UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  x
              Quarterly
      report pursuant to section 13 or 15(d) of the Securities Exchange Act
      of 1934.
                
                For
      the quarterly period ending December 31,
2010
  OR
 
 o
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934.
                For
      the transition period from
      ________    to ________.
  Commission
file number: 000-52954
  Tongli
Pharmaceuticals (USA), Inc.
 (Exact
name of registrant as specified in its charter)
  Delaware
              
              84-1090791(State
      or other jurisdiction
                of
      incorporation or organization)
              
              (IRS
      Employer
                Identification
      number)14
      Wall street, 20th Floor
                New
      York, NY
              
              10005(Address
      of Principal Executive Offices)
              
              (Zip
      Code)
  212-842-8837
 (Registrant’s
Telephone Number, Including Area Code)
 
 n/a
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
 
 Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer o
              
              Smaller
      reporting company x(Do
      not check if a smaller reporting company)
  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
   
 
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).     o
  As of
February 14, 2010, there were 11,663,218 shares of company’s common stock issued
and outstanding.
   
  TABLE
OF CONTENTS
 
 Cautionary
      Note on Forward Looking StatementsPART
      I – FINANCIAL INFORMATIONItem
      1.
                Unaudited
      Condensed Consolidated Financial StatementsItem
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsItem
      3.
                Quantitative
      and Qualitative Disclosures About Market RiskItem
      4(T).
                Controls
      and ProceduresPART
      II – OTHER INFORMATIONItem
      1.
                Legal
      ProceedingsItem
      2.
                Unregistered
      Sales of Equity Securities and Use of ProceedsItem
      3.
                Defaults
      Upon Senior SecuritiesItem
      4.
                Removed
      and ReservedItem
      5.
                Other
      InformationItem
      6.
                ExhibitsSIGNATURES
 
 Unless
otherwise provided in this Quarterly Report on Form 10-Q, references to “the
Company,” “the Registrant,” “Tongli,” “we,” “us,” and “our” refer to Tongli
Pharmaceuticals (USA), Inc. together with its wholly-owned
subsidiaries.
   
 
 
 CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
  In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in such forward-looking statements. 
We cannot give any guarantee that the plans, intentions or expectations
described in the forward looking statements will be achieved.  All
forward-looking statements involve significant risks and uncertainties, and
actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those factors described in
the “Risk Factors” section of our Annual Report for the fiscal year ended June
30, 2010 (the “2010 10-K”).  Readers should carefully review such risk
factors as well as factors described in other documents that we file from time
to time with the Securities and Exchange Commission.
 
 In some
cases, you can identify forward-looking statements by terminology such as
“guidance,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “projects,” “potential,” “proposed,”
“intended,” or “continue” or the negative of these terms or other comparable
terminology.  You should read statements that contain these words
carefully, because they discuss our expectations about our future operating
results or our future financial condition or state other “forward-looking”
information.  There may be events in the future that we are not able to
accurately predict or control.  You should be aware that the occurrence of
any of the events described in our risk factors and other disclosures could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline.  Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, growth rates, and levels of activity, performance or
achievements.  Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include, without limitation:
 
 ·
              our
      ability to obtain sufficient working capital to support our business
      plans;
 
 ·
              our
      ability to expand our product offerings and maintain the quality of our
      products;
 
 ·
              the
      availability of Chinese government granted rights to exclusively
      manufacture or co-manufacture our
products;
 
 ·
              the
      availability of Chinese national healthcare reimbursement of our
      products;
 
 ·
              our
      ability to manage our expanding operations and continue to fill customers’
      orders on time;
 
 ·
              our
      ability to maintain adequate control of our expenses allowing us to
      realize anticipated revenue growth;
 
 ·
              our
      ability to maintain or protect our intellectual
  property;
 
 ·
              our
      ability to maintain our proprietary
technology;
 
 ·
              the
      impact of government regulation in China and elsewhere, including the
      support provided by the Chinese government to the Traditional Chinese
      Medicine and healthcare sectors in
China;
   
 
 ·
              our
      ability to implement product development, marketing, sales and acquisition
      strategies and adapt and modify them as
needed;
 
 ·
              our
      ability to integrate any future
acquisitions;
 
 ·
              our
      implementation of required financial, accounting and disclosure controls
      and procedures and related corporate governance policies;
    and
 
 ·
              our
      ability to anticipate and adapt to changing conditions in the Traditional
      Chinese Medicine and healthcare industries resulting from changes in
      government regulations, mergers and acquisitions involving our
      competitors, technological developments and other significant competitive
      and market dynamics.
  Readers
are cautioned not to place undue reliance on our forward-looking statements,
which reflect management’s opinions only as of the date thereof.  We
undertake no obligation to revise or publicly release the results of any
revision of our forward-looking statements, except as required by
law.
   
