312
            )Issuance
                of common shares for services
            
            
            1,242,400
            
            
            121
            
            
            1,118,040
            
            
            -
            
            
            -
            
            
            -
            
            
            1,118,161Issuance
                of warrants for services
            
            
            -
            
            
            -
            
            
            11,240
            
            
            -
            
            
            -
            
            
            -
            
            
            11,240Issuance
                of common shares for cash, net of offering costs
            
            
            2,000,000
            
            
            200
            
            
            1,264,496
            
            
            -
            
            
            -
            
            
            -
            
            
            1,264,696Issuance
                to acquire SRKP 8
            
            
            664,000
            
            
            66
            
            
            (66
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,001,496
            
            
            -
            
            
            3,001,496Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            176,060
            
            
            176,060**Balance,
                December 31, 2006**
            
            
            19,119,400
            
            
            1,912
            
            
            4,829,633
            
            
            147,023
            
            
            2,318,950
            
            
            220,873
            
            
            7,518,391Shares
                issued in public offering, net of costs
            
            
            460,000
            
            
            46
            
            
            1,094,336
            
            
            -
            
            
            -
            
            
            -
            
            
            1,094,382Exercise
                of warrants for cash
            
            
            100,000
            
            
            10
            
            
            249,990
            
            
            -
            
            
            -
            
            
            -
            
            
            250,000Issuance
                of warrants for services
            
            
            -
            
            
            -
            
            
            19,968
            
            
            -
            
            
            -
            
            
            -
            
            
            19,968Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,720,387
            
            
            -
            
            
            1,720,387Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            708,770
            
            
            708,770**Balance,
                December 31, 2007 As Restated**
            
            
            19,679,400
            
            $
            1,968
            
            $
            6,193,927
            
            $
            147,023
            
            $
            4,039,337
            
            $
            929,643
            
            $
            11,311,898





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


F-4


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**





**For the Years Ended****December 31,****2007**
            
            **2006****As
                Restated****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            1,720,387
            
            $
            3,001,496Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            676,547
            
            
            660,632Deferred
                income taxes
            
            
            526,849
            
            
            (200,553
            )Minority
                interest in income of subsidiaries
            
            
            119,437
            
            
            313,444Stock
                issued for services
            
            
            -
            
            
            1,118,161Warrants
                issued for services
            
            
            19,968
            
            
            11,240Change
                in current assets and liabilities:Accounts
                and notes receivable
            
            
            20,532
            
            
            (7,335,970
            )Employee
                advances
            
            
            (5,202,769
            )
            
            (1,066,054
            )Advances
                to suppliers
            
            
            (595,358
            )
            
            39,742Inventory
            
            
            (1,311,644
            )
            
            1,826,375Other
                current assets
            
            
            (140,750
            )
            
            39,610Accounts
                payable
            
            
            (68,893
            )
            
            (208,173
            )Accrued
                expenses and deposits
            
            
            1,607,130
            
            
            1,569,452Advances
                from customers
            
            
            (236,998
            )
            
            86,270Unearned
                revenue
            
            
            -
            
            
            (203,826
            )Taxes
                and related payables
            
            
            (2,171,207
            )
            
            1,848,555**Net
                Cash (Used in) Provided by Operating Activities**
            
            
            (5,036,769
            )
            
            1,500,401**Cash
                Flows from Investing Activities:**Receivable
                from related parties
            
            
            67,018
            
            
            (37,795
            )Restricted
                cash
            
            
            487,056
            
            
            (76,001
            )Capital
                expenditures
            
            
            (176,453
            )
            
            (180,737
            )Acquisition
                of land use rights
            
            
            -
            
            
            (20,295
            )**Net
                Cash (Used in) Provided by Investing Activities**
            
            
            377,621
            
            
            (314,828
            )**Cash
                Flows from Financing Activities:**Payable
                to related parties
            
            
            (312,391
            )
            
            -Purchase
                of minority interest
            
            
            -
            
            
            (274,780
            )Proceeds
                from short and long-term loans
            
            
            15,491,257
            
            
            2,581,672Payments
                on short and long-term loans
            
            
            (12,960,626
            )
            
            (2,401,605
            )Issuance
                of common stock for cash
            
            
            1,094,382
            
            
            1,264,696Proceeds
                from exercise of warrants
            
            
            250,000
            
            
            -**Net
                Cash Provided by Financing Activities**
            
            
            3,562,622
            
            
            1,169,983Effect
                of exchange rate changes on cash
            
            
            205,729
            
            
            231,839Net
                Increase (Decrease) in Cash and Cash Equivalents
            
            
            (890,797
            )
            
            2,587,395Cash
                and Cash Equivalents at Beginning of Period
            
            
            3,691,438
            
            
            1,104,043**Cash
                and Cash Equivalents at End of Period**
            
            $
            2,800,641
            
            $
            3,691,438





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


F-5


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (CONTINUED)**
 
 **For the Years Ended****December 31,****2007**
              
              **2006****Supplemental
                  Information**Cash
                  paid for interest
              
              $
              781,030
              
              $
              757,432Cash
                  paid for income taxes
              
              
              98,357
              
              
              -**Noncash
                  investing and financing activities**Reduction
                  in carrying amount of assets related to acquisition of minority
                  interest
              
              $
              -
              
              $
              440,158Conversion
                  of common shares to minority interest
              
              
              -
              
              
              223,312





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


F-6


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





**NOTE
      1 – ORGANIZATION AND NATURE OF OPERATIONS**





***Nature
      of Business*** –
China
      Shenghuo Pharmaceutical Holdings, Inc. (the “Company” or “the Parent” or “the
      Group”) and its subsidiaries designs, develops, markets, exports and sells
      pharmaceutical, nutritional supplements and cosmetic products throughout the
      People’s Republic of China (PRC) and abroad. The Company also conducts research
      and development for third parties as well as for itself using the medicinal
      herb
      Panax notoginseng, also known as Sanqi, Sanchi, or Tienchi and sells
      pharmaceutical, nutritional supplements and cosmetic products that contain
      this
      herb, which is grown in two provinces in the PRC. Sales from the cosmetic
      products represent less than 10% of total Company sales and revenue. The Company
      does not maintain accounting records by line of business as the Company’s
      subsidiaries sell products from multiple lines of business and management
      evaluates each subsidiary as a separate entity.





