**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**





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




For
      the
      fiscal year ended December
      31, 2006





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




For
      the
      transition period from _____________________ to ______________





Commission
      file number 000-51477





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


(Exact
      name of small business issuer as specified in its charter)





Delaware
            20-2903562(State
                or other jurisdictionof
                incorporation)
            (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: None





Securities
      registered under Section 12(g) of the Exchange Act: Common
      Stock, par value $0.0001





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
x No o





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 the 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
x





State
      issuer’s revenue for its most recent fiscal year: $19,959,971





At
      December 31, 2006, the last business day of the registrant’s most recently
      completed fiscal year, there were 19,119,400 shares of the registrant’s common
      stock outstanding, and there was no aggregate market value of such shares held
      by non-affiliates of the registrant because the registrant’s common stock was
      not trading on any exchange.





The
      number of shares outstanding of the issuer’s common equity as of April 1, 2007
      was 19,119,400.





Documents
      incorporated by reference: None





Transitional
      Small Business Disclosure Format: Yes o  No
x








**TABLE
      OF CONTENTS**




**PAGE**PART
                IITEM
                1.
            
            DESCRIPTION
                OF BUSINESS
            
            4ITEM
                2.
            
            DESCRIPTION
                OF PROPERTY
            
            27ITEM
                3.
            
            LEGAL
                PROCEEDINGS
            
            27ITEM
                4.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            27PART
                IIITEM
                5.
            
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            
            27ITEM
                6.
            
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            
            29ITEM
                7.
            
            FINANCIAL
                STATEMENTS
            
            38ITEM
                8.
            
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            
            39ITEM 8A.
            
            CONTROLS
                AND PROCEDURES
            
            39ITEM 8B.
            
            OTHER
                INFORMATION
            
            39PART
                IIIITEM
                9.
            
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSON AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
            
            39ITEM
                10.
            
            EXECUTIVE
                COMPENSATION
            
            41ITEM
                11.
            
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            
            42ITEM
                12.
            
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
            
            43ITEM
                13.
            
            EXHIBITS
            
            45ITEM
                14.
            
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            46SIGNATURES
            
            
            
            47Certification
                Pursuant to Rule 13a-14(a) or 15d-14(a)Certification
                Pursuant to Rule 13a-14(a) or 15d-14(a)Certification
                Pursuant to Section 1350




2


**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 80% 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
                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 of Financial Condition and Results of Operations,” and
                “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.




3


**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.





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 .





**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. Sin ce
        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**





***Completion
      of Share Exchange***





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. On June 30, 2006, we entered into a share exchange agreement (the
      “Exchange Agreement”) with 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”). On August 31, 2006, the Share Exchange closed. 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.





Upon
      the
      closing of the Share Exchange, 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. Pursuant to the Exchange Agreement, as amended,
      we
      issued 15,213,000 shares of common stock to LIMI and 567,600 and 474,800 shares
      of common stock to Marvel International Limited and FirstAlliance Financial
      Group, Inc., respectively, as designees of LIMI. In addition, at the closing
      of
      the Share Exchange, we issued 200,000 shares of our common stock and five year
      warrants to purchase 100,000 shares of our common stock at a per share exercise
      price of $2.50 for investor relations services (the “IR Securities”).
      Immediately following the closing of the Share Exchange and after giving effect
      to the issuance of the IR Securities, LIMI and its designees beneficially owned
      approximately 85.0% of our issued and outstanding common stock, our pre-existing
      shareholders owned approximately 3.5% and investors in the Private Placement
      (described below) that closed concurrently with the Share Exchange owned
      approximately 10.5% of our outstanding common stock. We issued no fractional
      shares in connection with the Share Exchange. Immediately after the closing
      of
      the Share Exchange, we changed our corporate name from SRKP 8, Inc. to China
      Shenghuo Pharmaceutical Holdings, Inc.





FirstAlliance
      Financial Group, Inc. was hired by LIMI as a consultant to assist LIMI in
      selecting the right venue for the listing of the securities of our common stock,
      coordinating with various parties related to the share exchange transaction
      and
      assisting in the preparation of various documents. FirstAlliance’s services will
      be completed when we complete our listing process. Marvel International Limited
      acted as the finder in the share exchange transaction. Marvel’s service was
      completed when the share exchange was completed. Neither FirstAlliance nor
      Marvel is an affiliate of LIMI.





Immediately
      prior to the Share Exchange and Private Placement, certain of our shareholders
      agreed to cancel an aggregate of 2,036,000 shares of common stock such that
      there were 664,000 shares of common stock outstanding immediately prior to
      the
      Share Exchange and Private Placement. Immediately after the closing of the
      Share
      Exchange, Private Placement and after giving effect to the issuance of the
      IR
      Securities, we had 19,119,400 outstanding shares of common stock and warrants
      to
      purchase 100,000 shares of our common stock.




4





Pursuant
      to the terms of the Share Exchange, we agreed to register a total of 664,000
      shares of common stock held by our shareholders immediately prior to the Share
      Exchange. Of these 664,000 shares held by our shareholders, 348,600 shares
      would
      be covered by the resale registration statement filed in connection with the
      Private Placement (described below) and 315,400 shares that are held by
      affiliates of Westpark Capital, Inc. (“WestPark”) are to be included in a
      subsequent registration statement filed by us within ten days after the end
      of
      the six month period that immediately follows the date on which we file the
      registration statement to register the shares issued in the Private Placement.
      WestPark acted as the placement agent in the Private Placement. We also agreed
      to register the IR Securities in the registration statement filed in connection
      with the Private Placement and to include 1,042,400 shares of common stock
      that
      were issued to FirstAlliance Financial Group, Inc. and Marvel International
      Limited as designees of LIMI (the former majority shareholder of Shenghuo China)
      upon the closing of the Share Exchange in the subsequent registration statement
      that we agreed to file to register the shares held by the affiliates of
      Westpark.





***The
      Private Placement***





On
      August
      31, 2006, concurrently with the close of the Share Exchange, we received gross
      proceeds of $1,800,000 in a private placement transaction (the “Private
      Placement”). Pursuant to subscription agreements entered into with the
      investors, we sold an aggregate of 2,000,000 shares of common stock at $0.90
      per
      share. We agreed to file a registration statement covering the common stock
      sold
      in the private placement within 30 days of the closing of the Share Exchange
      pursuant to the subscription agreement with each investor. The investors in
      the
      Private Placement also entered into a lock up agreement pursuant to which they
      agreed not to sell their shares until our common stock begins to be traded
      on
      the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market,
      NASDAQ Capital Market or the OTC Bulletin Board, after which their shares will
      automatically be released from the lock up on a monthly basis pro rata over
      a
      nine month period. After commissions and expenses, we received net proceeds
      of
      approximately $1.3 million in the Private Placement. WestPark acted as placement
      agent in connection with the Private Placement. 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. Some of the controlling shareholders and control persons
      of WestPark were also, prior to the completion of the Share Exchange,
      controlling shareholders and control persons of our company, including Richard
      Rappaport, who is the Chief Executive Officer of WestPark and was the President
      and a significant shareholder of our company prior to the Share Exchange, and
      Anthony C. Pintsopoulos, who is the Chief Financial Officer of Westpark and
      was
      a controlling stockholder and an officer and director of our company prior
      to
      the Share Exchange. Each of Messrs. Rappaport and Pintsopoulos resigned from
      all
      of their executive and director positions with our company upon the closing
      of
      the Share Exchange.





**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.





·
            ***Health
                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.




5




**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 more than 90% of our sales for the year ended December
                31,
                2005 and more than 80% of our sales for the year ended December 31,
                2006.
                The reason for the change in percentage is that the sale of 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.





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
                are expected to be completed before the end of June 2007 (June 30,
                2007),
                and phase three clinical trials are expected to begin immediately
                thereafter. Best efforts will be made to obtain production approval
                by the
                end of 2008.




6




·
            *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 in 2011. 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. 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.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.




7




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.





**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
            
            September
                2007




8




**Anticipated
                Product Name**
            
            **Intended
                Use**
            
            **Application
                Submission Date**
            
            **Anticipated
                Approval Date**Long
                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 will 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
            
            October
                2007 - January 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
            
            January
                2008Zhi
                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 a 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. Our line of cosmetic
      products include the following food products and health supplements.




9





**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.





**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.




10




**Research
      and Development**





As
      of
      December 31, 2006, we employed 56 technicians, including seven senior
      researchers, 17 mid-level researchers, and 32 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**





We
      have a
      trained marketing team and maintain 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 hospitals and retail drug stores.





Approximately
      15% of sales of Xuesaitong Soft Capsules are made to chain drugstores to sell
      to
      patients by prescription, while approximately 85% of sales are made to
      distributors to hospitals directly. Our three largest customers accounted for
      approximately 21.7% and 32.1% of our sales for the year ended December 31,
      2005
      and the year ended December 31, 2006, respectively.





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. We do not allow returns on our products sold.




11





**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
      include 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 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 .





**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-finishedproducts
                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.




12




**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
      a
      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.





**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. 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.




13





**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.





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 represent more than 80% of our
      revenue, and 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. According to state regulation,
      the Insurance Catalogue should be updated once every two years, but the last
      update was more than 5 years ago because there was an immense amount of data
      to
      update.





**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. Currently, its maximum price has been
      adjusted to 54.80 RMB (U.S. $6.85) 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. Recently
      we
      received news that the application has been approved by the experts committee,
      but the category of drugs with good quality and low price has not yet been
      officially announced.




14





**Employees**





As
      of
      December 31, 2006, we had 438 full-time, salaried employees who 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 $115,744, $99,700 and $93,000 for the years ended December 31,
      2006, 2005 and 2004, 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.




**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. Our shares
      of
      common stock are not currently listed or quoted for trading on any national
      securities exchange or national quotation system. If and when our common stock
      is traded, the trading price 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.




**RISKS
      RELATED TO OUR OPERATIONS**





**Our
      Current Business Is Primarily Based On A Single Product, Which Accounts For
      More
      Than 80% Of Our Revenues, And We May Not Be Able To Generate Significant Revenue
      If This Product Fails.**




More
      than
      80% of our revenue 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.




15





**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 more than 90% of our revenues for the year ended December
      31, 2005 and more than 80% of our revenues for the year ended December 31,
      2006,
      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, 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.




**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% and 32.1% of our sales
      for
      the year ended December 31, 2005 and the year ended December 31, 2006,
      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, 2006, we had 438 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.




16





**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 is almost complete. 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.




17





**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.**





We
      had
      trade receivables, net of allowance for doubtful accounts, of approximately
      $9.9
      million as of December 31, 2006. 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 2005 was 150 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
      year ended December 31, 2005 and the year ended December 31, 2006, the gross
      profit margin for our products was approximately 61.9% 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
      year
      ended December 31, 2005 and the year ended December 31, 2006, 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.




18





**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 August 21, 2007;
                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.





**We
      Enjoy Certain Preferential Tax Concessions And Loss Of These Preferential Tax
      Concessions Will 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 has had an income tax rate
      of 15% since 2003. We are currently applying for a more favorable tax rate
      under
      which we could pay no income taxes for the two years and half of our current
      rate for the three years thereafter. If the application is not successful,
      the
      income tax rate for us will be 15%. 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.


19


**We
      Enjoy Certain Preferential Tax Concessions And Loss Of These Preferential Tax
      Concessions Will Cause Our Tax Liabilities To Increase And Our Profitability
      To
      Decline.**




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. However,
      for foreign-invested enterprises established before the promulgation of the
      EIT
      Law, a five-year transition period is provided during which reduced rates will
      apply but gradually be phased out. Since the PRC government has not announced
      implementation measures for the transitional policy with regards to such
      preferential tax rates, we cannot reasonably estimate the financial impact
      of
      the new tax law to us at this time. 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.