 
 PART
I
 
 ITEM
1.                      FINANCIAL
STATEMENTS
  TONGLI
      PHARMACEUTICALS (USA), INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAs
      ofDecember
      31, 2010
                    
                    
                    March
      31, 2010(Unaudited)ASSETSCurrent
      assets:Cash
                    
                    
                    520,325
                    
                    
                    
                    30,066Accounts
      Receivable
                    
                    
                    1,101,885
                    
                    
                    
                    351,991Inventory
                    
                    
                    284,938
                    
                    
                    
                    109,387Prepaid
      expense
                    
                    
                    11,040
                    
                    
                    
                    3,900Advance
      to suppliers
                    
                    
                    2,120,470
                    
                    
                    
                    1,465,713Total
      current assets
                    
                    
                    4,038,658
                    
                    
                    
                    1,961,057Property
      and equipment, net
                    
                    
                    6,710,111
                    
                    
                    
                    6,744,376Contract
      deposits
                    
                    
                    2,730,862
                    
                    
                    
                    2,641,418Deposit
      for land use right
                    
                    
                    1,817,541
                    
                    
                    
                    -Intangible
      assets, net
                    
                    
                    -
                    
                    
                    
                    163,244Total
      assets
                    
                    
                    15,297,172
                    
                    
                    
                    11,510,095LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    
                    125,709
                    
                    
                    
                    101,611Due
      to related parties
                    
                    
                    877,895
                    
                    
                    
                    788,166Accrued
      expenses and other current liabilities
                    
                    
                    998,209
                    
                    
                    
                    555,969Total
      current liabilities
                    
                    
                    2,001,813
                    
                    
                    
                    1,445,746Stockholders'
      EquityPreferred
      stock, $0.001 par value,Authorized
      1,000,000 shares; none issued
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.001 par valueIssued
      and outstanding-  11,663,207 shares and 11,395,025 shares,
      respectively
                    
                    
                    11,663
                    
                    
                    
                    11,395Additional
      paid-in-capital
                    
                    
                    8,031,031
                    
                    
                    
                    7,913,799Accumulated
      other comprehensive income
                    
                    
                    1,544,706
                    
                    
                    
                    1,142,133Retained
      earnings
                    
                    
                    3,707,959
                    
                    
                    
                    997,022Total
      Stockholders' equity
                    
                    
                    13,295,359
                    
                    
                    
                    10,064,349Total
      liabilities and Stockholders' equity
                    
                    $
                    15,297,172
                    
                    
                    $
                    11,510,095
  
 See
accompanying notes to the condensed consolidated financial
statements.
   
  TONGLI
      PHARMACEUTICALS (USA), INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)
  For
      the nine months ended December 31,2010
                                                                        
                                                                        
                                                                        2009Cash
      flows from operating activitiesNet
      income
                                                                        
                                                                        $
                                                                        2,710,939
                                                                        
                                                                        
                                                                        $
                                                                        1,408,903Adjustments
      to reconcile net income to net cash provided (used in)operating
      activities:Depreciation
      and amortization
                                                                        
                                                                        
                                                                        269,455
                                                                        
                                                                        
                                                                        
                                                                        261,847Amortization
      of stock compensation
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        38,250Accrued
      interest- related party
                                                                        
                                                                        
                                                                        43,280
                                                                        
                                                                        
                                                                        
                                                                        65,730Stock
      issued for services
                                                                        
                                                                        
                                                                        117,500
                                                                        
                                                                        
                                                                        
                                                                        20,000Loss
      of disposal of intangible asset- Yan Li Xiao
                                                                        
                                                                        
                                                                        152,401Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                        
                                                                        
                                                                        (721,922
                                                                        )
                                                                        
                                                                        
                                                                        (290,278
                                                                        )Inventory
                                                                        
                                                                        
                                                                        (168,110
                                                                        )
                                                                        
                                                                        
                                                                        (298,337
                                                                        )Advances
      to suppliers
                                                                        
                                                                        
                                                                        (591,960
                                                                        )
                                                                        
                                                                        
                                                                        (478,063
                                                                        )Prepaid
      expenses
                                                                        
                                                                        
                                                                        (7,140
                                                                        )
                                                                        
                                                                        
                                                                        (3,900
                                                                        )Accounts
      payable
                                                                        
                                                                        
                                                                        20,209
                                                                        
                                                                        
                                                                        
                                                                        33,299Accrued
      expenses and other current liabilities
                                                                        
                                                                        
                                                                        420,102
                                                                        
                                                                        
                                                                        
                                                                        (55,808
                                                                        )Net
      cash provided by operating activities
                                                                        
                                                                        
                                                                        2,244,754
                                                                        
                                                                        
                                                                        
                                                                        701,643Cash
      flows from investing activitiesAcquistion
      of intangible assets
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (175,710
                                                                        )Deposit
      for land use right
                                                                        
                                                                        
                                                                        (1,778,015
                                                                        )
                                                                        
                                                                        
                                                                        -Net
      cash used in investing activities
                                                                        
                                                                        
                                                                        (1,778,015
                                                                        )
                                                                        
                                                                        
                                                                        (175,710
                                                                        )Cash
      flows from financing activitiesProceeds
      from (repayment of) related party loans
                                                                        