***Organization*** **** –
The
      Company was organized under the laws of the State of Delaware on May 24, 2005.
      On August 31, 2006, the Company consummated a share exchange agreement, as
      amended (“Agreement”), with Lan’s Int’l Medicine Investment Co., a Hong Kong
      corporation, and a shareholder holding 93.75% of the equity interest of Kunming
      Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”) whereby the Company, in exchange
      for 15,213,000 shares of its common stock, acquired 93.75% of Shenghuo’s
      shares.





In
      addition, the Company agreed to cancel 2,036,000 shares of its common stock;
      issue 1,242,400 shares of its common stock and warrants to purchase 100,000
      shares of its common stock (the “Warrants”) for services rendered, and issue
      2,000,000 shares for $1,800,000 cash (less costs of $535,304).





There
      was
      no written agreement for the services to be performed in connection with the
      1,242,400 shares of common stock or the 100,000 warrants. The shares issued
      for
      services were valued at $0.90 per share. This value was taken from the value
      of
      the shares issued for cash on the same day. In accordance with FAS 123(R),
      as
      the fair value of the common shares could more reliably be measured than the
      fair value of the services, the fair value of the shares was used to measure
      the
      transaction. In accordance with EITF 96-18, the measurement date was determined
      to be the date of the Agreement as there was no contract that specifically
      outlined the commitment date or the performance date for the shares issued
      for
      services. Further, in accordance with the guidance given in EITF 00-18, the
      shares were expensed on the date of the agreement as all shares vested
      immediately.





The
      Warrants vested immediately, have an exercise price of $2.50, and expire five
      years from the date of issue. The Warrants were valued using the Black Scholes
      Option Pricing Model with the following assumptions: dividend yield of 0%,
      estimated life of 5 years, estimate market price of $0.90, volatility of 44.96%
      and a risk-free interest rate of 4.73%. This resulted in a fair value of $0.1124
      per warrant for a total value of $11,240 for the 100,000 warrants. On October
      10, 2007 the Warrants were exercised and the Company received proceeds of
      $250,000.





As
      part
      of several agreements, the Company agreed to register the 1,242,400 shares
      of
      its common stock and the Warrants. The Company also agreed to register the
      2,000,000 shares of common stock that were to be issued for cash and the 664,000
      shares of common stock that were held by the Company’s shareholders immediately
      prior to the Agreement.


F-7





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





Because
      the shares issued by the Company to Shenghuo’s shareholders in the
      aforementioned transaction represented a controlling interest, the transaction
      has been accounted for as a recapitalization or reverse merger with Shenghuo
      being considered the acquirer. The accompanying consolidated financial
      statements have been restated on a retroactive basis to present the capital
      structure of Shenghuo as though it were the reporting entity.





In
      October 1995, Shenghuo was formed under the laws of the Peoples Republic of
      China (“PRC”) and subsequently acquired an 80% interest in both Kunming Shenghuo
      Medicine Co., Ltd. (“Medicine”) and Kunming Pharmaceutical Importation and
      Exportation Co., Ltd. (“Import/Export”), and a 98.18% interest in Kunming
      Shenghuo Cosmetics Co., Ltd. (“Cosmetic”). All of these entities were also
      formed in and operate within the PRC. Stockholder’s equity was represented by
      share capital and no shares were outstanding prior to August 31, 2006. Share
      capital of Shenghuo prior to the consummation of the agreement was $2,660,760.
      On August 30, 2006, the minority shareholders of Medicine agreed to transfer
      19%
      of their 20% interest to Shenghuo for $249,800. Also on August 30, 2006, the
      minority shareholders of Import/Export agreed to transfer 19% of their 20%
      interest to Shenghuo for $24,980. Subsequent to these transfers, Shenghuo owns
      99% of the equity interests in Medicine and Import/Export.





In
      September 2006, Shenghuo, which is the 93.75%-owned subsidiary of the Company,
      formed Kunming Beisheng Tech Development Ltd. (“Beisheng”), under the laws of
      the PRC as its partially owned subsidiary for the purpose of doing research
      and
      development on bio-tech products, health-care products and cosmetics, import
      and
      export business on medicines, equipment and pharmaceutical technologies. Upon
      formation, Shenghuo owned 70% of Beishing. In August 2007, Shenghuo established
      a new subsidiary named Pingbian Shenghuo Nanyao Development Co., LTD. (“Pingbian
      Shenghuo”). Pingbian Shenghuo was organized under the laws of the PRC, has a
      registered capital of RMB 1,000,000 and Shenghuo holds 100% of the equity
      interest of Pingbian Shenghuo. The scope of operation of Pingbian Shenghuo
      is to
      produce and refine the raw materials, such as Sanchi, that are needed to produce
      our products. There were no material operations for Beisheng or Pingbian
      Shenghuo for the years ended December 31, 2007 or 2006.





***Restatement
      of Financial Statements*** –
During
      August 2008, the Company was informed by its auditing firm that the December
      31,
      2007 consolidated financial statements needed to be revised to correct certain
      errors related to accounts and notes receivable and advances to employees.
      The
      Audit Committee of the Board of Directors commenced an internal investigation
      which focused on the reported errors.





As
      a
      result the Company has restated its consolidated financial statements for the
      year ended December 31, 2007 to correct the errors to accounts and notes
      receivable and advances to employees and the related impact on allowance for
      bad
      debts, general and administrative expenses, income taxes and the minority
      interest in income of subsidiaries. See Note 13. The errors also affected the
      realization of the deferred tax asset creating a valuation allowance that was
      caused by  unsettled
      circumstances that, if unfavorably resolved, would adversely affect future
      operations and profit levels on a continuing basis in future
      years.