**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 equipment
      and production facility 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 1988. 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, w e
      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 decade, the rate of inflation in China has been
      as
      high as approximately 20% and China has experienced deflation as low as
      approximately minus 2%. 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. In April 2006, the People’s Bank of China raised the
      interest rate again. Repeated rises in interest rates by the central bank would
      likely slow economic activity in China which could, in turn, materially increase
      o ur 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, Including Our Ability To Pay Dividends.**





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, China Securities Regulatory Commission 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.





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.


22


**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 ofourmanufacturing facilities, which would severely disrupt our
                operations,




·
            the
                sickness or death ofourkey 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.





**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.





**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**





**There
      Is No Current Trading Market For** **Our** **Common Stock, And There Is No Assurance Of An Established Public Trading Market,
      Which Would Adversely Affect The Ability Of** **Our** **Investors To Sell Their Securities In The Public Market.**




Our
      common stock is not currently listed or quoted for trading on any national
      securities exchange or national quotation system. We
      have
      provided application documents to the American Stock Exchange (“AMEX”) for the
      listing of our common stock on AMEX. Currently, we are in discussions with
      the
      AMEX regarding the eligibility of our securities for listing. There
      is
      no guarantee that AMEX, or any other exchange or quotation system, will permit
      our shares to be listed and traded. If we fail to
      obtain a listing on AMEX, we may seek quotation on the OTC Bulletin Board.
      The
      NASD has enacted changes that limit quotations on the OTC Bulletin Board to
      securities of issuers that are current in their reports filed with the
      Securities and Exchange Commission. The effect on the OTC Bulletin Board of
      these rule changes and other proposed changes cannot be determined at this
      time.
      The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides
      significantly less liquidity than AMEX. Quotes for stocks included on the OTC
      Bulletin Board are not listed in the financial sections of newspapers as are
      those for AMEX. Therefore, prices for securities traded solely on the OTC
      Bulletin Board may be difficult to obtain and holders of common stock may be
      unable to resell their securities at or near their original offering price
      or at
      any price.




23





**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.** **




Pursuant
      to the terms of the Share Exchange, we agreed
      to file a registration statement with the Securities and Exchange Commission
      to
      register a total of 2,000,000 shares
      of common stock issued in an equity financing that was conducted in connection
      with the Share Exchange in August 2006. The registration statement must be
      filed
      within 30 days of the closing of the Share Exchange. The
      investors in the Private Placement also entered into a lock up agreement
      pursuant to which they agreed not to sell their shares until our common stock
      begins to be traded on the New York Stock Exchange, American Stock Exchange,
      NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after
      which their shares will automatically be released from the lock up on a monthly
      basis. We also agreed to register the IR Securities, which consist of 200,000
      shares of our common stock and five-year warrants to purchase 100,000 shares
      of
      our common stock at a per share exercise price of $2.50, in the registration
      statement filed in connection with the Private Placement. In addition, we agreed
      to register all of the 664,000 shares of common stock held by our shareholders
      immediately prior to the Share Exchange. Of these 664,000 shares, 348,600 shares
      would be covered by the registration statement filed in connection with the
      Private Placement and 315,400 shares that are held by affiliates of Westpark
      Capital, Inc. would be included in a subsequent registration statement filed
      by
      us within ten days after the end of the six month period that immediately
      follows the date on which we file the registration statement to register the
      shares issued in the Private Placement. We also agreed to register 1,042,400
      shares of common stock that were issued to FirstAlliance Financial Group, Inc.
      and Marvel International Limited as designees of the former shareholder of
      Shenghuo China upon the closing of the Share Exchange in the subsequent
      registration statement that we will file to register the shares held by the
      affiliates of Westpark Capital, Inc. 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. 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. As of the closing of the Share Exchange, 1% of our issued
      and outstanding shares of common stock was approximately 191,194 shares. Rule
      144 also permits, under certain circumstances, the sale of securities, without
      any limitations, by a non-affiliate that has satisfied a two-year holding
      period. 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.




**Following
      The Share Exchange, The Former Principal Stockholder Of Shenghuo China Has
      Significant Influence Over** **Us** .




Our largest
      shareholder, Lan’s Int’l Medicine Investment Co., Limited, or LIMI, beneficially
      owns or controls approximately 80% 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 62.2%, 5.0% and 1.3%,
      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 our 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.




24





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.





**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.




25




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, The
      Price
      Of** **Our** **Common Stock May Be Adversely Affected.**





Our internal
      control over financial reporting 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. 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 may
      identify weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting 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, disclosure of management’s assessment of our
      internal controls over financial reporting or disclosure of our public
      accounting firm’s attestation to or report on management’s assessment of our
      internal controls over financial reporting may have an adverse impact on the
      price of our common stock.





**Compliance
      With Changing Regulation Of Corporate Governance And Public Disclosure Will
      Result In Additional Expenses.**




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
      regulations, have created uncertainty for public companies and significantly
      increased the costs and risks associated with accessing the public markets
      and
      public reporting. Our management team will need to invest significant management time and financial
      resources to comply with both existing and evolving standards for public
      companies, which will lead to increased general and administrative expenses
      and
      a diversion of management time and attention from revenue generating activities
      to compliance activities.





**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, which is not currently listed or quoted for trading, 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”) once, and if, it starts trading. 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.




26




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.





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




Our
      principal executive offices are located at No. 2, Jing You Road, Kunming
      National Economy & Technology Developing District, People’s Republic of
      China 6 50217.
      W e
      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.




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




In
      2006,
      a former employee asked the court to force us to pay a penalty in the amount
      of
      $100,000 for not paying the judgment in a timely manner. During the court’s
      review of the request for the penalty, the court froze a bank account of ours
      that held $105,284.The court has rejected the employee’s claim and the bank
      account has been unfrozen. The employee has now asserted claims against us
      for
      allegedly ruining the employee’s reputation and causing mental anguish. No
      amount has been recorded on our books in connection with this claim as we
      believe that no information suggestions that it is probable a liability has
      been
      incurred and the amount of loss as a result of this litigation cannot yet be
      reasonably estimated.





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





None.





**PART
      II**




**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS**





There
      has
      never been a public trading market for our common stock and our shares of common
      stock are not currently listed or quoted for trading on any national securities
      exchange or national quotation system. We have provided application documents
      to
      the American Stock Exchange for the listing of our common stock on the American
      Stock Exchange. Currently, we are in discussions with the American Stock
      Exchange regarding the eligibility of our securities for listing. There is
      no
      guarantee that our application for listing on the American Stock Exchange will
      be approved.





If
      and
      when our common stock is listed or quoted for trading, 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;


27


·
            Our
                financial position and results of
                operations;




·
            Concern
                as to, or other evidence of, the reliability and efficiency of our
                proposed 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 our company; and




·
            General
                economic and other national
                conditions.




As
      of
      April 1 ,
      2007 ,
      we had
      19,119,400 shares of our common stock issued and outstanding, held by 49
      registered shareholders.





**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**
  #
                  of securities remainingavailable
                  for future#
                  of securities to be issued
              
              
              Weighted-average
              issuance
                  under equityupon
                  exercise of
              
              
              exercise
                  price of
              compensation
                  plansoutstanding
                  options,
              
              
              outstanding
                  options,
              (excluding
                  securitieswarrants
                  and rights
              
              
              warrants
                  and rights
              reflected
                  in column (a))Equity
                  compensation plans approved
                  by security holders
              
              -
              
              
              -
              -Equity
                    compensation plans not approved
                    by securities holders
              
              100,000
              (1)
              
              $2.50
              -Total
              
              100,000
              
              
              $2.50
              -
  (1)
        Upon
        the closing of the Share Exchange on August 31, 2006, we issued five-year
        warrants to purchase 100,000
        shares of our common stock at a per share exercise price of $2.50 for investor
        relations services.


**Recent
      sales of unregistered securities**





On
      August
      31, 2006, pursuant to the terms of the Exchange Agreement entered into by and
      between the Company, 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”), the Company issued 16,255,400 shares of common stock to the
      shareholder and its designees in exchange for 93.75% of the equity interest
      of
      Shenghuo China. Pursuant to the Exchange Agreement, as amended, we issued
      15,213,000 shares of common stock to LIMI and 567,600 and 474,800 shares of
      common stock to Marvel International Limited and FirstAlliance Financial Group,
      Inc., respectively, as designees of the shareholder. The securities were offered
      and sold to the investors in reliance upon exemptions from registration pursuant
      to Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
      promulgated thereunder. Each of the LIMI, Marvel International Limited and
      FirstAlliance Financial Group, Inc. qualified as an accredited investor (as
      defined by Rule 501 under the Securities Act of 1933, as amended).





On
      August
      31, 2006, immediately following the closing of the Share Exchange, the Company
      received gross proceeds of $1,800,000 in a private placement transaction (the
      “Private Placement”). Pursuant to subscription agreements entered into with the
      investors, the Company sold an aggregate of 2,000,000 shares of its common
      stock
      at a price of $0.90 per share. The Company agreed to file a registration
      statement covering the common stock sold in the private placement within 30
      days
      of the closing of the Share Exchange pursuant to the subscription agreement
      with
      each investor. The securities were offered and sold to investors in reliance
      upon exemptions from registration pursuant to Section 4(2) under the Securities
      Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of the
      persons and/or entities receiving the Company’s securities qualified as an
      accredited investor (as defined by Rule 501 under the Securities Act of 1933,
      as
      amended).




28





On
      August
      31, 2006, at the closing of the Share Exchange, the Company issued to an
      investment firm 200,000 shares of its common stock and five year warrants to
      purchase 100,000 shares of our common stock at a per share exercise price of
      $2.50 for investor relations services (the “IR Securities”). The
      securities were offered and sold to the investment firm in reliance upon
      exemptions from registration pursuant to Section 4(2) under the Securities
      Act
      of 1933, as amended, and Rule 506 promulgated thereunder. The investment firm
      qualified as an accredited investor (as defined by Rule 501 under the Securities
      Act of 1933, as amended).





**ITEM
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





*The
      following discussion should be read in conjunction with our Financial
      Statements, including the related notes thereto, and other financial information
      included herein. The information in this report includes forward-looking
      statements. In addition, past operating results are not necessarily indicative
      of the results to be expected for future periods.*





**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, 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.





**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 more than
      90% and 80% of our sales for the year ended December 31, 2005 and the year
      ended
      December 31, 2006, respectively.





We
      earn
      revenues mainly from the production and sale of our products and external
      processing. Moving forward, we intend to increase our efforts in research.
      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.




29





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.





Xuesaitong
      Soft Capsules, which are 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.
      Approximately 15% of sales of Xuesaitong Soft Capsules are sold to hospitals
      directly while approximately 85% of sales are made to distributors. Our three
      largest customers are Yunnan Province Pharmaceutical, Ltd., Xinjiang Province
      New & Special National Pharmaceutical Co., Ltd. and Guangdong Donguan City
      Medicinal Company, all of which accounted for 11.87%, 11.27% and 8.93% of our
      sales for the year ended December 31, 2006 and 9.15%, 9.27% and 3.30% for the
      year ended December 31, 2005, respectively.





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 and good price,” which, if granted, would help
      prevent future price reductions. This may 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 two or three
      years.





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 will 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 of
      the
      uncertainty of test results and clinical approvals related to new products.
      Over
      the last three years, the price of the main raw material we use - sanchi -
      has
      stabilized and is declining slightly. We will benefit from this trend if it
      continues.





**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.





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.