                                                                        
                                                                        13,184
                                                                        
                                                                        
                                                                        
                                                                        (353,331
                                                                        )Net
      cash provided by (used in) financing activities
                                                                        
                                                                        
                                                                        13,184
                                                                        
                                                                        
                                                                        
                                                                        (353,331
                                                                        )Effect
      of exchange rate changes on cash
                                                                        
                                                                        
                                                                        10,336
                                                                        
                                                                        
                                                                        
                                                                        88Net
      increase in cash
                                                                        
                                                                        
                                                                        490,259
                                                                        
                                                                        
                                                                        
                                                                        172,690Cash,
      beginning of the period
                                                                        
                                                                        
                                                                        30,066
                                                                        
                                                                        
                                                                        
                                                                        50,247Cash
      , end of the period
                                                                        
                                                                        $
                                                                        520,325
                                                                        
                                                                        
                                                                        $
                                                                        222,937Supplemental
      cash flow informationDuring
      the period, cash was paid for the following:Income
      taxes
                                                                        
                                                                        $
                                                                        837,626
                                                                        
                                                                        
                                                                        $
                                                                        530,667Interest
      paid
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
 
 See
accompanying notes to the condensed consolidated financial
statement
   
  TONGLI
      PHARMACEUTICALS (USA), INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME(UNAUDITED)For
      the three months ended December 31,
                                                  
                                                  
                                                  For
      the nine months ended December 31,2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2010
                                                  
                                                  
                                                  2009Revenue
                                                  
                                                  $
                                                  4,402,342
                                                  
                                                  
                                                  $
                                                  2,928,562
                                                  
                                                  
                                                  $
                                                  9,782,220
                                                  
                                                  
                                                  $
                                                  5,821,937Cost
      of sales
                                                  
                                                  
                                                  2,265,302
                                                  
                                                  
                                                  
                                                  1,650,817
                                                  
                                                  
                                                  
                                                  5,240,369
                                                  
                                                  
                                                  
                                                  3,241,589Gross
      Profit
                                                  
                                                  
                                                  2,137,040
                                                  
                                                  
                                                  
                                                  1,277,745
                                                  
                                                  
                                                  
                                                  4,541,851
                                                  
                                                  
                                                  
                                                  2,580,348Operating
      expenses:General
      and administrative expenses
                                                  
                                                  
                                                  136,468
                                                  
                                                  
                                                  
                                                  105,538
                                                  
                                                  
                                                  
                                                  567,277
                                                  
                                                  
                                                  
                                                  364,360Depreciation
      expenses
                                                  
                                                  
                                                  38,216
                                                  
                                                  
                                                  
                                                  45,579
                                                  
                                                  
                                                  
                                                  119,324
                                                  
                                                  
                                                  
                                                  122,200Selling
      expenses
                                                  
                                                  
                                                  14,982
                                                  
                                                  
                                                  
                                                  14,391
                                                  
                                                  
                                                  
                                                  42,505
                                                  
                                                  
                                                  
                                                  42,249Total
      operating expenses
                                                  
                                                  
                                                  189,666
                                                  
                                                  
                                                  
                                                  165,508
                                                  
                                                  
                                                  
                                                  729,106
                                                  
                                                  
                                                  
                                                  528,809Operating
      income
                                                  
                                                  
                                                  1,947,374
                                                  
                                                  
                                                  
                                                  1,112,237
                                                  
                                                  
                                                  
                                                  3,812,745
                                                  
                                                  
                                                  
                                                  2,051,539Other
      Income (expenses):Interest
      expense-related party
                                                  
                                                  
                                                  (14,834
                                                  )
                                                  
                                                  
                                                  (23,857
                                                  )
                                                  
                                                  
                                                  (43,280
                                                  )
                                                  
                                                  
                                                  (65,643
                                                  )Total
      other income (expenses)
                                                  
                                                  
                                                  (14,834
                                                  )
                                                  
                                                  
                                                  (23,857
                                                  )
                                                  
                                                  
                                                  (43,280
                                                  )
                                                  
                                                  
                                                  (65,643
                                                  )Income
      before income taxes
                                                  
                                                  
                                                  1,932,540
                                                  
                                                  
                                                  
                                                  1,088,380
                                                  
                                                  
                                                  
                                                  3,769,465
                                                  
                                                  
                                                  
                                                  1,985,896Income
      Taxes
                                                  
                                                  
                                                  506,526
                                                  
                                                  
                                                  
                                                  302,555
                                                  
                                                  
                                                  
                                                  1,058,526
                                                  
                                                  
                                                  
                                                  576,993Net
      Income
                                                  
                                                  
                                                  1,426,014
                                                  
                                                  
                                                  
                                                  785,825
                                                  
                                                  
                                                  
                                                  2,710,939
                                                  
                                                  
                                                  
                                                  1,408,903Other
      Comprehensive item:Foreign
      Currency Translation adjustment
                                                  
                                                  
                                                  158,601
                                                  
                                                  
                                                  
                                                  (768
                                                  )
                                                  