F-8


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





The
      effects of the restatements were as follows:


**As Previously**
              
              **Effect of****Reported**
              
              **Restatement**
              
              **As Restated****Consolidated
                  Balance Sheet****As
                  of December 31, 2007**Accounts
                  and notes receivable, net
              
              $
              9,651,304
              
              $
              916,368
              
              $
              10,567,672Employee
                  advances, net
              
              
              10,147,415
              
              
              (1,897,609
              )
              
              8,249,806Total
                  Current Assets
              
              
              27,581,623
              
              
              (981,241
              )
              
              26,600,382Deferred
                  Income Taxes
              
              
              1,593,159
              
              
              (1,593,159
              )
              
              -TOTAL
                  ASSETS
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718Minority
                  Interest in Net Assets of Subsidiaries
              
              
              655,962
              
              
              (176,644
              )
              
              479,318Stockholders'
                  Equity:Retained
                  earnings
              
              
              6,335,590
              
              
              (2,296,253
              )
              
              4,039,337Accumulated
                  other comprehensive income,foreign
                  currency translation
              
              
              1,031,146
              
              
              (101,503
              )
              
              929,643Total
                  Stockholders' Equity
              
              
              13,709,654
              
              
              (2,397,756
              )
              
              11,311,898TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718**Consolidated
                  Statement of Operations****For
                  the year ended December 31, 2007**General
                  and administrative expense
              
              
              4,935,754
              
              
              942,194
              
              
              5,877,948Total
                  Operating Expenses
              
              
              12,048,873
              
              
              942,194
              
              
              12,991,067Income
                  from Operations
              
              
              2,886,755
              
              
              (942,194
              )
              
              1,944,561Income
                  Before Income Taxes
              
              
              2,332,820
              
              
              (942,194
              )
              
              1,390,626Benefit
                  from (provision for) income taxes
              
              
              1,978,963
              
              
              (1,529,765
              )
              
              449,198Minority
                  interest in income of subsidiaries
              
              
              (295,143
              )
              
              175,706
              
              
              (119,437
              )Net
                  Income
              
              
              4,016,640
              
              
              (2,296,253
              )
              
              1,720,387Foreign
                  currency translation adjustment
              
              
              810,273
              
              
              (101,503
              )
              
              708,770Comprehensive
                  Income
              
              
              4,826,913
              
              
              (2,397,756
              )
              
              2,429,157Earnings
                  Per ShareBasic
              
              
              0.21
              
              
              (0.12
              )
              
              0.09Diluted
              
              
              0.21
              
              
              (0.12
              )
              
              0.09**Consolidated
                  Statement of Cash Flows****For
                  the year ended December 31, 2007**Cash
                  Flows from Operating Activities:Net
                  income
              
              
              4,016,640
              
              
              (2,296,253
              )
              
              1,720,387Deferred
                  income taxes
              
              
              (1,002,915
              )
              
              1,529,764
              
              
              526,849Minority
                  interest in income of subsidiaries
              
              
              295,143
              
              
              (175,706
              )
              
              119,437Change
                  in current assets and liabilities:Accounts
                  and notes receivable
              
              
              900,437
              
              
              (879,905
              )
              
              20,532Employee
                  advances
              
              
              (7,024,869
              )
              
              1,822,100
              
              
              (5,202,769
              )Net
                  Cash Used in Operating Activities
              
              
              (5,036,769
              )
              
              -
              
              
              (5,036,769
              )


F-9


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES**





***Basis
      of Presentation and Translating Financial Statements*** –
The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America and
      pursuant to the rules and regulations of the United States Securities and
      Exchange Commission. The functional currency of the operating subsidiaries
      in
      the PRC is the Chinese Yuan Renminbi (“CNY”); however, the consolidated
      financial statements have been expressed in United States Dollars (“USD”). The
      accompanying consolidated balance sheets have been translated into USD at the
      exchange rates prevailing at each balance sheet date. The consolidated
      statements of operations have been translated using the average exchange rates
      prevailing during the operating periods of each statement.





***Principles
      of Consolidation*** –
The
      accompanying consolidated financial statements present the operations of the
      Company and its majority owned subsidiaries. All significant intercompany
      accounts and transactions have been eliminated in consolidation.





***Accounting
      Estimates*** –
The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosures of contingent assets and liabilities at the
      date
      of the financial statements, and the reported amounts of revenues and expenses
      during the reporting periods. Actual results could differ from those
      estimates.





***Fair
      Value of Financial Instruments*** —
The
      carrying amounts reported in the consolidated balance sheets for accounts
      receivables, employee advances, advances to suppliers, accounts payable, accrued
      liabilities, and advances from customers approximate fair value because of
      the
      immediate or short-term maturity of these financial instruments. Management
      believes the interest rates on short-term notes payable and long-term debt
      reflect rates currently available in the PRC. Thus, the carrying value of these
      loans approximates fair value.





***Cash
      and Cash Equivalents*** –
The
      Company’s cash and cash equivalents are maintained in bank deposit accounts. The
      Company has not experienced any losses with respect to these deposits. Cash
      and
      cash equivalents include interest bearing and non-interest bearing bank
      deposits, money market accounts, and short-term certificates of deposit with
      original maturities of three months or less. The Company did not enter into
      any
      hedge contracts during any of the periods presented.





***Accounts
      and Notes Receivable and Allowance for Doubtful Accounts*** –
Trade
      receivables are carried at original invoiced amounts less an allowance for
      doubtful accounts. An allowance for uncollectible accounts receivable is
      established by charges to operations for amounts required to maintain an
      adequate allowance, in management’s judgment, to cover anticipated losses from
      customer accounts and sales returns. Such accounts are charged to the allowance
      when collection appears doubtful. Any subsequent recoveries are credited to
      the
      allowance account. The Company believes that the allowance for doubtful accounts
      is consistent with industry standards in the PRC based on the products that
      are
      being sold. Notes receivable
      represent bank drafts that are non-interest bearing and due within six months.
      Such bank drafts have been arranged with third-party financial institutions
      by
      certain customers to settle their purchases from
      us.





***Employee
      Advances*** –
      Employee advances are presented net of an estimated allowance for doubtful
      advances. As time passes from when advances are made to employees for travel
      and
      related expenses, the Company will create an allowance for these older
      receivables as the likelihood of collection from each particular employee
      decreases as their respective advances age. Long-term employee advances are
      not
      expected to be realized in the current operating period.


F-10


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





***Inventory*** –
      Inventories consist principally of pharmaceutical products and are stated at
      weighted average cost. When market value of the inventory products is lower
      than
      the weighted average cost, inventory is reduced to its net realizable value.
      The
      Company also holds inventory on consignment.





***Property
      and Equipment*** –
      Property and equipment are stated at cost. Maintenance and depreciation are
      charged to expense as incurred and major improvements are capitalized. Gains
      or
      losses on sales or retirements are included in the statements of operations
      in
      the period of disposition, determined by reference to their carrying amounts.
      The Company reviews its property and equipment periodically for changes in
      circumstances that would indicate its recoverable carrying value is less than
      its net book value. If such circumstances occur, impairment is charged to such
      items.