30





**Recent
      Events**





***Principal
      Terms of the Share Exchange***





Upon
      the
      closing of the Share Exchange, 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. Pursuant to the Exchange Agreement, as amended,
      we
      issued 15,213,000 shares of common stock to LIMI and 567,600 and 474,800 shares
      of common stock to Marvel International Limited and FirstAlliance Financial
      Group, Inc., respectively, as designees of LIMI. In addition, at the closing
      of
      the Share Exchange, we issued 200,000 shares of our common stock and five year
      warrants to purchase 100,000 shares of our common stock at a per share exercise
      price of $2.50 for investor relations services (the “IR Securities”).
      Immediately following the closing of the Share Exchange and after giving effect
      to the issuance of the IR Securities, LIMI and its designees beneficially owned
      approximately 85.0% of our issued and outstanding common stock, our pre-existing
      shareholders owned approximately 3.5% and investors in the Private Placement
      (described below) conducted by us that closed concurrently with the Share
      Exchange owned approximately 10.5% of our outstanding common stock. We issued
      no
      fractional shares in connection with the Share Exchange. Immediately after
      the
      closing of the Share Exchange, we changed our corporate name from SRKP 8, Inc.
      to China Shenghuo Pharmaceutical Holdings, Inc.





FirstAlliance
      Financial Group, Inc. was hired by LIMI as a consultant to assist LIMI in
      selecting a exchange for the listing of securities, coordinating with various
      parties involved in the going public transaction (such as investment banking
      firm, law firm and audit firm) and preparing various documents. FirstAlliance’s
      services will be completed when we complete our listing process. Marvel
      International Limited is the finder in the share exchange transaction between
      us
      and LIMI. Its service was completed when the share exchange took place. Neither
      FirstAlliance nor Marvel is an affiliate of LIMI.





Immediately
      prior to the Share Exchange and Private Placement, certain of our shareholders
      agreed to cancel an aggregate of 2,036,000 shares of common stock such that
      there were 664,000 shares of common stock outstanding immediately prior to
      the
      Share Exchange and Private Placement. Immediately after the closing of the
      Share
      Exchange, Private Placement and after giving effect to the issuance of the
      IR
      Securities, we had 19,119,400 outstanding shares of common stock and warrants
      to
      purchase 100,000 shares of our common stock.





Pursuant
      to the terms of the Share Exchange, we agreed to register a total of 664,000
      shares of common stock held by our shareholders immediately prior to the Share
      Exchange. Of these 664,000 shares held by our shareholders, 348,600 shares
      would
      be covered by the resale registration statement filed in connection with the
      Private Placement (described below) and 315,400 shares, which are held by
      affiliates of Westpark Capital, Inc. (“WestPark”) are to be included in a
      subsequent registration statement filed by us within ten days after the end
      of
      the six month period that immediately follows the date on which we file the
      registration statement to register the shares issued in the Private Placement.
      WestPark acted as the placement agent in the Private Placement. We also agreed
      to register the IR Securities in the registration statement filed in connection
      with the Private Placement and to include 1,042,400 shares of common stock
      that
      were issued to FirstAlliance Financial Group, Inc. and Marvel International
      Limited as designees of LIMI upon the closing of the Share Exchange in the
      subsequent registration statement that we agreed to file to register the shares
      held by the affiliates of Westpark.




31





The
      transactions contemplated by the Exchange Agreement, as amended, were intended
      to be a “tax-free” incorporation pursuant to the provisions of Section 351 of
      the Internal Revenue Code of 1986, as amended.





***The
      Private Placement***





On
      August
      31, 2006, concurrently with the close of the Share Exchange, we received gross
      proceeds of $1,800,000 in a private placement transaction (the “Private
      Placement”). Pursuant to subscription agreements entered into with the
      investors, we sold an aggregate of 2,000,000 shares of common stock at $0.90
      per
      share. We agreed to file a registration statement covering the common stock
      sold
      in the private placement within 30 days of the closing of the Share Exchange
      pursuant to the subscription agreement with each investor. We filed the
      registration statement within that timeframe. The investors in the Private
      Placement also entered into a lock up agreement pursuant to which they agreed
      not to sell their shares until our common stock begins to be traded on either
      the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market,
      NASDAQ Capital Market or the OTC Bulletin Board, after which their shares will
      automatically be released from the lock up on a monthly basis pro rata over
      a
      nine month period. After commissions and expenses, we received net proceeds
      of
      approximately $1.3 million in the Private Placement. WestPark acted as placement
      agent in connection with the Private Placement. 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. Some of the controlling shareholders and control persons
      of WestPark were also, prior to the completion of the Share Exchange,
      controlling shareholders and control persons of our company, including Richard
      Rappaport, who is the Chief Executive Officer of WestPark and was the President
      and a significant shareholder of our company prior to the Share Exchange, and
      Anthony C. Pintsopoulos, who is the Chief Financial Officer of Westpark and
      was
      a controlling stockholder and an officer and director of our company prior
      to
      the Share Exchange. Each of Messrs. Rappaport and Pintsopoulos resigned from
      all
      of their executive and director positions with our company upon the closing
      of
      the Share Exchange.





**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 weighted 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. In connection with opening Bankers' Acceptance Bill,
      we
      have restricted cash in the amount of $474,576. We did not enter into any hedge
      contracts during any of the periods presented.





***Accounts
      Receivable and Allowance for Doubtful Accounts*** - Trade
      accounts receivable and employee advances are carried at original invoiced
      amounts less an allowance for doubtful accounts. The allowance for doubtful
      accounts at December 31, 2006 for trade accounts receivable and employee
      advances was $794,468 and $1,429,426, respectively, and at December 31, 2005,
      was $959,668 and $658,401, respectively.





***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 (Loss) per Share -*** Basic
      and
      diluted earnings (loss) 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 represent
      the effect of potentially issuable shares of common stock. We have warrants
      outstanding that, when exercised, are issuable into 100,000 shares of common
      stock and that could affect diluted earnings (loss) per share. Since our shares
      are not currently traded the shares underlying the warrants have been valued
      at
      $0.90 per share, which is less than the exercise price, and as a result, there
      are no potentially dilutive securities outstanding at December 31,
      2006.




32





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





**Results
      of Operations**





The
      following table set forth key components of our results of operations for the
      periods indicated, both in dollars and as a percentage of revenues for the
      years
      ended December 31, 2006 and 2005.





**Year
                Ended December 31,****2006**
            
            **2005**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**
            
            $
            19,960
            
            
            100
            %
            $
            11,066
            
            
            100
            %**Cost
                of Products Sold**
            
            
            6,400
            
            
            32.07
            %
            
            4,218
            
            
            38.12
            %**Gross
                Profit**
            
            
            13,560
            
            
            67.93
            %
            
            6,848
            
            
            61.88
            %**Operating
                Expenses:**Selling
                expenses
            
            
            5,256
            
            
            26.33
            %
            
            3,158
            
            
            28.54
            %General
                and administrative
            
            
            3,903
            
            
            19.55
            %
            
            869
            
            
            7.85
            %Research
                and development expense
            
            
            28
            
            
            0.14
            %
            
            132
            
            
            1.19
            %**Total
                Operating Expenses**
            
            
            9,187
            
            
            46.03
            %
            
            4,159
            
            
            37.58
            %**Income
                from Operations**
            
            
            4,373
            
            
            21.91
            %
            
            2,689
            
            
            24.30
            %**Other
                Income (Expenses):**Interest
                income
            
            
            7
            
            
            0.04
            %
            
            13
            
            
            0.12
            %Non-operating
                Income
            
            
            105
            
            
            0.53
            %
            
            27
            
            
            0.24
            %Interest
                expense
            
            
            (757
            )
            
            -3.79
            %
            
            (522
            )
            
            -4.72
            %Non-operating
                expenses
            
            
            (7
            )
            
            -0.04
            %
            
            (21
            )
            
            -0.19
            %**Net
                Other Expenses**
            
            
            (652
            )
            
            -3.26
            %
            
            (503
            )
            
            -4.55
            %**Income
                Before Income Taxes**
            
            
            3,721
            
            
            18.64
            %
            
            2,186
            
            
            19.75
            %Provision
                for income taxes
            
            
            (406
            )
            
            -2.03
            %
            
            (445
            )
            
            -4.03
            %Minority
                interest in income of subsidiaries
            
            
            (314
            )
            
            -1.57
            %
            
            (52
            )
            
            -0.47
            %**Net
                Income**
            
            $
            3,001
            
            
            15.04
            %
            $
            1,689
            
            
            15.26
            %**Net
                Income**
            
            $
            3,001
            
            
            15.04
            %
            $
            1,689
            
            
            15.26
            %Foreign
                currency translation adjustment
            
            
            177
            
            
            0.88
            %
            
            47
            
            
            0.42
            %**Comprehensive
                Income**
            
            $
            3,178
            
            
            15.92
            %
            $
            1,736
            
            
            15.68
            %**Basic
                and Diluted Earnings per Common Share**
            
            $
            0.17
            
            
            
            
            $
            0.10**Weighted-average
                Common Shares Outstanding**
            
            
            17,198,308
            
            
            
            
            
            16,227,200





**For
      the Fiscal Years Ended December 31, 2006 and 2005**





***Revenue
      -*** Sales
      of
      products for the fiscal year ended December 31, 2006 was approximately $20.0
      million, an increase of approximately $8.9 million, or 80.4 %, from $11.1
      million for the comparable period ended December 31, 2005. The increase was
      primarily due to increased sales of our primary product, Xuesaitong Soft
      Capsules, which was added to China’s National Medical Insurance List in year
      2005.




33





***Cost
      of Revenue -*** Our
      costs
      of goods sold for the fiscal year ended December 31, 2006 was approximately
      $6.4
      million, an increase of approximately $2.2 million, or 51.7%, from $4.2 million
      for the fiscal year ended December 31, 2005. The increase was primarily as
      a
      result of an increase in our sales revenue. As a percentage of revenue, the
      cost
      of goods sold decreased to 32.07% from the period ended December 31, 2006 from
      38.12% in the corresponding period of year 2005. The slight decrease in cost
      of
      sales was due to the downturn in the price of some raw materials for our major
      products related to medicine reform of China.





***Gross
      Profit -*** Our
      gross
      profit for the fiscal year ended December 31, 2006 was $13.6 million as compared
      with 6.8 million for the period ended December 31, 2005. Gross Profit as a
      percentage of revenues was 67.93% for the period ended December 31, 2006, a
      slight increase of 6.05 % from 61.88% during the corresponding period in year
      2005. The slight increase in gross margin was due to lower raw materials prices
      resulting from higher purchase volumes required to support increased product
      sales. Margins may decrease on a going forward basis due to the highly
      competitive medical industry in China, which continuously experiences new
      product introductions. 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.





***Selling
      Expense -*** Selling
      expenses were approximately $5.3 million for the twelve months ended December
      31, 2006, an increase of $2.1 million, or 66.4%, from $3.2 million for the
      twelve months ended December 31, 2005. Our increase in product sales for the
      twelve months ended December 31, 2006 as compared to the same period in 2005
      caused an increase in freight expenses, traveling expenses, sales commissions,
      and marketing expenses.





***General
      and Administrative Expense -*** General
      and administrative expenses were $3.9 million for the twelve months ended
      December 31, 2006, an increase of $3.0 million, or 349.1%, from $0.87 million
      for the twelve months ended December 31, 2005. The increase primarily resulted
      from legal and professional expenses associated with our share exchange that
      was
      completed in August 2006 and the attendant expenses associated with being a
      public company, in addition to our recent focus on business expansion and
      increased costs related to overhead, vehicle fees, consulting fees and the
      depreciation of fixed assets.





***Research
      and Development Expense -*** There
      were no significant R&D expenses for the fiscal period ended December 31,
      2006 as compared to 0.13 million for the period ended December 31, 2005. The
      change was primarily due to the staggered fulfillment of R&D in the year
      2006. Our company has planned to enhance the development of new product in
      next
      three years for a sustainable growth.