                                                  
                                                  402,573
                                                  
                                                  
                                                  
                                                  9,870Comprehensive
      income
                                                  
                                                  
                                                  1,584,615
                                                  
                                                  
                                                  
                                                  785,057
                                                  
                                                  
                                                  
                                                  3,113,512
                                                  
                                                  
                                                  
                                                  1,418,773Basic
      and diluted income per share
                                                  
                                                  $
                                                  0.12
                                                  
                                                  
                                                  $
                                                  0.08
                                                  
                                                  
                                                  $
                                                  0.24
                                                  
                                                  
                                                  $
                                                  0.14Basic
      and diluted weighted average shares outstanding
                                                  
                                                  
                                                  11,654,318
                                                  
                                                  
                                                  
                                                  10,186,716
                                                  
                                                  
                                                  
                                                  11,500,974
                                                  
                                                  
                                                  
                                                  10,225,789
  See
accompanying notes to the condensed consolidated financial
statements.
  
   TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED DECEMBER 31, 2010
AND 2009
 (UNAUDITED)
 
 1.           BASIS
OF PRESENTATION
 
 Tongli
Pharmaceuticals (USA), Inc., through a wholly-owned subsidiary, Harbin Tianmu
Pharmaceuticals Co., Ltd. (“Tianmu Pharmaceuticals”), develops, produces and
sells a wide variety of pharmaceuticals and healthcare products in the People’s
Republic of China (“PRC” or “China”) that are based on traditional Chinese
medicine (“TCM”).
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for
interim financial information and pursuant to the requirements for reporting on
Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. In the opinion of the
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Results from
operation for the three and nine months periods ended December 31, 2010 are not
necessarily indicative of the results to be expected for the entire year or for
any other period. The information included in this Form 10-Q should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included in
the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2010.
 
 The
balance sheet as of March 31, 2010 has been derived from the audited financial
statements at that date included in the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2010, but does not include all of the
information and footnotes required by U.S. GAAP for the complete financial
statements.
 
 2.           INVENTORY
 
 As of
December 31, 2010 and March 31, 2010, inventory consists the
following:
  As
      ofDecember
      31, 2010
                                      
                                      
                                      March
      31, 2010(Unaudited)Raw
      materials
                                      
                                      $
                                      91,062
                                      
                                      
                                      $
                                      32,313Finished
      goods
                                      
                                      
                                      193,876
                                      
                                      
                                      
                                      77,074Total
                                      
                                      $
                                      284,938
                                      
                                      
                                      $
                                      109,387
  3           INTANGIBLE
ASSETS
 
 Intangible
assets primarily represent sales rights related to a new product as provided in
a contract between the Company and a third party Harbin Sanmu Pharmaceuticals
(“Sammu”).  The Company paid RMB 1,200,000 (equivalent to $175,772) to
Sanmu in October 2009 for exclusive rights to manufacture and sell such new
product under its trademark for a period of seven years. However, during the
three months ended September 30, 2010, the Company terminated the contract with
Sanmu.  Management decided to write off the intangible asset related
to this product as of September 30, 2010.
   
 
 4.           DEPOSIT
FOR LAND USE RIGHT
 
 On
December 20, 2010, the Company entered into a contract with a third party to
acquire land use right to a parcel for a total purchase price of RMB 20 million
(approximately $3 million) for twenty years (from December 20, 2010 to December
30, 2030).  The Company will use this parcel of land to plant herbs
which are raw materials for the Company’s products.  The Company is
required to pay the purchase price in two installments. The first installment of
RMB 12 million (equivalent to $1,817,541) was paid in December 2010 to the third
party and the second installment payment of RMB 8 million (approximately
$1,211,694) will be paid upon closing of the transaction, which is expected to
occur in the first half of 2011.
 
 5.           DUE
TO RELATED PARTIES
 
 Due to
related parties consisted of the following:
  As
      ofDecember
      31, 2010
                                    
                                    
                                    March
      31, 2010(Unaudited)Harbin
      Tianmu Real Estate Development Co., Ltd. (a)
                                    
                                    $
                                    (336,210
                                    )
                                    
                                    $
                                    (308,705
                                    )Chairman
      of the Company (a)
                                    
                                    
                                    (521,098
                                    )
                                    
                                    
                                    (458,874
                                    )US
      Hua Sky International Investment LLC. (b)
                                    
                                    
                                    (20,587
                                    )
                                    
                                    
                                    (20,587
                                    )Total
                                    
                                    $
                                    (877,895
                                    )
                                    
                                    $
                                    (788,166
                                    )
  (a)
              These
      loans bear interest at 7% per annum and are due on
  demand.
  (b)
              The
      Company had a month to month sub-lease arrangement for its New York office
      with US Hua Sky International Investment LLC, a company owned by its
      Chairman. This arrangement began on March 31, 2008 and ended on March 31,
      2009. The monthly rental was
$3,950.
 