***Intangible
      Assets*** –
      Acquisition costs of land use rights are capitalized at their acquisition cost
      and amortized using the straight-line method over their estimated useful lives.
      For those intangible assets with legal protection over a specific period, their
      useful life is the protected period. Assets that do not have legal protection
      periods are amortized over their estimated useful life. Research and development
      costs are expensed during the period incurred.





***Impairment
      of Long-Lived Asset -*** The
      Company reviews its long-lived assets, including intangibles, for impairment
      when events or changes in circumstances indicate that the carrying value of
      an
      asset may not be recoverable. The Company evaluates, at each balance sheet
      date,
      whether events and circumstances have occurred that indicate possible
      impairment. The Company uses an estimate of future undiscounted net cash flows
      from the related asset or group of assets over their remaining life in measuring
      whether the assets are recoverable. As of December 31, 2007, the Company does
      not consider any of its long-lived assets to be impaired.





***Deposits
      and Accrued Expenses*** –
Accrued
      expenses consists of accrued commission expense, accrued payroll expense, and
      accrued welfare expense. Deposits consist of funds paid by the selling
      representatives held by the Company until the selling representatives no longer
      provide services to the Company, at which time the deposit is returned to the
      selling representatives. The Company records deposits from selling
      representatives when payments are received.





***Advances
      to Suppliers and Advances from Customers*** –
The
      Company will often make advanced payments to suppliers for materials, or receive
      advance payments from customers in the normal course of business. Advances
      to
      suppliers were $669,858 and $46,620 as of December 31, 2007 and 2006,
      respectively. Advances to suppliers are recorded when payment is made by the
      Company and relieved against inventory when goods are received. The advance
      payments to suppliers may include provisions that set the purchase price and
      delivery date of raw materials. Advances from customers were $119,287 and
      $342,531 as of December 31, 2007 and 2006, respectively and are recognized
      in
      revenue when delivery has occurred.





***Revenue
      Recognition*** –
The
      Company recognizes revenue when it is realized and earned. The Company considers
      revenue realized or realizable and earned when (1) it has persuasive evidence
      of
      an arrangement, (2) delivery has occurred, (3) the sales price is fixed or
      determinable, and (4) collectability is reasonably assured. Delivery does not
      occur until products have been shipped to the client, risk of loss has
      transferred to the client and client acceptance has been obtained, client
      acceptance provisions have lapsed, or the Company has objective evidence that
      the criteria specified in client acceptance provisions have been satisfied.
      The
      sales price is not considered to be fixed or determinable until all
      contingencies related to the sale have been resolved.


F-11


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





The
      Company recognizes revenue for its consignment sales only after the customer
      has
      checked the quality of the goods and the Company has received a written
      confirmation from the customer that they have accepted the goods.





Revenue
      is recognized net of value added tax (“VAT”) payable to the Chinese tax
      authorities as part of the PRC government’s policy. Sales of products in the PRC
      are subject to a 17% VAT. Companies that fulfill certain criteria set by the
      relevant authorities are entitled to a refund of VAT equivalent to the excess
      over 3% of contracted amount paid in the month when output VAT exceeds input
      VAT. Such VAT rebates are recorded on an accrual basis.





***Cost
      of Revenues*** –
The
      cost of revenues are the direct expenses incurred in producing the
      pharmaceuticals and cosmetics, which include materials, wages, handling charges,
      and a portion of overhead expenses associated with the manufacture and delivery
      of products.





***Shipping
      and Handling Costs*** –
      Shipping and handling billed to customers is recorded as revenue. Shipping
      and
      handling costs are included in cost of revenues.





***Research
      and Development*** **–** The
      Company charges research and development costs to operations in the period
      incurred. The Company recognizes revenue from research and development
      activities in accordance with their revenue recognition policy as stated above.
      Because in many cases the Company cannot be assured that the terms of specific
      contracts can be fulfilled, the Company recognizes revenue only after all terms
      of a contract are complete.





***Advertising*** –
      Advertising expense was $330,937 and $9,396 for the years ended December 31,
      2007 and 2006, respectively.





***Basic
      and Diluted Earnings per Share*** ****** – The
      computation of basic and diluted earning per share is based on the
      weighted-average number of shares outstanding during the periods presented.
      Using the treasury stock method, dilutive securities for the year ended December
      31, 2007 include the effects of warrants for the respective periods outstanding
      during the year. Potentially dilutive securities for the year ended December
      31,
      2006 include 100,000 warrants which were antidilutive as the strike price
      exceeded the market price. The following table is a reconciliation of the
      numerators and denominators used in the calculation of basic and diluted
      earnings per share and the weighted-average common shares outstanding,
      respectively:




**For the Years Ended December 31,****2007**
              
              **2006**Net
                  income
              
              $
              1,720,387
              
              $
              3,001,496Basic
                  weighted-average common shares outstanding
              
              
              19,387,619
              
              
              17,198,308Effect
                  of dilutive securities:Warrants
              
              
              51,458
              
              
              -Diluted
                  weighted-average common shares outstanding
              
              
              19,439,077
              
              
              17,198,308Basic
                  earnings per share
              
              $
              0.09
              
              $
              0.17Diluted
                  earnings per share
              
              $
              0.09
              
              $
              0.17




F-12


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





***Retirement
      Benefit Plans*** –
The
      Company makes monthly contributions to various employee retirement benefit
      plans
      organized by provincial governments in the PRC in accordance with rates
      prescribed by them. The provincial governments undertake to assume the
      retirement benefit obligations of all existing and future retired employees
      of
      the Company. Contributions to these plans are charged to expense as incurred.





***Registration
      Rights Agreements*** –
The
      Company accounts for registration payment arrangements under FSP 00-19-2 which
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement, whether issued
      as a separate arrangement or included as a provision of a financial instrument
      or arrangement, should be separately recognized and measured in accordance
      with
      FASB No. 5, Accounting for Contingencies (SFAS No. 5). The Company adopted
      FSP
      00-19-2 upon its issuance and has accounted for registration payments discussed
      in these financial statements in accordance with this guidance.





***Comprehensive
      Income*** –
Other
      comprehensive income presented in the consolidated financial statements consists
      of cumulative foreign currency translation adjustments.