***Net
      Other Expense -*** Net
      other
      expense, which includes interest income, non-operating income, interest expense
      and non-operating expenses, were an expense of $652,000 in the twelve months
      ended December 31, 2006 as compared to an expense of $503,000 in the twelve
      months ended December 31, 2005. The increase in the expense was primarily due
      to
      an increase in interest expense on outstanding loans during the twelve months
      ended December 31, 2006, partially offset by increased non-operating income
      during the same period in respect to government subsidies.





***Provision
      for Income Taxes -*** Provision
      for income taxes was $0.40 million for the twelve months ended December 31,
      2006
      compared with a provision for income tax of $0.45 million for the twelve months
      ended December 31, 2005. As a percentage of revenue, income before income taxes
      and minority interest decreased slightly to 18.6% for the period as of December
      31, 2006 from 19.8% for the period as of December 31, 2005. Generally, we are
      subject to corporate income tax in the PRC at a rate of 30% and a local income
      tax rate of 3%. Since we are located in the Economic and Technological
      Development Zone in the PRC, we are currently subject to a corporate income
      tax
      rate of 15%. In addition, one of our subsidiaries, Shenghuo Medicine Co., LTD,
      will benefit from income tax exemption for 2005 and 2006. The effective tax
      rate
      for the year ended December 31, 2006 was approximately 11% compared with an
      effective tax rate of 20% for the year ended December 31, 2005. The difference
      in the effective tax rates is due to the different tax rates and exemptions
      that
      apply to each of our subsidiaries and the variation in income between these
      subsidiaries. We expect our effective tax rates to increase in future periods
      as
      a result of new tax laws passed in China.





Net
      income increased to $3.0 million for the year ended December 31, 2006 from
      a net
      income of $1.7 million for the year ended December 31, 2005. In the twelve
      months ended December 31, 2006 and the twelve months ended December 31, 2005,
      considering a foreign currency translation adjustment, respectively, of $177,000
      and $47,000, which resulted in respective comprehensive income of $3.2 million
      and $1.7 million for the years ended December 31, 2006 and 2005,
      respectively.




34





**Liquidity
      and Capital Resources**





***General
      -*** At
      December 31, 2006, we had cash and cash equivalents of $3,691,438, compared
      to
      that of $1,104,043 as of December 31, 2005.





We
      have
      historically financed our business operations through bank loans, mostly prior
      to August 2006.We have borrowed from banks and other institutions and have
      approximately $12.8 million in short-term notes payable as of December 31,
      2006
      against that of $9.4 million during the period ended December 31, 2005. The
      single payment notes have been with interest rates ranging from 5.76% to 6.34%
      per annum. In addition to the payment of $1.2 million of the short-term debt
      due
      on September 29, 2006, the loan of $2.5 million from the Shuanglong Branch
      of
      Kunming Agriculture Bank borrowed on August 29, 2006 has been paid off as of
      December 31, 2006. We have also borrowed funds from related parties, including
      officers. As of December 31, 2006, we had payables of approximately $393,213
      to
      related parties. These amounts are due on demand and do not accrue interest.
      In
      order to meet the cash flow requirements of our short-term debt, we intend
      to
      borrow from banks when the debts are due by rolling forward each specific note
      with similar notes payable for each respective note, leaving no cash shortage,
      but we will have to pay interest on the borrowed funds. Any cash flow shortage
      due to interest on notes payable the Company expects to be able to satisfy
      with
      collections on accounts receivable or additional capital contributions. Our
      long
      term debt is comprised of single payment notes with interest rates ranging
      from
      5.76% to 6.34% per annum.





On
      August
      31, 2006, concurrently with the close of the Share Exchange, we received gross
      proceeds of $1.8 million (less costs of approximately $535,304) in a private
      placement transaction (the “Private Placement”).





The
      following table provides detailed information about net cash flow for years
      ended December 31, 2005 and 2006.





**Cash
                Flow****Years
                ended December 31,****2006**
            
            **2005*****(in
                thousands)***Net
                cash provided by (used in) operating activities
            
            $
            1,500
            
            $
            —Net
                cash provided by (used in) investing activities
            
            $
            (314
            )
            $
            (1,899
            )Net
                cash provided by (used in) financing activities
            
            $
            1,170
            
            $
            2,282**Cash
                and Cash Equivalents at End of Period**
            
            $
            3,691
            
            $
            1,104





***Operating
      Activities -*** Net
      cash
      provided by operating activities for the twelve months ended December 31, 2006
      was $1.5 million, as compared to net cash of $102 provided for the same period
      in 2005. The change is primarily the result of increases in cash flows related
      to deposits and accrued expenses in addition to the increase in inventory the
      year ended December 31, 2006, partially offset by the decreases related to
      net
      account receivables and account payables.





***Investing
      Activities -*** Net
      cash
      used in investing activities was $0.3 million for the fiscal year ended December
      31, 2006 compared to net cash used of $1.9 million for the year ended December
      31, 2005. The change was primarily a result of an increase in use of funds
      related to receivable from related parties, acquisition of land use and capital
      expenditures during 2005.





***Financing
      Activities -*** Net cash
      provided by financing activities was $1.2 million for the year ended December
      31, 2006 compared to $2.3 million for the same period in 2005. The decrease
      is
      cash provided was primarily a result of changes in cash flows related to a
      decrease in proceeds from short-term loans, though there was an increase in
      payment on short-term loans in addition to the net increase resulting from
      issuance of stock for cash during the fiscal period as of December 31,
      2006.





At
      December 31, 2006, we had no material commitments for capital expenditures
      other
      than for those expenditures incurred in the ordinary course of
      business.





As
      of
      December 31, 2006, our accounts receivable (less allowance for doubtful accounts
      of $0.79 million) were $9.9 million, an increase of $7.6 million, or 323.3%,
      over accounts receivable of $2.3 million as of December 31, 2005. The increase
      in accounts receivable reflected the increase in sales. Because the collection
      period typically runs from three months to one year, the increase in accounts
      receivable reflects not only the increase in sales but also the long collection
      period. Since our company normally requires one to two months to receive
      products we order, we have in the past been increasing our inventories in order
      to enable us to meet anticipated increases in sales. One reason we anticipate
      an
      increase in future sales is that for 2007, we have adjusted our sales strategy
      mainly in the areas of expanding our sales scope for OTC (over-the-counter)
      products and strengthening our supervision of salespeople. To this end, we
      intend to establish an internal OTC Department and will carry out uniform
      management of our OTC market around China, rather than having each one of our
      provincial offices control their own OTC market, as we had done before. As
      a
      result, we believe that we will experience an increase in sale as related to
      anticipated growth in sales in the OTC market. There is no guarantee that we
      will experience such growth. In addition, 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. A significant portion of our current assets are
      now
      contained in accounts receivable as we have paid our suppliers more rapidly
      than
      we have received payments from our customers.




35





Our
      customers generally are given 60-day or six-month payment terms. Customers
      who
      have a good relationship with us are granted terms of six months. As we now
      have
      more customers that have established a good relationship with us, more of our
      sales are being made under six-month payment terms. For this reason and also
      because sales have increased, the balance of our accounts receivable has
      increased over prior periods. We have not granted payment terms of longer than
      six months to any customers. However, we do not vigorously collect or pursue
      legal action for some customers until after one year from the date of sale.
      In
      addition, we require our customers to pay a certain percentage of the sales
      price as deposit before we ship products to the customers. The percentage varies
      from customer to customer. During the course of business, we reduce the deposit
      requirement for some customers with good credit. 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.





In
      addition, in the course of our business, we must make significant deposits
      to
      our suppliers when we place an order. As of December 31, 2006, our advance
      payments to our suppliers totaled approximately $46,620. We believe that our
      available funds and cash generated from operations will provide us with
      sufficient capital for at least following 12 months; however, we may require
      additional capital for the acquisition or for the operation of the combined
      companies. As of the date of this annual report, we have no material commitments
      for capital expenditures. We cannot assure that such funding will be
      available.





**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. Sales
      in
      the fourth quarter are usually higher.





**Off-Balance
      Sheet Arrangements**





None.





**Legal
      Proceedings**





In
      2003,
      we were sued by a former employee for allegedly violating his contract and
      the
      courts entered a judgment in favor of the employee in 2003 for $128,978, which
      included litigation costs. We accrued the liability for this loss at December
      31, 2003 and paid the amount of the judgment to the employee on April 27, 2004.
      In 2006, the plaintiff asked the court to force us to pay a penalty in the
      amount of $100,000 for not paying the judgment in a timely manner. During the
      court’s review of the request for the penalty, the court froze a bank account of
      ours that held $105,284. The court has rejected the employee’s claim and the
      bank account has been unfrozen. The employee has now asserted claims against
      us
      for allegedly ruining the employee’s reputation and causing mental anguish. No
      amount has been recorded on our books in connection with this claim as we
      believe that no information suggests that it is probable a liability has been
      incurred and the amount of loss as a result of this litigation cannot yet be
      reasonably estimated.





**Change
      in Accountants**





As
      previously reported on our Current Report on Form 8-K, dated September 1, 2006,
      effective as of August 31, 2006 and following the change in control of our
      company on the closing of the Share Exchange, the board of directors accepted
      the resignation of AJ. Robbins, PC (“AJ. Robbins”) as our independent registered
      public accounting firm and approved the engagement of Hansen, Barnett &
Maxwell, PC as our independent registered public accounting firm as of August
      31, 2006. Hansen, Barnett & Maxwell, PC served as Shenghuo China’s
      independent registered certified public accountants for the fiscal year ended
      December 31, 2005.




36





**Recently
      Enacted Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
      Financial Instruments — an amendment of FASB Statements No. 133 and 140 (SFAS
      155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and
      Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing
      of
      Financial Assets and Extinguishments of Liabilities, and related
      interpretations. SFAS 155 permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation and clarifies which interest-only strips and principal-only
      strips are not subject to recognition as liabilities. SFAS 155 eliminates the
      prohibition on a qualifying special-purpose entity from holding a derivative
      financial instrument that pertains to a beneficial interest other than another
      derivative financial instrument. SFAS 155 is effective for our company for
      all
      financial instruments acquired or issued beginning January 1, 2007. The impact
      of adoption of this statement on the Company’s consolidated financial
      statements, if any, has not yet been determined.





In
      March
      2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
      - an amendment of FASB Statement No. 140 (SFAS 140). SFAS 156 amends SFAS 140
      Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities and related interpretations. SFAS 156 requires an entity to
      recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset. It also requires all separately
      recognized servicing assets and servicing liabilities to be initially measured
      at fair value, if practicable. SFAS 156 permits an entity to use either the
      amortization method or the fair value measurement method for each class of
      separately recognized servicing assets and servicing liabilities. SFAS 156
      is
      effective for our company as of January 1, 2007. The impact of adoption of
      this
      statement on our consolidated financial statements, if any, has not yet been
      determined.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS No.
      109,
“Accounting for Income Taxes.” Specifically, FIN-48 prescribes a recognition
      threshold and a measurement attribute for the financial statement recognition
      and measurement of a tax position taken or expected to be taken. The provisions
      of FIN-48 are effective for financial statements for fiscal years beginning
      after December 15, 2006. Accordingly, the Company is to adopt FIN-48 on January
      1, 2007. The adoption of FIN-48 is not expected to have a material effect on
      the
      Company’s financial position or results of operations.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry
      price).





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods.




37




SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the impact of
      this statement on its results of operations or financial position of the
      Company.





In
      September 2006, the Securities Exchange Commission issued Staff Accounting
      Bulletin No. 108 (“SAB No. 108”). SAB No. 108 addresses how the effects of prior
      year uncorrected misstatements should be considered when quantifying
      misstatements in current year financial statements. SAB No. 108 requires
      companies to quantify misstatements using a balance sheet and income statement
      approach and to evaluate whether either approach results in quantifying an
      error
      that is material in light of relevant quantitative and qualitative factors.
      When
      the effect of initial adoption is material, companies will record the effect
      as
      a cumulative effect adjustment to beginning of year retained earnings and
      disclose the nature and amount of each individual error being corrected in
      the
      cumulative adjustment. SAB No. 108 will be effective beginning January 1, 2007
      and it is anticipated that the initial adoption of SAB No. 108 will not have
      a
      material impact on the Company’s financial statements.