 6.           STOCKHOLDERS’
EQUITY
  In
December 2009, the company adopted the 2009 Incentive Plan to provide additional
incentive to selected employees, officers, directors and consultants of the
Company.  2,000,000 shares were initially reserved for issuance under
the 2009 Incentive Plan. Awards may be in the form of incentive stock options,
non-qualified stock options, restricted shares or other arrangements or
programs. On March 29, 2010, the Company issued 1,169,093 common shares to 46
employees and consultants. The Company recorded fair value of $1,180,784 for
these shares. On September 8, 2010, additional 250,000 shares of common stock
were issued 7 employees and consultants. The Company recorded fair value of
$975,000 for these shares. On November 15, 2010, the Company issued 18,182
common shares to its US legal consul for services rendered.  The
Company recorded fair value of $20,000 for these shares.
  As of
December 31, 2010, the Company has 11,663,207 common shares issued and
outstanding.
   
  7.           EARNINGS
PER SHARE
  Earnings
(loss) per share are computed by dividing income available to stockholders of
our common stock by the weighted-average number of shares of common stock
outstanding for the three and nine months ended December 31, 2010 and 2009.
Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional
shares of common stock that would have been outstanding if the potential shares
of common stock have been issued and if the additional shares of common stock
were dilutive. There are no common stock equivalents available for dilution
purposes as of December 31, 2010 and 2009, respectively. The following
demonstrates the calculation for earnings per share for the three and nine
months ended December 31, 2010 and 2009:
 
 Three
      months ended December 31
                                    
                                    
                                    Nine
      months ended December 312010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009(Unaudited)
                                    
                                    
                                    (Unaudited)
                                    
                                    
                                    (Unaudited)
                                    
                                    
                                    (Unaudited)Net
      income (loss)
                                    
                                    $
                                    1,426,014
                                    
                                    
                                    $
                                    785,825
                                    
                                    
                                    $
                                    2,710,939
                                    
                                    
                                    $
                                    1,408,903Weighted
      shares outstanding- Basic and diluted
                                    
                                    
                                    11,654,318
                                    
                                    
                                    
                                    10,186,716
                                    
                                    
                                    
                                    11,500,974
                                    
                                    
                                    
                                    10,225,789Earning
      per share- Basic
                                    
                                    $
                                    0.12
                                    
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    0.14Earnings
      per share- Diluted
                                    
                                    $
                                    0.12
                                    
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    0.14
  8.           TAXES
  (a)  Corporation
income tax (“CIT”)
  The
Company has not recorded a provision for U.S federal income tax for the three
and nine months ended December 31, 2010 and 2009 due to the net operating losses
in the United States which the Company has set up 100% valuation
allowance.
  The
Company’s Chinese subsidiaries are subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements in accordance with PRC
generally accepted accounting principals after appropriate tax
adjustments.
   
  A
reconciliation of tax at United States Federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
  For
      the nine months ended December 31,2010
                              
                              
                              2009(Unaudited)
                              
                              
                              (Unaudited)U.S.statutory
      income tax rate
                              
                              
                              35.0
                              %
                              
                              
                              35.0
                              %Foreign
      tax rate difference between US and China
                              
                              
                              (10.0
                              %)
                              
                              
                              (10.0
                              %)NOL
      from U.S with 100% valuation allowance
                              
                              
                              3.08
                              %
                              
                              
                              4.0
                              %Actual
      consolidated income tax rate
                              
                              
                              28.08
                              %
                              
                              
                              29.0
                              %
  The
components of deferred taxes as of December 31, 2010 and March 31, 2010
consisted of the following:
 As
      ofDecember
      31,2010
                            
                            
                            March
      31, 2010(Unaudited)Net
      operating loss carry-forwards
                            
                            $
                            884,751
                            
                            
                            $
                            773,165Valuation
      allowance
                            
                            $
                            (884,751
                            )
                            
                            $
                            (773,165
                            )Net
      deferred tax asset
                            
                            
                            -
                            
                            
                            
                            -
 
 Management
believes the deferred tax assets as of December 31, 2010 and March 31, 2010 do
not satisfy the realization criteria set forth in FASB ASC 740 and has recorded
a valuation allowance for the entire net tax asset.
 
 (b)           Value
added tax (“VAT”)
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on the sales of the finished
products.
  (c)           Other
taxes
  The
Company is also subject to PRC business tax at a rate of 5%, PRC City
Construction Tax at a rate of 7% and Education Fees at a rate of 4% based on
VAT.
 
 9.           COMMITMENTS
AND CONTINGENCIES
 
 On March
21, 2010, the Company entered into a patent purchase agreement with a third
party, Tonghua Yisheng Pharmaceuticals Company Limited, to purchase a new drug
candidate which is presently in clinical trials.  Total purchase price
for this patent amounted to RMB 33,000,000 (approximately $4.85 million) payable
in three installments. The Company paid the first installment of RMB 11,000,000
(approximately $1,611,514) to Tonghua Yisheng Pharmaceuticals Company Limited in
March 2010 upon execution of the purchase agreement.  The second and
third installments are expected to be paid in late 2011 and 2012 pending on
whether the clinical test results for this drug candidate meet requirements
specified in the agreement.
 