***Credit
      Risk*** –
The
      carrying amounts of accounts receivable and employee advances included in the
      balance sheets represent the Company’s major exposure to credit risk in relation
      to its financial assets. No other financial assets carry a significant exposure
      to credit risk. The Company performs ongoing credit evaluations of each
      customer’s financial condition. It maintains allowances for doubtful accounts
      and such allowances in the aggregate have not exceeded management’s
      estimations.





The
      Company has its cash in bank deposits and money market funds primarily in the
      PRC. Historically, deposits in Chinese banks have been secure due to the state
      policy on protecting depositors’ interests. China promulgated a new Bankruptcy
      Law in August 2006, which came into effect on June 1, 2007, which contains
      provisions for the implementation of measures for the bankruptcy of Chinese
      banks. In the event that bankruptcy laws are enacted for banks in the PRC,
      the
      Company’s deposits may be at a higher risk of loss.





***Business
      Condition and Liquidity*** –
      Although the Company has a history of positive income, working capital and
      retained earnings, the Company has incurred significant increases in employee
      advances and inventory for the twelve months ended December 31, 2007 which
      has
      resulted in a use of cash from operations of $5,036,769. The Company has
      expended significant efforts to expand its revenues by assisting it sales
      representatives and increasing its marketing in fiscal 2008. In addition, the
      Company has been forced to give significant attention to the
      internal investigation conducted by the Audit Committee and may have to
      address purported class action lawsuits that have been commenced due to the
      Company’s failure to file its second quarterly report with the Securities and
      Exchange Commission. The Company believes that it will remedy these matters
      and
      will be able to return to its normal operations in the near future, including
      being in full compliance with the Securities and Exchange Commission filing
      requirements and the rules of the American Stock Exchange, but the Company
      can
      not give any assurance that this will be the case.





***Recently
      Enacted Accounting Standards***  – In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS No. 157 is effective for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. In
      February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
      extended the effective date for certain nonfinancial assets and nonfinancial
      liabilities to fiscal years beginning after November 15, 2008. The Company
      does
      not expect the adoption of SFAS No. 157 to have a material impact on our
      consolidated financial statements.


F-13


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits companies to choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of SFAS No. 159 to have a
      material impact on our consolidated financial statements.





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
      “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
      in Future Research and Development Activities”, (“EITF 07-3”) which is effective
      for fiscal years beginning after December 15, 2007. EITF 07-3 requires that
      nonrefundable advance payments for future research and development activities
      be
      deferred and capitalized. Such amounts will be recognized as an expense as
      the
      goods are delivered or the related services are performed. EITF 07-3 is not
      expected to have a material impact on our results of operations or financial
      position.





In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* ,
      and
      SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements.* SFAS
      No. 141(R) requires an acquirer to measure the identifiable assets
      acquired, the liabilities assumed and any non-controlling interest in the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. SFAS No. 160
      clarifies that a non-controlling interest in a subsidiary should be reported
      as
      equity in the consolidated financial statements, consolidated net income shall
      be adjusted to include the net income attributed to the non-controlling interest
      and consolidated comprehensive income shall be adjusted to include the
      comprehensive income attributed to the non-controlling interest. The calculation
      of earnings per share will continue to be based on income amounts attributable
      to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for
      financial statements issued for fiscal years beginning after December 15,
      2008. Early adoption is prohibited. The Company has not yet determined the
      effect on our consolidated financial statements, if any, upon adoption of SFAS
      No. 141(R) or SFAS No. 160.




**NOTE
      3 – INVENTORY**





Inventory
      consisted of the following:


**December 31,****2007**
              
              **2006**Raw
                  materials
              
              $
              871,425
              
              $
              843,163Work-in-process
              
              
              1,797,379
              
              
              546,156Finished
                  goods
              
              
              786,235
              
              
              620,676Product
                  on consignment
              
              
              806,513
              
              
              682,652Total
                  Inventory
              
              $
              4,261,552
              
              $
              2,692,647Less:
                  Provision for obsolescence
              
              
              (136,359
              )
              
              (111,128
              )Net
                  Inventory
              
              $
              4,125,193
              
              $
              2,581,519


F-14


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**








**NOTE
      4 – PROPERTY, PLANT AND EQUIPMENT**





Property
      and equipment consisted of the following:


**December 31,****2007**
              
              **2006**Buildings
                  and land use rights
              
              $
              5,745,353
              
              $
              5,374,007Machinery
              
              
              5,234,388
              
              
              4,832,776Other
                  equipment
              
              
              429,985
              
              
              328,706Vehicles
              
              
              411,471
              
              
              352,563Total
              
              
              11,821,197
              
              
              10,888,052Less
                  accumulated depreciation
              
              
              (4,247,993
              )
              
              (3,333,305
              )Net
                  property, plant and equipment
              
              $
              7,573,204
              
              $
              7,554,747





Depreciation
      is computed on a straight-line basis over the estimated useful lives of the
      assets, which were as follows:


**Life****Asset**
              
              **(years)**Buildings
                  and land use rights
              
              30
                  - 50Machinery
              
              3
                  -
                  20Other
                  equipment
              
              3
                  -
                  10Vehicles
              
              3
                  -
                  10


Depreciation
      and amortization expense was $676,547 and $660,632 for the years ended December
      31, 2007 and 2006, respectively.




**NOTE
      5 – INTANGIBLE ASSETS**





At
      December 31, 2007 the Company’s intangible assets consist of land use rights
      that were not currently being utilized but were held for future use as building
      sites. When utilized in the construction of buildings, the land use rights
      are
      reclassified as property, plant and equipment and are depreciated using the
      straight-line method over the remainder of their 50-year life. Estimated
      aggregate future amortization expense for the succeeding five years and
      thereafter as of December 31, 2007 is as follows:


F-15


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**


2008
                
                $
                18,0852009
                
                
                18,0852010
                
                
                16,9882011
                
                
                15,9512012
                
                
                15,723Thereafter
                
                
                566,038





**NOTE
      6 – NOTES PAYABLE**





The
      Company’s notes payable consist of short and long-term debt that is payable to
      banks, governmental financial bureaus, municipalities and a company. The
      following schedule summarizes the Company’s debt obligations and respective
      balances at December 31, 2007 and 2006:


**December
                  31,****2007**
              
              **2006**Short-term
                  notes payable to banks, settled as of December 31, 2007
              
              $
              -
              
              $
              9,593,860Short-term
                  notes payable to suppliers, settled as of December 31,
                  2007
              