In
      September 2006, the FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans (an
      amendment of FASB Statements No. 87, 88, 106, and 132R)* ,
      which
      will require employers to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare and other
      postretirement plans in their financial statements. Under past accounting
      standards, the funded status of an employer’s postretirement benefit plan (i.e.,
      the difference between the plan assets and obligations) was not always
      completely reported in the balance sheet. Past standards only required an
      employer to disclose the complete funded status of its plans in the notes to
      the
      financial statements. SFAS No. 158 applies to plan sponsors that are public
      and
      private companies and nongovernmental not-for-profit organizations. The
      requirement to recognize the funded status of a benefit plan and the disclosure
      requirements are effective as of the end of the fiscal year ending after
      December 15, 2006, for entities with publicly traded equity securities, and
      at
      the end of the fiscal year ending after June 15, 2007, for all other entities.
      The requirement to measure plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The Company does not expect that
      the adoption of SFAS No. 158 will have a significant impact on the consolidated
      results of operations or financial position of the Company.





In
      February, 2007 the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115,* which
      permits companies to choose to measure many financial instruments and certain
      other items at fair value. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007 and interim periods within those fiscal years. The
      Company does not expect SFAS 159 to have a material impact on its results of
      operation or financial position.





**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 of this Form
      10-KSB.




38




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





None.





**ITEM
              8A.**
            **CONTROLS
                AND PROCEDURES**





**(a)** **Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 2006, our Chief Executive Officer (CEO) and our Chief
      Financial Officer (CFO) performed an evaluation of the effectiveness of and
      the
      operation of our disclosure controls and procedures as defined in Rule
      13a-15 (e)
      or Rule
      15d-15 (e)
      under
      the Exchange Act. Based on that evaluation, our CEO concluded that our
      disclosure controls and procedure as of December 31, 2006 had significant
      deficiencies that caused our controls and procedures to be ineffective. These
      deficiencies consisted of inadequate staffing and supervision that could lead
      to
      the untimely identification and resolution of accounting and disclosure matters
      and failure to perform timely and effective reviews. In addition, there are
      deficiencies in the recording and classification of accounting transactions
      and
      a lack of personnel with expertise in US generally accepted accounting
      principles and US Securities and Exchange Commission rules and
      regulations.




We
      are in
      the process of improving our controls and procedures in an effort to remediate
      these deficiencies through improving supervision, education, and training of
      our
      accounting staff. Management may also seek additional qualified in house or
      third-party accounting personnel to ensure that management will have adequate
      resources in order to attain complete reporting of financial information
      disclosures in a timely matter. We believe that the remedial steps that we
      take
      will address the conditions identified by our CEO as significant deficiencies
      in
      our disclosure controls and procedures. Additional effort is needed to fully
      remedy these deficiencies and we are continuing our efforts to improve and
      strengthen our control processes and procedures. Our CEO believes that there
      are
      no material inaccuracies, or omissions of material facts necessary to make
      the
      statements not misleading in light of the circumstances in which they were
      made,
      in this Form 10-KSB.




**(b)** **Changes
      in Internal Control Over Financial Reporting**




There
      have been no changes in our internal control over financial reporting identified
      in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d)
      under the Exchange Act that occurred during the quarter ended December 31,
      2006 that has materially affected, or is reasonably likely to materially affect,
      our internal control over financial reporting.





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





None.





**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
            
            PositionGui
                Hua Lan
            
            64
            
            Chief
                Executive Officer and Chairman of the BoardFeng
                Lan
            
            34
            
            President
                and DirectorLei
                Lan
            
            32
            
            Executive
                Director of Sales and DirectorQiong
                Hua Gao
            
            40
            
            Chief
                Financial OfficerPeng
                Chen
            
            32
            
            Chief
                Technological OfficerZheng
                Yi Wang
            
            61
            
            Executive
                Director of Exports, Corporate Secretary and
                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 Biologicial Resources
      Development Corp., Ltd., a pharmaceutical research company in China, and
      President and Chairman of Lan’s Int’l 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.




39




***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 Int’l
      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 a Director since November
      2004. 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.





***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 Biologicial
      Resources Development Corp., Ltd., a pharmaceutical research company, and a
      director of Lan’s Int’l 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.




40





**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.





**The
      Board of Directors and Committees**





Our
      Board
      of Directors does not maintain a separate audit, nominating or compensation
      committee. Functions customarily performed by such committees are performed
      by
      our Board of Directors as a whole. We are not required to maintain such
      committees under the rules applicable to companies that do not have securities
      listed or quoted on a national
      securities exchange or national quotation system. We
      intend
      to create board committees, including an independent audit committee, in the
      near future. If we are successful in listing our common stock on the American
      Stock Exchange (AMEX), we would be required, prior to listing, to maintain
      a
      board of directors comprised of at least 50% independent directors and to have
      an independent audit committee formed, in compliance with the requirements
      for
      listing on AMEX and in compliance with Rule 10A-3 of the Securities Exchange
      Act
      of 1934. Although none of our directors is currently an “independent director”
as that term is defined in the AMEX Company Guide, we intend to
      comply with the applicable AMEX independence listing requirements in the
      near future, prior to listing on AMEX.





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





Our
      securities are currently registered under Section 12 of the Securities Exchange
      Act of 1934, as amended. As a result, and pursuant to Rule 16a-2, our directors
      and officers and holders of 10% or more of our common stock are currently
      required to file statements of beneficial ownership with regards to their
      ownership of equity securities under Sections 13 or 16 of the Exchange Act.
      O ur
      current officers, directors and beneficial holders of 10% or more of our equity
      securities became subject to such requirement and to date, b ased
      solely upon a review of Forms 3, 4, and 5 and any amendments thereto furnished
      to us during our most recent fiscal year, none of our officers or directors
      has
      failed to file on a timely basis, as disclosed in the above forms, reports
      required by Section 16(a) of the Exchange Act during the most recent fiscal
      year
      except for the Form 3   for
      Peng
      Chen that was not filed timely.





**Code
      of Ethics.**





Subsequent
      to the Share Exchange in August 2006, we have not yet adopted a code of business
      conduct and ethics that applies to our principal executive officer, principal
      financial officer, principal accounting officer or controller, or persons
      performing similar functions. We intend to adopt a code in the near future.





**ITEM
              10.**
            **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, 2006 (collectively, the “Named Executive Officers”).





Annual
                CompensationName
                and Position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Total($)Gui
                Hua Lan
            
            
            2006
            
            $
            7,656
            
            $
            1,531
            
            $
            9,187Chief
                Executive Officer and
            
            
            2005
            
            $
            6,758
            
            $
            2,785
            
            $
            9,543Chairman
                of the BoardRichard
                Rappaport(1)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —Former
                President and Director
            
            
            2005
            
            
            —
            
            
            —
            
            
            —








(1)
      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 2006**





There
      were no option grants in 2006.




41





**Outstanding
      Equity Awards at 2006 Fiscal Year-End**




There
      were no option exercises or options outstanding in 2006.




**Option
      Exercises and Stock Vested in Fiscal 2006**




There
      were no option exercises or stock vested in 2006.





**Employment
      Agreements**





Each
      of
      Gui Hua Lan, Feng Lan, Qiong Hua Gao, Lei Lan, Peng Chen and Zheng Y. 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 $7,753, $6,340,
      $5,024, $4,733, $5,165, and $5,516, respectively. None of the agreements provide
      for severance upon termination.





**Director
      Compensation**





Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)All
                Directors (total of 4 persons)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





For
      the
      year ended December 31, 2006, none of the members of our Board of Directors
      received compensation for his or her service as a director. We do not currently
      have an established policy to provide compensation to members of our Board
      of
      Directors for their services in that capacity. We intend to develop such a
      policy in the near future.





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




Beneficial
      ownership is determined in accordance with the rules of the SEC. 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 19,119,400 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.




42





**Name
                and Address**
              **of
                Beneficial Owner**
            
            **Title**
            
            **Beneficially
                Owned**
            
            **Percent
                of Class Beneficially Owned*****Directors
                and Executive Officers***Gui
                Hua Lan
            
            
            Chief
                Executive Officer and
              Chairman
                of the Board
            
            
            15,213,000
            (1)
            
            79.6
            %Feng
                Lan
            
            
            President
                and Director
            
            
            15,213,000
            (1)
            
            79.6Qiong
                Hua Gao
            
            
            Chief
                Financial Officer
            
            
            —
            (2)
            
            —Lei
                Lan
            
            
            Executive
                Director of Sales
              and
                Director
            
            
            —
            (2)
            
            —Peng
                Chen
            
            
            Chief
                Technological Officer
            
            
            15,213,000(3
            )
            
            79.6Zheng
                Yi Wang
            
            
            Executive
                Director of Exports,
              Corporate
                Secretary and Director
            
            
            15,213,000
            (1)
            
            79.6Officers
                and Directors as a Group (total of 6 persons)
            
            
            
            
            
            15,213,000
            (1)
            
            79.6***5%
                or more Stockholders***Lan’s
                Int’l Medicine Investment Co., Limited
            
            
            
            
            
            15,213,000
            (1)
            
            79.6







(1)
            Represents
                shares of common stock in the Company held by Lan’s Int’l Medicine
                Investment Co., Limited, a Hong Kong corporation (“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 owns 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.





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




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





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





**August
      2006 Share Exchange**





In
      August
      2006, we completed the Share Exchange with Shenghuo China. Shenghuo China’s
      93.75% shareholder, Lan’s
      Int’l Medicine Investment Co., Limited (“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 a Director, 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.




43





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





Westpark
      Capital, Inc. acted as the placement agent for the Private Placement, 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 Rapparport, 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.





**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 Lan’s Int’l
      Medicine Investment Co., Ltd., a company formed under the laws of Hong Kong
      (“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 Transaction, which was completed
      on
      August 31, 2006.





**Loans
      to and from Insiders**





In
      the
      past, we have made loans to our officers. As of December 31, 2006 and 2005
      the
      Company had receivables due from officers in the amount of $nil and $60,462,
      respectively. All amounts due were paid prior to completion of the transactions
      contemplated by the Share Exchange Agreement. As of December 31, 2006 and 2005,
      we had loan receivables due from our parent company in the amount of $nil and
      $118,000, respectively. There was no interest rate or terms for repayment
      associated with any of these loans. Also at December 31, 2006, we had payables
      due to officers in the amount of $288,463 and due to our former parent company
      in the amount of $104,750. At December 31, 2006 the amounts payable to officers
      and to the parent company were $288,463 and $nil, respectively. These amounts
      were due on demand and do not accrue interest.




44





**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.




Director
      Independence




See “Item 9. Directors, Executive Officers, Promoters and
      Control Persons; Compliance with Section 16(a) of the Exchange Act” for a
      discussion of board member independence.





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




**Exhibit
                Number**
            
            **Description
                of Exhibit**2.1
            
            Share
                Exchange Agreement, dated as of June 30, 2006, by and among the
                Registrant, Kunming Shenghuo Pharmaceutical (Group) Co., Ltd., and
                Lan’s
                Int’l 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 Registrant, Kunming Shenghuo Pharmaceutical (Group) Co.,
                Ltd.,
                and Lan’s Int’l Medicine Investment Co., Limited (incorporated by
                referenced from Exhibit 2.1(a) to Amendment No. 1 to the Registration
                Statement on Form SB-2 (File No. 333-137689) filed with the Securities
                and
                Exchange Commission on December 20, 2006).2.1(b)
            
            Amendment
                No. 2 to the Share Exchange Agreement, dated as of August 28, 2006,
                by and
                among the Registrant, Kunming Shenghuo Pharmaceutical (Group) Co.,
                Ltd.,
                and Lan’s Int’l 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 Registrant (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 Registrant (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
                Registrant (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 betweenFeng
                Lanand the Registrant (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 Registrant
                (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
                Registrant (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 betweenPeng
                Chenand the Registrant (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).