 The
Company has a lease agreement for the Company’s New York office beginning on
December 1, 2010 with a monthly rent of $3,570. The rentals for December 2010
and January 2011 were waived and the rentals for October 2011 and November 2011
will be waived pursuant to the lease agreement. The Company made a deposit of
$7,140 for this lease.
   
  10.           CONCENTRATION
OF RISKS
 
 During
the nine months ended December 31, 2010, approximately 42.7% of the sales were
generated from five major distributors with the largest distributor representing
11.3% of the sales, while approximately 32.9% of the sales were generated from
four major distributors for the nine months ended December 31, 2009. During the
three months ended December 31, 2010, 41.6% of the sales were generated from
four major distributors with the largest distributor representing 11.25% of the
sales, while 28.33% of the sales were generated from four major distributors for
the three months ended December 31, 2009.
 
 For the
nine months ended December 31, 2010, the Company’s five major products
Antihyperlipidemics, Calcium Gluconate Oral Liquid, Anti-bacterial Mouthwash,
Panax and Radix Polygoni Capsule, and Yan Li Xiao Capsule, represented 24.85%,
21.37%, 20.56%, 15.32% and 11.25%, respectively, of the total sales, while four
major products Antihyperlipidemics, Anti-bacterial Mouthwash, Calcium Gluconate
Oral Liquid and Leucorrhea Relief Tablet represented 34.4%, 31.2%, 24.1% and
10.1%, respectively, of total sales for the nine months ended December 31,
2009.  For the three months ended December 31, 2010, Panax and Radix
Polygoni Capsule, Antihyperlipidemics, Anti-bacterial Mouthwash and Calcium
Gluconate Oral Liquid, represented 34.33%, 23.98%, 18.36% and 17.95%,
respectively, of the total sales, while Antihyperlipidemics, Anti-bacterial
Mouthwash, Calcium Gluconate Oral Liquid and Leucorrhea Relief Tablet,
represented 38.11%, 26.80%, 23.53% and 11.56%, respectively, of the total sales
for the three months ended December 31, 2009.
 
 11.           VULNERABILITY
DUE TO OPERATIONS IN PRC
 
 The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC government has
been pursuing economic reform policies for more than thirty years, no assurance
can be given that the PRC government will continue to pursue such policies or
that such policies may not be significantly altered, especially in the event of
a change in leadership, social or political disruption or unforeseen
circumstances affecting the PRC’s political, economic and social conditions.
There is also no guarantee that the PRC government’s pursuit of economic reforms
will be consistent or effective.
 
 Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The Peoples Bank of China or other banks are authorized to buy and
sell foreign currencies at the exchange rates quoted by the Peoples Bank of
China. Approval of foreign currency payments by the Peoples Bank of China or
other institutions requires submitting a payment application form together with
suppliers’ invoices, shipping documents and signed contracts.
 
 Since the
Company has its primary operations in the PRC, the majority of its revenues will
be settled in RMB, not U.S. dollars. Due to certain restrictions on currency
exchanges that exist in the PRC, the Company’s ability to use revenue generated
in RMB to pay any dividend payments to its shareholders outside of China may be
limited.
 
 The
Company’s business depends on maintaining licenses of its current products from
China State Food and Drug Administration or SFDA. Obtaining licenses for new
products can be expensive and is usually time consuming. Failure to obtain the
required licenses can cause the Company’s business plan to be delayed. If the
delays prevent the Company from generating positive cash flows or introducing a
significant number of products, there will be a material adverse effect on the
Company
 .
  
  12.           SUBSEQUENT
EVENT
 
 On
January 21, 2011, the Board of Directors appointed Mr. Zhijian Hao as a director
of the Company, effective on the same day. Pursuant to a Director Agreement the
Company entered into with Mr. Hao, the Company will provide for an annual base
salary of RMB24,000 (approximately $3,625 based upon the January 1, 2011
exchange rate of $1.00 = RMB6.62) and an annual award of 30,000 shares of
restricted stock of the Company starting from January 1, 2011.  The
Director Agreement has a term of three years, subject to election by the
shareholders of the Company.  Either the Company or Mr. Hao can
terminate the Director Agreement and Mr. Hao’s association with the Company on
10 days prior notice.
 
 The
Company has evaluated events after the date of these financial statements
through the date that these financial statements were issued and no other
sequent event is required to be reported.
   
 
 Item
2.  Management’s Discussion and Analysis of Financial Conditions of
Operations.
 
 The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
financial statements of Tongli Pharmaceuticals (USA) Inc. for the three and nine
months ended December 31, 2010 and 2009, and should be read in conjunction with
such financial statements and related notes included in this report. Those
statements in the following discussion that are not historical in nature should
be considered to be forward looking statements that are inherently uncertain.
Actual results and the timing of the events may differ materially from those
contained in these forward looking statements due to a number of factors,
including those discussed in the “Cautionary Note on Forward Looking Statements”
set forth above.
 