              
              -
              
              
              474,576Long-term
                  note payable to a bank, settled as of December 31, 2007
              
              
              -
              
              
              1,751Long-term
                  note payable to a bank, settled as of December 31, 2007
              
              
              -
              
              
              1,279,181Short-term
                  note payable to a bank, interest at 6.12%, matures March 2008,
                  secured by
                  land use rights
              
              
              1,367,223
              
              
              1,279,181Short-term
                  note payable to a municipality, interest at 1.8%, payable on demand,
                  unsecured
              
              
              68,360
              
              
              63,959Short-term
                  note payable to a finance bureau, interest at 4.5%, payable on
                  demand,
                  unsecured
              
              
              70,455
              
              
              65,918Short-term
                  note payable to a bank, interest at 6.39%, matures March 2008,
                  secured by
                  property
              
              
              3,418,056
              
              
              -Short-term
                  note payable to a government development zone interest at 2.43%,
                  payable
                  on demand, secured by property
              
              
              410,167
              
              
              -Total
                  short-term notes payable
              
              $
              5,334,260
              
              $
              12,758,426


F-16


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**




**December 31,****2007**
              
              **2006**Long-term
                  note payable to a bank, interest at 7.72%, matures August 2009,
                  secured by
                  shareholder (see below)
              
              $
              6,836,111
              
              $
              -Long-term
                  note payable to a bank, interest at 6.57%, matures March 2010,
                  secured by
                  property
              
              
              4,101,667
              
              
              -Total
                  long-term debt
              
              
              10,937,778
              
              
              -Less
                  current maturities of long-term debt
              
              
              4,101,667
              
              
              -Long-term
                  notes payable, net of current portion
              
              $
              6,836,111
              
              $
              -Past
                  due notes payable
              
              $
              480,622
              
              $
              65,918


The
      Company’s short and long-term debt obligations and respective balances at
      December 31, 2007 are payable as follows:


2008
              
              $
              9
                  ,435,9272009
              
              
              5
                  ,468,8892010
              
              
              1
                  ,367,222Total
              
              $
              16,272,038





On
      August
      17, 2007, the Company received a loan for $6,651,094 from Shuang Long Branch
      of
      Agricultural Bank of China with a term of two years. The loan bears interest
      at
      a rate of 7.722% which is due quarterly. The loan is for working capital and
      is
      guaranteed by Lan's International Medicine Investment Co Ltd. (“LIMI”). Gui Hua
      Lan, our Chief Executive Officer; Feng Lan, our President; and Zheng Yi Wang,
      our Executive Director of Exports, are directors and have voting and investment
      control over the shares owned by LIMI, which beneficially owns or controls
      approximately 78% of our outstanding shares. In addition, Gui Hua Lan, Feng
      Lan
      and Zheng Yi Wang owns 62.42%, 5.15% and 1.45%, respectively, of LIMI’s issued
      and outstanding shares. LIMI is not receiving any compensation for the guarantee
      of the Company’s loan.





**NOTE
      7 – STOCKHOLDERS’ EQUITY**





***Statutory
      Reserves -*** **** According
      to the Articles of Association, the Company is required to transfer a certain
      portion of its net profits to Statutory Reserves, as determined under PRC
      accounting regulations, from net income to both the surplus reserve fund and
      the
      public welfare fund. Accordingly, the Company has recorded an aggregate of
      $147,023 in the Statutory Reserves account in the equity section of the
      accompanying balance sheet as of December 31, 2007 and 2006.





***Initial
      Public Offering*** - In
      June 2007, the Company completed an initial public offering (“IPO”) consisting
      of 460,000 shares of common stock. The Company’s sale of common stock, which was
      sold indirectly by the Company at a price to the public of $3.50 per share,
      resulted in net proceeds of $1,094,382. These proceeds were net of underwriting
      discounts and commissions and offering costs payable by the Company totaling
      approximately $0.6 million. Upon the closing of the offering the Company sold
      the underwriter warrants to purchase 40,000 shares of common stock for $400.
      The
      warrants are exercisable at a per share price of $4.20 and expire if unexercised
      after five years. The shares underlying the warrants have been
      registered.


F-17


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





***Issuance
      of Warrants*** - On
      September 25, 2007, pursuant to agreements with the two of the Company’s
      independent directors, the Company issued each independent director 3,000
      five-year warrants at an exercise price of $3.50 per share. The Warrants were
      valued using the Black Scholes Option Pricing Model with the following
      assumptions: dividend yield of 0%, estimated life of 5 years, closing market
      price of $4.84, volatility of 72.4% and a risk-free interest rate of 4.26%.
      This
      resulted in a fair value of $3.328 per warrant for a total value of $19,968
      for
      the 6,000 warrants. The warrants vest immediately.





***Exercise
      of Warrants*** - During
      2007, the Company received proceeds of $250,000 upon the exercise of the warrant
      to purchase 100,000 shares of common stock at $2.50 per share as described
      in
      Note 1.





The
      following summarizes the outstanding warrants as of December 31,
      2007:


**Weighted-Average****Exercise**
              
              **Warrants**
              
              **Remaining Contractual**
              
              **Number****Price**
              
              **Outstanding**
              
              **Life (Years)**
              
              **Exercisable**$      3.50
              
              
              6,000
              
              
              4.7
              
              
              6,000$      4.20
              
              
              40,000
              
              
              4.5
              
              
              40,00046,000
              
              
              
              
              
              46,000




**NOTE
      8 – RELATED PARTY TRANSACTIONS**





As
      of
      December 31, 2007 and 2006, the Company had receivables due from officers in
      the
      amount of $27,555 and $76,751, respectively.




At
      December 31, 2007 and 2006 the amounts payable to officers were $94,939 and
      $288,463, respectively. At December 31, 2007 and 2006 the amounts payable to
      the
      related party were $0 and $104,750, respectively. These amounts are due on
      demand and do not accrue interest.





During
      2007 the Company entered into a loan agreement with a bank which is secured
      by
      shares of the Company owned by the Company’s principal shareholder. See Note
      6.