45




10.7
            
            Employment
                Agreement dated December 3, 2004 by and betweenZheng
                Yi Wangand the Registrant (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 Registrant and Beijing University Shijia Research Center
                (translated to English) (incorporated by referenced from Exhibit
                10.8 to
                Amendment No. 1 to the Registration Statement on Form SB-2 (File
                No.
                333-137689) filed with the Securities and Exchange Commission on
                December
                20, 2006).10.9
            
            Joint
                Venture Agreement for Kunming Shenghuo Pharmaceutical Group Co.,
                Ltd.
                dated May 22, 2006 entered into by and between Lan’s Int’l Medicine
                Investment Co., Limited and SDIC Venture Capital Investment, Co.,
                Ltd.
                (translated to English) (incorporated by referenced from Exhibit
                10.9 to
                Amendment No. 1 to the Registration Statement on Form SB-2 (File
                No.
                333-137689) filed with the Securities and Exchange Commission on
                December
                20, 2006).10.10
            
            Form
                of Lock Up Agreement for Investors in the August 2006 Private Placement
                (incorporated by referenced from Exhibit 10.10 to Amendment No. 1
                to the
                Registration Statement on Form SB-2 (File No. 333-137689) filed with
                the
                Securities and Exchange Commission on December 20,
                2006).16.1
            
            Letter
                from AJ. Robbins, PC to the Securities and Exchange Commission dated
                September 1, 2006 (incorporated by reference from Exhibit 16.1 to
                Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                September 1, 2006).21.1
            
            List
                of Subsidiaries.31.1
            
            Certification
                of the Chief Executive Officer pursuant Securities Exchange Act Rule
                13a-14(a).31.2
            
            Certification
                of the Chief Financial Officer pursuant Securities Exchange Act Rule
                13a-14(a).32.1*
            
            Certification
                pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes Oxley Act of 2002.







*  This
      exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
      Exchange Act of 1934 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 or the Securities Exchange Act of 1934, whether made
      before or after the date hereof and irrespective of any general incorporation
      language in any filings.





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





During
      the fiscal years ended December 31, 2006 and 2005, we retained Hansen,
      Barnett & Maxwell, PC to provide services as follows:





**Fees
                for the Year Ended December 31****Services**
            
            **2006**
            
            **2005**Audit
                fees(1)
            
            $
            182,700
            
            $
            150,500Audit-related
                fees
            
            
            —
            
            
            —Tax
                fees
            
            
            —
            
            
            —All
                other fees
            
            
            —
            
            
            —Total
                audit and non-audit fees
            
            $
            182,700
            
            $
            150,500







(1)
            These
                are fees for professional services performed by Hansen, Barnett &
                Maxwell, PC for the audit of our annual financial statements, review
                of
                our quarterly reports, and review of our Registration Statement on
                Form SB-2 and amendments
                thereto.





**Pre-Approval
      Policy**





We
      do not
      maintain an audit committee. Our Board as a whole pre-approves all services
      provided by Hansen,
      Barnett & Maxwell, PC and
      has
      concluded that such services are compatible with Hansen,
      Barnett & Maxwell, PC 's
      independence as our auditors.





46


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, in the Province of Yunnan, People’s
      Republic of China, on the date indicated.






CHINA
                SHENGHUO PHARMACEUTICAL HOLDINGS, INC.Date:
                April 17, 2007
            
            /s/
                Gui Hua LanGui
                Hua Lan,
              Chief
                Executive Officer and Chairman of the Board(Principal
                Executive Officer)




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




Date:
                April 17, 2007
            
            /s/
                Gui Hua LanGui
                Hua Lan,
              Chief
                Executive Officer and Chairman of the Board
              (Principal
                Executive Officer)


Date:
                  April 17, 2007
              
              /s/
                  Qiong Hua GaoQiong
                  Hua Gao,
                Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)
 Date:
                    April 17, 2007
                
                /s/
                    Feng LanFeng
                    Lan,
                  President
                    and Director
 Date:
                        April 17, 2007
                    
                    /s/
                        Lei LanLei
                        Lan,
                      Executive
                        Director of Sales and Director
 Date:
                            April 17, 2007
                        
                        /s/
                            Zheng Yi WangZheng
                            Yi Wang,
                          Executive
                            Director of Exports, Corporate Secretary and
                            Director
 47




**EXHIBIT
      INDEX**





**Exhibit
                Number**
            
            **Description
                of Exhibit**2.1
            
            Share
                Exchange Agreement, dated as of June 30, 2006, by and among the
                Registrant, Kunming Shenghuo Pharmaceutical (Group) Co., Ltd., and
                Lan’s
                Int’l 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 Registrant, Kunming Shenghuo Pharmaceutical (Group) Co.,
                Ltd.,
                and Lan’s Int’l Medicine Investment Co., Limited (incorporated by
                referenced from Exhibit 2.1(a) to Amendment No. 1 to the Registration
                Statement on Form SB-2 (File No. 333-137689) filed with the Securities
                and
                Exchange Commission on December 20, 2006).2.1(b)
            
            Amendment
                No. 2 to the Share Exchange Agreement, dated as of August 28, 2006,
                by and
                among the Registrant, Kunming Shenghuo Pharmaceutical (Group) Co.,
                Ltd.,
                and Lan’s Int’l 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 Registrant (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 Registrant (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
                Registrant (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 betweenFeng
                Lanand the Registrant (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 Registrant
                (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
                Registrant (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 betweenPeng
                Chenand the Registrant (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 betweenZheng
                Yi Wangand the Registrant (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).




48




10.8
            
            Joint
                Establishment Agreement of Kunming Beisheng Science & Technology
                Development Co., Ltd. dated January 1, 2006 entered into by and
                between the Registrant and Beijing University Shijia Research Center
                (translated to English) (incorporated by referenced from Exhibit
                10.8 to
                Amendment No. 1 to the Registration Statement on Form SB-2 (File
                No.
                333-137689) filed with the Securities and Exchange Commission on
                December
                20, 2006).10.9
            
            Joint
                Venture Agreement for Kunming Shenghuo Pharmaceutical Group Co.,
                Ltd.
                dated May 22, 2006 entered into by and between Lan’s Int’l Medicine
                Investment Co., Limited and SDIC Venture Capital Investment, Co.,
                Ltd.
                (translated to English) (incorporated by referenced from Exhibit
                10.9 to
                Amendment No. 1 to the Registration Statement on Form SB-2 (File
                No.
                333-137689) filed with the Securities and Exchange Commission on
                December
                20, 2006).10.10
            
            Form
                of Lock Up Agreement for Investors in the August 2006 Private Placement
                (incorporated by referenced from Exhibit 10.10 to Amendment No. 1
                to the
                Registration Statement on Form SB-2 (File No. 333-137689) filed with
                the
                Securities and Exchange Commission on December 20,
                2006).16.1
            
            Letter
                from AJ. Robbins, PC to the Securities and Exchange Commission dated
                September 1, 2006 (incorporated by reference from Exhibit 16.1 to
                Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                September 1, 2006).21.1
            
            List
                of Subsidiaries.31.1
            
            Certification
                of the Chief Executive Officer pursuant Securities Exchange Act Rule
                13a-14(a).31.2
            
            Certification
                of the Chief Financial Officer pursuant Securities Exchange Act Rule
                13a-14(a).32.1*
            
            Certification
                pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes Oxley Act of 2002.







*  This
      exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
      Exchange Act of 1934 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 or the Securities Exchange Act of 1934, whether made
      before or after the date hereof and irrespective of any general incorporation
      language in any filings.





49




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**AND
      SUBSIDIARIES**




**TABLE
      OF CONTENTS**





Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            
            F-3Consolidated
                Statements of Operations and Comprehensive Income for the Years Ended
                December 31, 2006 and 2005
            
            F-4Consolidated
                Statements of Stockholders’ Equity for the Years Ended December 31, 2005
                and 2006
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005
            
            F-6Notes
                to the Consolidated Financial Statements
            
            F-8




F-1




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




**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, 2006 and
      2005,
      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. An audit 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, 2006 and
      2005
      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.





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








Salt
      Lake
      City, Utah





April
      14,
      2007





F-2





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,****2006**
            
            **2005****ASSETS:****Current
                Assets:**Cash
                and cash equivalents
            
            $
            3,691,438
            
            $
            1,104,043Restricted
                cash
            
            
            474,576
            
            
            384,395Accounts
                receivable, less allowance for doubtful accounts of
                $794,468and
                $959,668 at December 31, 2006 and 2005, respectively
            
            
            9,907,184
            
            
            2,340,346Employee
                advances, less allowance for doubtful accounts of
                $1,429,426and
                $658,401 at December 31, 2006 and 2005, respectively
            
            
            3,130,045
            
            
            1,976,868Advances
                to suppliers
            
            
            46,620
            
            
            84,434Inventory,
                net of reserve for obsolescence of $111,128 and $0at
                December 31, 2006 and 2005, respectively
            
            
            2,581,519
            
            
            4,305,377Receivable
                from related parties
            
            
            76,751
            
            
            178,133Other
                current assets
            
            
            17,454
            
            
            56,062**Total
                Current Assets**
            
            
            **19,925,587**
            
            
            **10,429,658**Property,
                plant and equipment, net of accumulated depreciation of$3,333,305
                and $2,606,685 at December 31, 2006 and 2005, respectively
            
            
            7,554,747
            
            
            8,161,847Intangible
                assets, net of accumulated amortization of $22,569and
                $0 at December 31, 2006 and 2005, respectively
            
            
            624,426
            
            
            638,693Deferred
                income taxes
            
            
            655,223
            
            
            368,247**TOTAL
                ASSETS**
            
            $
            **28,759,983**
            
            $
            **19,598,445****LIABILITIES
                AND STOCKHOLDERS' EQUITY:****Current
                Liabilities:**Accounts
                payable
            
            $
            764,636
            
            $
            946,216Accrued
                Expenses
            
            
            1,966,822
            
            
            930,057Deposits
            
            
            1,573,426
            
            
            946,319Payable
                to related parties
            
            
            393,213
            
            
            585,394Short-term
                notes payable
            
            
            12,758,426
            
            
            9,426,457Advances
                from customers
            
            
            342,531
            
            
            246,382Taxes
                and related payables
            
            
            3,057,471
            
            
            1,065,030Unearned
                revenue
            
            
            -
            
            
            201,516Current
                portion of long-term debt
            
            
            -
            
            
            272,295**Total
                Current Liabilities**
            
            
            **20,856,525**
            
            
            **14,619,666****Long-Term
                Debt**
            
            
            **-**
            
            
            **2,477,278****Total
                Liabilities**
            
            
            **20,856,525**
            
            
            **17,096,944****Minority
                Interest**
            
            
            **385,067**
            
            
            **331,451****Stockholders'
                Equity:**Preferred
                stock, $0.0001 par value, 10,000,000 shares authorized, 0
                sharesoutstanding
                at December 31, 2006 and 2005, respectively
            
            
            -
            
            
            -Common
                stock, $0.0001 par value, 100,000,000 shares authorized,
                19,119,400and
                16,227,200 shares outstanding at December 31, 2006 and 2005,
                respectively
            
            
            1,912
            
            
            1,626Additional
                paid-in capital
            
            
            4,829,633
            
            
            2,659,134Statutory
                reserves
            
            
            147,023
            
            
            147,023Retained
                earnings (deficit)
            