 COMPANY
OVERVIEW
 
 Tongli
Pharmaceuticals (USA), Inc. formally known as Aim Smart Corporation (“Aim
Smart”), was originally formed in the State of Colorado in April 1998 and
reorganized as a Delaware corporation in September 2007.
 
 On July
29, 2008, Aim Smart acquired all of the outstanding capital stock of American
Tony Pharmaceutical, Inc., a Delaware corporation (“American Tony”), by issuing
9,700,000 shares of its common stock, representing 96.7% of the outstanding
shares of Aim Smart, to the shareholders of American Tony. American Tony paid
$525,000 for its controlling interest in Aim Smart and this interest was
acquired solely to effectuate the reverse merger and was paid for with $276,000
of the Company’s own funds and a $249,000 loan from its Chairman.
 
 The
acquisition has been accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, American Tony is
treated as the continuing entity for accounting purposes, whereas the entity
formally known as Aim Smart is the legal surviving entity.
  Subsequent
to the reverse merger, Aim Smart changed its name to American Tony
Pharmaceuticals, Inc. on September 23, 2008, and then changed its name to Tongli
Pharmaceuticals (USA), Inc. on October 30, 2008.
 
 American
Tony is a holding company incorporated in the State of Delaware. In February
2007, American Tony acquired, through a wholly owned subsidiary, Heilongjiang
Tongli Technology Co., Ltd., all of the registered capital of Harbin Tianmu
Pharmaceuticals Co., Ltd., a corporation organized under the laws of the PRC on
November 26, 1999.  Tianmu Pharmaceuticals is engaged in developing,
manufacturing and marketing pharmaceutical and health care products that
incorporate elements of Chinese Traditional Medicine with elements of western
medicine.
 
 In 2005,
Tianmu Pharmaceuticals obtained the GMP certificate (Good Manufacturing
Practices for Pharmaceutical Products), and currently maintains Drug Register
License and Drug Production Certificate from the China State Food and Drug
Administration (“SFDA”) for 10 products. Our major products include Panax and
Radix Polygoni Capsule, Yufang Anti-Bacterial Mouth Wash, Calcium Gluconate Oral
Liquid, and Antihyperlipidemics.
 
 We sell
our products through distributors or directly to customers; no service is
required from us after sales are made. Our primary customers are drug stores and
hospitals located in China
   
 
 DEVELOPMENT
AND STRATEGY
 
 During
the three and nine months ended December 31, 2010, we continued the execution of
our product channel expansion strategy that has resulted in increased market
penetration of our products and expanded revenue growth. In order to expand our
product offerings, in August 2009, we entered into a contract with a third
party Harbin Sanmu Pharmaceuticals (“Sanmu”) to purchase exclusive rights to
manufacture and sell Yan Li Xiao Capsule nationwide for seven
years.  We paid Sanmu RMB 1,200,000 (approximately $175,772) in
October 2009 under the contact and started to sell this product in late
2009.  In July 2010, due to some disputes with Sanmu, we terminated
the contract with Sanmu and suspended the sales of Yan Li Xiao Capsule.
Accordingly, no sales revenue from Yan Li Xiao Capsule was reported since July
2010. Management has decided to write off the intangible assets related to Yan
Li Xiao Capsule in September 2010.  In October 2010, we began to
manufacture and sell our new product Panax and Radix Polygoni Capsule. This new
product represented more than 15% of our total sales during the nine months
ended December, 31, 2010. We believe that this new product have great market
potential and will continue to generate sustainable income in the foreseeable
future.
 
 On March
21, 2010, we entered a patent purchase agreement with a third party Tonghua
Yisheng Pharmaceuticals Company Limited (“Yisheng”) to purchase a new drug
candidate. Total consideration for this patent transaction amounted to RMB
33,000,000 (approximately $4.85 million) payable in three installments. We paid
the first installment of RMB 11,000,000 (approximately $1.6 million) to Yisheng
in March 2010 upon execution of the patent purchase agreement. The second and
third installments are expected to be paid in late 2011 and 2012 pending on
whether the clinic test results for this drug candidate meet requirements
specified in our agreement.
 
 Our
ability to conclude this purchase and ultimately commercialize this product
requires additional assistance from the seller and obtaining government
approvals, including the approvals from the SFDA.
 
 Management
plans to continue to emphasize on expanding and enhancing marketing and sales in
the fiscal year 2011 ending March 31, 2011 and beyond.  Part of this
strategy involves increasing and improving marketing and sales activities to
enhance the market position of our key products and to increase the sales of
other products by expanding our sales force, solidifying our distribution
network and expanding market segment coverage, and increasing marketing and
promotional activities. Management also plans to pursue strategic acquisition
opportunities selectively, including purchase of new products or facilities, to
further consolidate our resources and expand our market coverage. We believe
that such initiatives will help to expand our product lines and market coverage
and complement our research and development capabilities. As of the date of this
report, we are not engaged in any discussions regarding any potential
acquisition.
 