During
      1999 the Company entered into an agreement through its variable interest parent
      company whereby it acquired the rights to utilize certain techniques for
      fabricating and manufacturing products using the natural herb Sanchi. Terms
      of
      the agreement required an initial payment of $217,202 and a final payment of
      $3,885,496 upon receiving governmental approval and protection for the developed
      techniques. As of July 13, 2006, such approvals had not been obtained and the
      parties to the agreement mutually agreed to terminate the agreement and the
      Company was allowed to retain the rights to the techniques and ownership of
      any
      research and development that had been undertaken with respect to the
      techniques.





**NOTE
      9 – INCOME AND OTHER TAXES**





The
      Company is not subject to any income taxes in the United States, but is subject
      to corporate income tax in the PRC at a rate of 30% and a local income tax
      rate
      of 3% for 2007. However, because the Parent is located in a special region,
      it
      has a 15% corporate income tax rate and has been granted a “tax holiday” during
      which it will pay no income taxes through December 31, 2008. On March 16, 2007,
      the National People’s Congress of China passed the new Enterprise Income Tax
      Law, (“EIT Law”), and on December 6, 2007, the State Council of China issued the
      Implementation Regulations for the EIT Law which took effect on January 1,
      2008. The EIT Law and Implementation Regulations Rules impose a unified EIT
      of
      25% on all domestic-invested enterprises and Foreign Invested Entities, or
      FIEs,
      unless they qualify under certain limited exceptions.


F-18


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





As
      a
      result of the above change in the income tax laws, the Parent will continue
      to
      have a 15% rate with a tax holiday for 2008 and will have a favorable rate
      of
      50% of the tax rates in effect during fiscal 2009 through 2011 as determined
      by
      the PRC government and the regional tax authorities. Medicine, Import/Export,
      Cosmetics, Beisheng and Pingbian Shenghuo will each be taxed at the new 25%
      rate
      effective January 1, 2008.





The
      Company recognizes deferred tax assets and liabilities for future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and the respective tax
      bases
      and any tax credit carry forwards available. Deferred tax assets and liabilities
      are measured using enacted tax rates expected to apply to taxable income in
      the
      years in which those temporary differences are expected to be recovered or
      settled. The effect on deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      The Company has established a valuation allowance for all deferred income tax
      assets due to the uncertainty of their realization. Income taxes payable are
      included in taxes and related payables on the accompanying balance sheets.
      Income taxes are not required to be paid to the PRC until after the end of
      the
      Company’s fiscal year.





Undistributed
      earnings of the Company’s foreign subsidiaries since acquisition amounted to
      approximately $5.2 million at December 31, 2007. Those earnings, as well as
      the investment in the subsidiaries of approximately $6.1 million are considered
      to be indefinitely reinvested and, accordingly, no U.S. federal and state income
      taxes have been provided thereon. Upon distribution of those earnings in the
      form of dividends or otherwise, the Company would be subject to both U.S. income
      taxes (subject to an adjustment for foreign tax credits) and withholding taxes
      payable to the PRC. The Company has U.S. net operating loss carryforwards of
      approximately $1.9 million that, if unused begin to expire in 2026.
      Determination of the amount of unrecognized deferred U.S. income tax liability
      is not practical because of the complexities associated with its hypothetical
      calculation; however, unrecognized foreign tax credits may be available to
      reduce a portion of the U.S. tax liability.





The
      Company is also subject to Value Added Tax (“VAT”) and other miscellaneous taxes
      including city construction tax, turnover tax and consumption tax. All
      enterprises that sell commodities, engage in repair and maintenance or import
      and export business in the PRC are subject to VAT tax. The standard rate for
      VAT
      tax is 17%. Once declared, VAT taxes are due on a monthly basis. Taxes and
      related payables are composed of the following:


**December 31,****2007**
              
              **2006**VAT
                  taxes
              
              $
              740,403
              
              $
              1,645,405Income
                  taxes
              
              
              58,562
              
              
              1,373,122Other
                  taxes
              
              
              56,119
              
              
              38,944Total
                  taxes and related payables
              
              $
              855,084
              
              $
              3,057,471


F-19


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





On
      March
      15, 2007, the Company’s majority owned subsidiary, Medicine was granted an
      approval of their application by the government of the PRC for relief of income
      taxes for the years ended December 31, 2006 and 2005. As a result, Medicine
      recognized an aggregate of $976,048 in income taxes that are no longer payable
      as of March 15, 2007. The amount has been recognized under the caption “Benefit
      from (provision for) income taxes” in the accompanying Consolidated Statement of
      Operations and Comprehensive Income for the year ended December 31,
      2007.





The
      temporary differences and carryforwards which give rise to the deferred income
      tax asset are as follows:


**December 31,****2007**
              
              **2006**Net
                  operating loss carryforwards
              
              $
              893,720
              
              $
              339,628Allowance
                  for doubtful trade receivables
              
              
              934,521
              
              
              322,342Allowance
                  for doubtful other receivables
              
              
              672,481
              
              
              355,158Inventory
                  obsolescence reserve
              
              
              5,096
              
              
              -Total
                  deferred income tax assets
              
              
              2,505,818
              
              
              1,017,128Valuation
                  allowance
              
              
              (2,505,818
              )
              
              (361,905
              )Net
                  deferred income tax asset
              
              $
              -
              
              $
              655,223





Following
      is a reconciliation of income taxes calculated at the federal and local
      statutory rates to actual income tax expense:


**For the Years****Ended December 31,****2007**
              
              **2006**Tax
                  at statutory rate of 33%
              
              $
              411,842
              
              $
              1,066,865Benefit
                  of favorable rate
              
              
              (1,732,456
              )
              
              (460,230
              )Tax
                  refund from government
              
              
              (976,048
              )
              
              -Benefit
                  of operating loss carryforwards
              
              
              -
              
              
              (32,127
              )Other
                  change in valuation allowance
              
              
              1,847,464
              
              
              (168,426
              )Provision
                  for (benefit from) income taxes
              
              $
              (449,198
              )
              $
              406,082





The
      provision for income taxes consisted of the following:


**For the Years****Ended December 31,****2007**
              
              **2006**Current
              
              $
              (976,048
              )
              $
              606,635Deferred
              
              
              526,850
              
              
              (200,553
              )Provision
                  for (benefit from) income taxes
              
              $
              (449,198
              )
              $
              406,082


F-20


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





The
      Company has $2,708,000 of net operating loss carryforwards available in the
      PRC
      that, if unused, begin to expire in 2011.