            
            2,318,950
            
            
            (682,546
            )Other
                comprehensive income, foreign currency translation
            
            
            220,873
            
            
            44,813**Total
                Stockholders' Equity**
            
            
            **7,518,391**
            
            
            **2,170,050****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            **28,759,983**
            
            $
            **19,598,445**





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




F-3


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**
 
 **For
                  the Years Ended****December
                  31,****2006**
              
              **2005****Sale
                  of Products**
              
              $
              19,959,971
              
              $
              11,066,783**Cost
                  of Products Sold**
              
              
              6,400,234
              
              
              4,218,341**Gross
                  Profit**
              
              
              13,559,737
              
              
              6,848,442**Operating
                  Expenses:**Selling
                  expense
              
              
              5,255,907
              
              
              3,158,503General
                  and administrative expense
              
              
              3,903,287
              
              
              868,582Research
                  and development expense
              
              
              28,001
              
              
              132,282**Total
                  Operating Expenses**
              
              
              9,187,195
              
              
              4,159,367**Income
                  from Operations**
              
              
              4,372,542
              
              
              2,689,075**Other
                  Income (Expense):**Interest
                  income
              
              
              7,791
              
              
              13,436Non-operating
                  income
              
              
              105,053
              
              
              26,654Interest
                  expense
              
              
              (757,432
              )
              
              (522,530
              )Non-operating
                  expenses
              
              
              (6,932
              )
              
              (20,843
              )**Net
                  Other Expense**
              
              
              (651,520
              )
              
              (503,283
              )**Income
                  Before Income Taxes**
              
              
              3,721,022
              
              
              2,185,792Provision
                  for income taxes
              
              
              (406,082
              )
              
              (445,467
              )Minority
                  interest in income of subsidiaries
              
              
              (313,444
              )
              
              (51,626
              )**Net
                  Income**
              
              $
              3,001,496
              
              $
              1,688,699**Net
                  Income**
              
              $
              3,001,496
              
              $
              1,688,699Foreign
                  currency translation adjustment
              
              
              176,060
              
              
              46,865**Comprehensive
                  Income**
              
              $
              3,177,556
              
              $
              1,735,564**Basic
                  and Diluted Earnings Per Share**
              
              $
              0.17
              
              $
              0.10**Weighted-Average
                  Shares Outstanding**
              
              
              17,198,308
              
              
              16,227,200
 The
        accompanying notes are an integral part of
        these consolidated financial statements




F-4





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005 AND 2006**


**Common
                Stock**
            
            **Additional
                Paid-in**
            
            **Statutory**
            
            **Retained
                Earnings**
            
            **Accumulated
                Other Comprehensive**
            
            **Total**
              **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Reserves**
            
            **(Deficit)**
            
            **Income
                (Loss)**
            
            **Equity****Balance,
                December 31, 2004**
            
            
            16,227,200
            
            $
            1,626
            
            $
            2,659,134
            
            $
            82,857
            
            $
            (2,307,079
            )
            $
            (2,052
            )
            $
            434,486Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            64,166
            
            
            1,624,533
            
            
            -
            
            
            1,688,699Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            46,865
            
            
            46,865**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, netof
                offering costs
            
            
            2,000,000
            
            
            200
            
            
            1,264,496
            
            
            -
            
            
            -
            
            
            -
            
            
            1,264,696Issuance
                to shell company shareholders
            
            
            664,000
            
            
            66
            
            
            (66
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income for 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
            
            $
            7,518,391


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





F-5





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For
                the Years Ended****December
                31,****2006**
            
            **2005****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            3,001,496
            
            $
            1,688,699Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            660,632
            
            
            585,307Deferred
                income taxes
            
            
            (269,261
            )
            
            10,876Minority
                interest in income of subsidiaries
            
            
            313,444
            
            
            51,626Stock
                issued for services
            
            
            1,118,161
            
            
            -Warrants
                issued for services
            
            
            11,240
            
            
            -Change
                in current assets and liabilities:Accounts
                receivable
            
            
            (7,335,970
            )
            
            (933,769
            )Employee
                advances
            
            
            (1,066,054
            )
            
            670,892Advances
                to suppliers
            
            
            39,742
            
            
            7,100Inventory
            
            
            1,826,375
            
            
            (446,130
            )Other
                current assets
            
            
            39,610
            
            
            (22,525
            )Accounts
                payable
            
            
            (208,173
            )
            
            450,836Deposits
                and accrued expenses
            
            
            1,569,452
            
            
            275,044Advances
                from customers
            
            
            86,270
            
            
            (2,979,234
            )Unearned
                revenue
            
            
            (203,826
            )
            
            86,909Taxes
                and related payables
            
            
            1,917,263
            
            
            554,471**Net
                Cash Provided by Operating Activities**
            
            
            1,500,401
            
            
            102**Cash
                Flows from Investing Activities:**Receivable
                from related parties
            
            
            (37,795
            )
            
            (129,216
            )Restricted
                cash
            
            
            (76,001
            )
            
            (384,395
            )Capital
                expenditures
            
            
            (180,737
            )
            
            (757,432
            )Acquisition
                of land use rights
            
            
            (20,295
            )
            
            (627,797
            )**Net
                Cash Used in Investing Activities**
            
            
            (314,828
            )
            
            (1,898,840
            )**Cash
                Flows from Financing Activities:**Payable
                to related parties
            
            
            -
            
            
            576,124Purchase
                of minority interest
            
            
            (274,780
            )
            
            -Payments
                on long-term loans
            
            
            -
            
            
            (2,096,720
            )Proceeds
                from short-term loans
            
            
            2,581,672
            
            
            9,867,176Payments
                on short-term loans
            
            
            (2,401,605
            )
            
            (6,064,640
            )Issuance
                of common stock
            
            
            1,264,696
            
            
            -**Net
                Cash Provided by Financing Activities**
            
            
            1,169,983
            
            
            2,281,940Effect
                of exchange rate changes on cash
            
            
            231,839
            
            
            30,574Net
                Increase in Cash and Cash Equivalents
            
            
            2,587,395
            
            
            413,776Cash
                and Cash Equivalents at Beginning of Period
            
            
            1,104,043
            
            
            690,267**Cash
                and Cash Equivalents at End of Period**
            
            $
            3,691,438
            
            $
            1,104,043





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




F-6





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**





**For
                the Years Ended****December
                31,****2006**
            
            **2005****Supplemental
                Information**Cash
                paid for interest
            
            $
            757,432
            
            $
            74,863**Noncash
                investing and financing activities**Reduction
                in carrying amount of assets related toacquisition
                of minority interest
            
            $
            440,158
            
            $
            -Conversion
                of common shares to minority interest
            
            $
            223,312
            
            $
            -





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




F-7


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**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 also vest 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.




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.




As
      part
      of these agreements, the Company agreed to a penalty provision with certain
      shareholders. If the Company fails to register the 2,000,000 shares that were
      issued for cash due to failure on the part of the Company, the Company will
      pay
      to those shareholders a cash payment equal to 0.0333% of the purchase price
      of
      their respective shares for each business day of the failure. There is no
      maximum potential consideration to be transferred. The Company is required
      to
      file the registration statement no later than thirty days after the consummation
      of the agreement and shall use reasonable best efforts to cause such
      Registration Statement to become effective within one hundred and fifty (150)
      days after the consummation of the agreement, or one hundred eighty (180) days
      after the consummation of the agreement if the Registration Statement is subject
      to a full review by the SEC. The Company is also required to use its reasonable
      best efforts to maintain the Registration Statement effective for a period
      of
      twenty-four (24) months at the Company’s expense.




F-8


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Similarly,
      if the Company fails to register 315,400 of the shares that were outstanding
      prior to the Agreement or the 1,042,400 shares issued for services rendered,
      due
      to failure on the part of the Company, additional shares of its common stock
      shall be issued to the respective shareholders in the amount of 0.0333% of
      their
      respective shares for each calendar day until the registration becomes
      effective. Correspondingly, there is no maximum potential consideration to
      be
      transferred in connection with the registration of these shares. Further, the
      Company shall file a registration statement no later than the tenth (10) day
      after the end of the six (6) month period that immediately follows the filing
      date of the initial registration statement (the “Required Filing Date”). The
      Company shall use reasonable best efforts to cause such registration statement
      to become effective within one hundred and twenty (120) days after the Required
      Filing Date or the actual filing date, whichever is earlier, or one hundred
      fifty (150) days after the Required Filing Date or the actual filing date,
      whichever is earlier, if the registration statement is subject to a full review
      by the SEC. In addition, the Company shall use its reasonable best efforts
      to
      maintain the registration statement effective for a period of twenty-four (24)
      months at the Company’s expense. There is no penalty associated with the other
      shares or the Warrants.




The
      Company considers any probability of payment of either of these penalties to
      be
      remote as both are on a best efforts basis and the Company intends to and has
      resources available to comply with all requirements listed above. Therefore,
      there are no liabilities accrued or gains or losses resulting from changes
      to
      this liability included in the financial statements.




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 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.
      There were no operations for Beisheng for the year ended December 31,
      2006.




**NOTE
      2 - BUSINESS CONDITION**





As
      of
      December 31, 2006 the Company had a working capital deficiency of $930,938.
      In
      addition, the Company has outstanding at December 31, 2006 an aggregate of
      $12,758,426 of short-term notes payable. The
      Company intends to borrow from banks when the debts are due, leaving no cash
      shortage, but the Company will have to pay interest on the borrowed funds in
      order to pay off the short-term loans. The current long-term debt is secured
      by
      a mortgage on the Company’s assets. Also, as of December 31, 2006 the Company
      has $3,057,471 of accrued taxes and related payables. The Company intends to
      meet cash flow requirements related to these taxes and interest on borrowed
      funds through collection of accounts receivable and additional capital
      contributions. Management believes cash flows will be sufficient for the Company’s operating
      needs over the next twelve months but there is no assurance that this will
      be
      the case.




F-9


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        3 - 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 weighted 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
      Values 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.





***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
      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. Customers that have outstanding balances for longer than
      three months have their credit curtailed. 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.





***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.





***Inventory*** -
      Inventories 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 holds inventory on consignment, which
      consists principally of pharmaceutical products.





***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, 2006, the Company does
      not consider any of its long-lived assets to be impaired.




F-10


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***Deposits
      and Accrued Expenses*** -
      Accrued expenses consists of accrued commission expense, accrued payroll
      expense, and accrued welfare expense. Deposits consist of funds paid by 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 representative.





***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 $46,620 and $84,434 as of December 31, 2006 and 2005,
      respectively. The advance payments to suppliers may include provisions that
      set
      the purchase price and delivery date of raw materials. Advances from customers
      were $342,531 and $246,382 as of December 31, 2006 and 2005,
      respectively.





***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.





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.





***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 $9,396 and $99,272 for the years ended December 31,
      2006
      and 2005, respectively.




***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, 2006 are comprised of
      warrants to purchase 100,000 shares of common stock at an exercise price of
      $2.50 per share. The effect of these warrants is excluded from the computation
      of diluted net income per share because the exercise price of the warrants
      is
      greater than the fair value of the underlying shares on December 31, 2006.
      Since
      the Company’s shares are not currently listed or quoted for trading in any
      active market, these shares have been valued at $0.90 which is what the
      Company’s shares were sold at in the most recent offering completed in August
      2006. As a result, there are no potentially dilutive securities outstanding
      as
      of December 31, 2006. There were no potentially issuable shares at December
      31,
      2005.





***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.




F-11


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***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. See Note
      1.