**NOTE
      10– COMMITMENTS AND CONTINGENCIES**





***Economic
      environment*** –
Since
      all of the Company’s operations are conducted in the PRC, the Company is subject
      to special considerations and significant risks not typically associated with
      companies operating in the United States of America. These risks include, among
      others, the political, economic and legal environments and foreign currency
      exchange rate fluctuations. The Company’s operational results may be adversely
      affected by changes in the political and social conditions in the PRC, and
      by
      changes in governmental policies with respect to medical reforms and other
      laws
      and regulations, anti-inflationary measures, currency conversion and remittance
      abroad, and rates and methods of taxation, among other things. In addition,
      all
      of the Company’s revenue is denominated in the PRC’s currency CNY, which must be
      converted into other currencies before remittance out of the PRC. Both the
      conversion of CNY into foreign currencies and the remittance of foreign
      currencies abroad require approval of the PRC government.





Due
      to
      changes in current worldwide economic conditions, the Company’s ability to raise
      capital or borrow funds may be limited.





***Dependence
      on a single raw material*** –
The
      primary ingredient in all of the Company’s products is Sanchi, an herb grown in
      two provinces of the PRC. The Company relies on its in-house purchasing
      department to acquire sufficient Sanchi at reasonable prices and may on occasion
      make advance payments to suppliers that include provisions for setting the
      purchase price and delivery date. However, the Company is not reliant on a
      single source or supplier in order to obtain the Sanchi.





***Advertising
      agreement -*** The
      Company has entered into an agreement for certain advertising services to be
      performed during fiscal 2008. The total commitment under the contract is
      approximately $1.9 million of which a deposit of approximately $211,000 has
      been
      made to the service provider which is reflected in advances to suppliers in
      the
      accompanying consolidated balance sheet as of December 31, 2007.





***Contingent
      Liability*** –
The
      Company was sued by a former employee for violation of his contract and the
      courts entered a judgment in favor of the employee in 2003 for $128,978, which
      included litigation costs. The Company accrued the liability for this loss
      at
      December 31, 2003 and paid the amount of the judgment on April 27, 2004. In
      2006, the plaintiff has asked the court to have the Company pay a penalty for
      not paying the judgment timely in the amount of $100,000. The court had frozen
      a
      bank account that had $105,284. During the fourth quarter of 2006, the court
      rejected the request for the penalty and released the funds back to the Company.
      The employee has now asserted claims for allegedly ruining the employee’s
      reputation and causing mental anguish. The lawsuit was settled in January of
      2008, which resulted in the payment of $65,136 by the company ***.***





**NOTE
      11 - GEOGRAPHIC INFORMATION**





The
      Company derives its sales from China and from other various countries.
      Operations in China make up the majority of the Company’s sales, with a very
      small portion from other various countries. No revenues from external customers
      attributed to any individual foreign country are material. The following table
      summarizes sales by geographic location for the years ended December 31, 2007
      and 2006:


F-21


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**


**Years Ended December 31,****2007**
              
              **2006**Sales
                  from China
              
              $
              19,655,934
              
              $
              19,810,207Sales
                  from other countries
              
              
              317,984
              
              
              149,764Total
                  Sales
              
              $
              19,973,918
              
              $
              19,959,971


**NOTE
      12 – CONCENTRATIONS**





During
      the year ended December 31, 2007, the Company had no concentrations of revenue
      from customers. During the year ended December 31, 2006, the Company had
      concentrations of revenue from two customers accounting for 23% of total
      revenue.





**NOTE
      13 – SUBSEQUENT EVENTS**





As
      a
      result of the investigation authorized by the Audit Committee of the Board
      of
      Directors of the errors in the accounting for accounts receivable and employee
      advances as discussed in Note 1, the Company failed to timely file its Quarterly
      report on Form 10-Q for the quarter ended June 30, 2008 with the Securities
      and
      Exchange Commission. On August
      21, 2008 it received a deficiency letter from the American Stock Exchange
      (“AMEX”) stating that the Company was no longer in compliance with their listing
      standards. In order to maintain its AMEX listing, the Company had to submit
      a
      plan by September 12, 2008, outlining actions the Company had taken, or will
      take, to regain compliance with the continued listing standards of AMEX,
      including submission of all required Securities and Exchange Commission filings,
      by no later than November 19, 2008.





Pursuant
      to the Deficiency Letter, if AMEX were to determine that the Company made a
      reasonable demonstration in the Plan of an ability to regain compliance with
      all
      applicable continued listing standards by November 19, 2008, AMEX would accept
      the Plan. The Plan was submitted by the Company and accepted by AMEX on November
      5, 2008. If the Company does not make adequate progress and complete the actions
      outlined in the Plan by November 19, 2008, AMEX will initiate delisting
      proceedings against the Company. The Company can provide no assurances that
      it
      will regain compliance with AMEX’s continued listing requirements, and its
      failure to do so could result in the delisting of the Company’s common stock
      from AMEX.





***Class
      Action Lawsuits –*** Putative
      class action lawsuits have been asserted against the Company and certain of
      its
      officers and directors in the United States District Court for the Southern
      District of New York (the “Court”). Only one complaint, Beni Varghese v. China
      Shenghuo Pharmaceutical Holdings, Inc., Gui Hua Lan, Qiong Hua Gao, Gene Michael
      Bennett, And Yunhong Guan, Index No. 08 CIV. 7422 (the “Varghese Action”) has
      been served on the Company thus far.





The
      complaints allege, among other things, that certain of the Company’s SEC filings
      and other public statements contained false and misleading statements which
      resulted in damages to the plaintiffs and the members of the purported class
      when they purchased the Company’s securities. On the basis of those allegations,
      plaintiffs in each of the actions seek an unspecified amount of damages under
      Sections 10(b) and 20(a) of the Exchange Act.


F-22


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**Notes
      to Consolidated Financial Statements**


**For
      the Years Ended December 31, 2007 and 2006**





On
      October 20, 2008, the Company and counsel to the plaintiff in the Varghese
      Action filed a stipulation with the Court in which the parties agreed that
      the
      plaintiff may file a consolidated, amended complaint within 60 days after the
      entry of an order appointing and approving lead counsel, and that the Company’s
      time to answer that complaint is extended until 60 days after the filing of
      the
      consolidated complaint.





The
      Company believes the allegations in the complaint are without merit, and intends
      to vigorously defend the lawsuits. The Company does not believe that the outcome
      of these suits will have a material, adverse effect on the
      Company.


F-23