***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 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.





***Recently
      Enacted Accounting Standards*** - In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments — an amendment of FASB Statements
      No. 133 and 140* (SFAS 155). SFAS 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and
      SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* and
      related interpretations. SFAS 155 permits fair value remeasurement for any
      hybrid financial instrument that contains an embedded derivative that otherwise
      would require bifurcation and clarifies which interest-only strips and
      principal-only strips are not subject to recognition as liabilities. SFAS 155
      eliminates the prohibition on a qualifying special-purpose entity from holding
      a
      derivative financial instrument that pertains to a beneficial interest other
      than another derivative financial instrument. SFAS 155 is effective for the
      Company for all financial instruments acquired or issued beginning
      January 1, 2007. The
      impact of adoption of this statement on the Company’s consolidated financial
      statements, if any, has not yet been determined.





In
      March
      2006, the FASB issued SFAS No. 156, *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No. 140* (SFAS
      140). SFAS 156 amends SFAS 140 *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* and
      related interpretations. SFAS 156 requires an entity to recognize a servicing
      asset or servicing liability each time it undertakes an obligation to service
      a
      financial asset. It also requires all separately recognized servicing assets
      and
      servicing liabilities to be initially measured at fair value, if practicable.
      SFAS 156 permits an entity to use either the amortization method or the fair
      value measurement method for each class of separately recognized servicing
      assets and servicing liabilities. SFAS 156 is effective for the Company as
      of
      January 1, 2007. The impact of adoption of this statement on the Company’s
      consolidated financial statements, if any, has not yet been
      determined.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS No.
      109,
“Accounting for Income Taxes.” Specifically, FIN-48 prescribes a recognition
      threshold and a measurement attribute for the financial statement recognition
      and measurement of a tax position taken or expected to be taken. The provisions
      of FIN-48 are effective for financial statements for fiscal years beginning
      after December 15, 2006. Accordingly, the Company is to adopt FIN-48 on January
      1, 2007. The adoption of FIN-48 is not expected to have a material effect on
      the
      Company’s financial position or results of operations.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry
      price).




F-12


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods.




SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the impact of
      this statement on its results of operations or financial position of the
      Company.




In
      September 2006, the Securities Exchange Commission issued Staff Accounting
      Bulletin No. 108 (“SAB No. 108”). SAB No. 108 addresses how the effects of prior
      year uncorrected misstatements should be considered when quantifying
      misstatements in current year financial statements. SAB No. 108 requires
      companies to quantify misstatements using a balance sheet and income statement
      approach and to evaluate whether either approach results in quantifying an
      error
      that is material in light of relevant quantitative and qualitative factors.
      When
      the effect of initial adoption is material, companies will record the effect
      as
      a cumulative effect adjustment to beginning of year retained earnings and
      disclose the nature and amount of each individual error being corrected in
      the
      cumulative adjustment. SAB No. 108 will be effective beginning January 1, 2007
      and it is anticipated that the initial adoption of SAB No. 108 will not have
      a
      material impact on the Company’s financial statements.





In
      September 2006, the FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans (an
      amendment of FASB Statements No. 87, 88, 106, and 132R)* ,
      which
      will require employers to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare and other
      postretirement plans in their financial statements. Under past accounting
      standards, the funded status of an employer’s postretirement benefit plan (i.e.,
      the difference between the plan assets and obligations) was not always
      completely reported in the balance sheet. Past standards only required an
      employer to disclose the complete funded status of its plans in the notes to
      the
      financial statements. SFAS No. 158 applies to plan sponsors that are public
      and
      private companies and nongovernmental not-for-profit organizations. The
      requirement to recognize the funded status of a benefit plan and the disclosure
      requirements are effective as of the end of the fiscal year ending after
      December 15, 2006, for entities with publicly traded equity securities, and
      at
      the end of the fiscal year ending after June 15, 2007, for all other entities.
      The requirement to measure plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The Company does not expect that
      the adoption of SFAS No. 158 will have a significant impact on the consolidated
      results of operations or financial position of the Company.





In
      February, 2007 the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities— Including an
      amendment of FASB Statement No. 115,* which
      permits companies to choose to measure many financial instruments and certain
      other items at fair value. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007 and interim periods within those fiscal years. The
      Company does not expect SFAS 159 to have a material impact on its results of
      operation or financial position.





F-13


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      4 - INVENTORY**





Inventory
      at December 31, 2006 and 2005 consisted of the following:


December
                  31,2006
              
              2005Raw
                  materials
              
              $
              843,163
              
              $
              511,224Work-in-process
              
              
              546,156
              
              
              1,180,014Finished
                  goods
              
              
              620,676
              
              
              1,574,508Product
                  on consignment
              
              
              682,652
              
              
              1,039,631Gross
                  Inventory
              
              
              2,692,647
              
              
              4,305,377Less:
                  Provision for obsolescence
              
              
              (111,128
              )
              
              -Net
                  Inventory
              
              $
              2,581,519
              
              $
              4,305,377





**NOTE
      5 - PROPERTY, PLANT AND EQUIPMENT**





Property
      and equipment at December 31, 2006 and 2005 consisted of the
      following:


December
                  31,2006
              
              2005Buildings
                  and land use rights
              
              $
              5,374,007
              
              $
              5,367,153Machinery
              
              
              4,832,776
              
              
              4,801,762Other
                  equipment
              
              
              328,706
              
              
              307,116Vehicles
              
              
              352,563
              
              
              292,501Total
              
              
              10,888,052
              
              
              10,768,532Less
                  accumulated depreciation
              
              
              (3,333,305
              )
              
              (2,606,685
              )Net
                  property, plant and equipment
              
              $
              7,554,747
              
              $
              8,161,847





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


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




Depreciation
      and amortization expense was $660,632 and $585,307 for the years ended December
      31, 2006 and 2005, respectively.




**NOTE
      6 - INTANGIBLE ASSETS**





At
      December 31, 2006 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, 2006 is as follows:




F-14


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  2007
              
              $
              18,0702008
              
              
              17,6222009
              
              
              17,6222010
              
              
              16,5532011
              
              
              15,542Thereafter
              
              
              539,017





**NOTE
      7 - 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 cash
      deposits that secure the short-term debt payable to banks have been classified
      as restricted cash on the balance sheet. The following schedule summarizes
      the
      Company’s debt obligations and respective balances at December 31, 2006 and
      2005:


December
                  31,2006
              
              2005Notes
                  payable to banks, interest at 5.3 to 6.1%,various
                  maturity dates, secured by property, plant,equipment
                  and intangible assets
              
              $
              9,593,860
              
              $
              9,042,062Notes
                  payable to suppliers, no interest rate,various
                  maturity dates, secured by cash deposits
              
              
              474,576
              
              
              384,395Note
                  payable to a municipality, no interest rate,due
                  on demand, unsecured
              
              
              63,959
              
              
              61,932Note
                  payable to a finance bureau, interest at1.5%,
                  matured January 2003, unsecured
              
              
              65,918
              
              
              63,829Note
                  payable to a bank, interest at 5.0%,settled
                  during 2006
              
              
              -
              
              
              134,600Note
                  payable to a bank, interest at 6.3%, maturesSeptember
                  2007, secured by property, plant,equipment
                  and intangible assets
              
              
              1,279,181
              
              
              1,238,639Note
                  payable to a bank, interest at 5.8%, maturesMarch
                  2007, secured by machinery
              
              
              1,279,181
              
              
              1,238,639Note
                  payable to a bank, interest at 5.5%, maturesJanuary
                  2007, secured by vehicle
              
              
              1,751
              
              
              11,93412,758,426
              
              
              12,176,030Current
                  maturities of long-term debt
              
              
              12,758,426
              
              
              9,698,752Long-term
                  notes payable, net of current portion
              
              
              -
              
              
              2,477,278Debt
                  past due
              
              $
              65,918
              
              $
              63,829




**NOTE
      8 - STOCKHOLDERS’ EQUITY**





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, 2006 and 2005.




F-15


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      9 - RELATED PARTY TRANSACTIONS**





As
      of
      December 31, 2006, the Company had a receivable due from a related party in
      the
      amount of $76,751. As of December 31, 2005, the Company had receivables from
      officers in the amount of $60,462 and from a related party in the amount of
      $117,671, respectively. There was no interest rate or terms for repayment
      associated with any of these receivables.





At
      December 31, 2006 and 2005 the amounts payable to officers were $288,463 and
      $397,344, respectively. At December 31, 2006 and 2005 the amounts payable to
      the
      related party were $104,750 and $188,050, respectively. These amounts are due
      on
      demand and do not accrue interest.





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
      10 - 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%. However, because the Parent is located in a special region, it has a
      15%
      corporate income tax rate. 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 of Cosmetics 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.





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
                  31,2006
              
              2005VAT
                  taxes
              
              $
              1,645,405
              
              $
              379,980Income
                  taxes
              
              
              1,373,122
              
              
              644,977Other
                  taxes
              
              
              38,944
              
              
              40,073Total
                  taxes and related payables
              
              $
              3,057,471
              
              $
              1,065,030




As
      shown
      in the above table, the Company has significant accruals for both VAT taxes
      and
      income taxes. Because in the past the Company has not filed tax returns in
      accordance with generally accepted accounting principles in the PRC, payments
      have not been made on a timely basis to the PRC government. The accrual above
      is
      sufficient to cover all taxes and related charges that should be remitted to
      the
      government as of the corresponding dates presented above. 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 has an aggregate
      of $904,501 in current income taxes payable in the accompanying balance sheet
      for the two year period ended December 31, 2006 that is no longer payable as
      of
      March 15, 2007. The Company will record the effects of this transaction in
      the
      first quarter of fiscal 2007.





The
      Company expects to correct any errors in the filing of their VAT tax returns
      and
      to remit these taxes during the fiscal year ended December 31, 2007.




F-16


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


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


December
                  31,2006
              
              2005Net
                  operating loss carryforwards
              
              $
              339,628
              
              $
              270,125Allowance
                  for doubtful trade receivables
              
              
              322,342
              
              
              249,128Allowance
                  for doubtful other receivables
              
              
              355,158
              
              
              131,492Total
                  deferred income tax assets
              
              
              1,017,128
              
              
              650,745Valuation
                  allowance
              
              
              (361,905
              )
              
              (282,498
              )Net
                  deferred income tax asset
              
              $
              655,223
              
              $
              368,247




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


For
                  the YearEnded
                  December 31,2006
              
              2005Tax
                  at statutory rate of 33%
              
              $
              1,066,865
              
              $
              721,311Benefit
                  of favorable rate
              
              
              (460,230
              )
              
              (373,929
              )Benefit
                  of operating loss carryforwards
              
              
              (32,127
              )
              
              -Change
                  in valuation allowance
              
              
              (168,426
              )
              
              98,085Provision
                  for income taxes
              
              $
              406,082
              
              $
              445,467




The
      provision for income taxes consisted of the following:


For
                  the YearEnded
                  December 31,2006
              
              2005Current
              
              $
              606,635
              
              $
              465,727Deferred
              
              
              (200,553
              )
              
              (20,260
              )Provision
                  for income taxes
              
              $
              406,082
              
              $
              445,467




**NOTE
      11- 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.





***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.





***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. No amount has been recorded in connection
      with this claim as the Company believes that no information suggests that it
      is
      probable a liability has been incurred and the amount of loss as a result of
      this litigation cannot be reasonably estimated.




F-17


**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




On
      January 24, 2007 the Company entered into a contract with an advertising company
      for advertising services. The contract terms require the Company to pay $95,492
      monthly for the advertising agreed upon until the expiration of the contract
      in
      May 2007.





**NOTE
      13 - 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, 2006
      and 2005:


December
                  31,2006
              
              2005Sales
                  from China
              
              $
              19,810,207
              
              $
              10,998,808Sales
                  from other countries
              
              
              149,764
              
              
              67,975
  **NOTE
        14 - CONCENTRATIONS**
  During
        2006 the Company had a concentration of revenues from two customers totalling
        12% and 11%, respectively.  There were no revenue concentrations during
        2005.
   F-18