 On
December 20, 2010, we entered into a contract with third party to acquire land
use rights to a parcel of land for twenty years (from December 20, 2010 to
December 30, 2030) and the total purchase price is RMB 20 million (approximately
$3 million).We will use this parcel of land to plant herbs which are raw
material for our products.  We are required to pay the purchase price
in two installments.  The first installment of RMB 12 million
(approximately $1,817,541) was paid partying December 2010 and the second
installment payment of RMB 8 million (approximately $1,817,541) will be
paid to the third party upon closing of the transaction in the near future,
which is expected in the first half of 2011.
 
 Management
believes that our emphasis on further commercializing and broadening our product
lines, enhanced sales and marketing efforts shall continue to yield increases in
revenue in fiscal 2011 and beyond.
 
 
 
 DISCUSSION
OF OPERATING RESULTS
 
 Operating
results for the three months ended December 31, 2010 and 2009
 
 The
results of our operation for the three months ended December 31, 2010 compared
to the prior comparative periods are as follows:
  For
      the three months endedDecember
      31, 2010
              
              
              December
      31, 2009Revenues
              
              $
              4,402,342
              
              
              $
              2,928,562Cost
      of Sales
              
              
              2,265,302
              
              
              
              1,650,817Gross
      Profit
              
              
              2,137,040
              
              
              
              1,277,745Selling,
      general & administrative expeses
              
              
              189,666
              
              
              
              165,508Other
      income (expenses)
              
              
              (14,834
              )
              
              
              (23,857
              )Provision
      of income taxes
              
              
              506,526
              
              
              
              302,555Net
      income
              
              
              1,426,014
              
              
              
              785,825Foreign
      currency translation adjustments
              
              
              158,601
              
              
              
              (768
              )Comprehensive
      income
              
              $
              1,584,615
              
              
              $
              785,057
 Revenues,
cost of sales and gross profit
 
 Our
revenues increased 50.32% to approximately $4.4 million for the three months
ended December 31, 2010 from approximately $2.9 million for the three months
ended December 31, 2009.  The $1.47 million increase was primarily
attributable to the increase in sales of our four major products, including
Antihyperlipidemics, Calcium Gluconate Oral Liquid, Anti-bacterial Mouthwash,
and Panax and Radix Polygoni Capsule, supported by our marketing efforts,
increasing brand recognition and effective pricing strategy and our distribution
to previously unaddressed market. For the three months ended December 31, 2010,
about 15.32% of our revenue was generated from our new product Panax and Radix
Polygoni Capsule.
 
 Management
expects that our emphasis on broadening our product offerings, coupled with our
continued sales channel expansions, and along with our enhanced sales and
marketing efforts will continue to yield increases in revenue for fiscal year
2011 and beyond.
 
 Cost of
sales was approximately $2.26 million for the three months ended December 31,
2010 compared to $1.65 million for the three months ended December 31, 2009. The
$0.61 million increase in cost of sales was mainly attributable to an increase
in manufacturing costs which was in line with the increase in the sales, and
which included the costs for our new product Panax and Radix Polygoni Capsule.
 As the sales of Panax and Radix Polygoni Capsule increased during the
three months ended December 31, 2010, our costs of sales increased
accordingly.  Cost of sales as a percentage of revenue decreased from
56.37% to 51.46% as compared to the prior comparative period.
 
 Gross
profit was approximately $2.13 million for the three months ended December 31,
2010 compared to $1.27 million for the three months ended December 31, 2009, an
increase of $0.86 million due to increased sales of our products. The gross
profit as a percent of revenues for the three months ended December 31, 2010
increased to 48.54% from 43.63% in the prior comparative period mainly due to
increased sales and relatively stable costs of sales of our major
products.
   
 
 Operating
expenses
 
 Total
operating expenses increased to approximately $189,666 for the three months
ended December 31, 2010 from $165,508 for the three months ended December 31,
2009, representing a 14.6% increase. The increase in our total operating expense
for the three months ended December 31, 2010 was primarily attributed to the
legal fees to our U.S. legal counsel. We issued 18,182 shares of common stock
our legal consul for services rendered for which we recorded an expense of
$20,000. The increase in our operating expense was also attributable to
increased selling and salary expenses incurred to support the sales of our new
product Panax and Radix Polygoni Capsule.
 
 Interest
expense
 
 Net
interest expense was $14,834 for the three months ended December 31, 2010
compared to $23,857 for the three months ended December 31, 2009. Interest
expenses are for the loans from related parties including our Chairman and his
companies. The decrease was due to our repayment of portion of related party
loans when cash generated from our operations became available. As the balance
of related party loans decreased, our interest expenses decreased
accordingly.
 
 Income
taxes
 
 All of
our net income for the period ended December 31, 2010 was generated in the PRC.
Our Chinese subsidiaries are subject to a tax rate of 25% on income reported in
the statutory financial statements prepared in compliance with PRC generally
accepted accounting principals after appropriate tax adjustments.
 
 The
income tax expense was $506,526 for the three months ended December 31, 2010, an
increase of $203,971 or 67.42% from the prior comparative period. The increase
was in line with the increase in taxable income for the three months ended
December 31, 2010.
 
 Net
income
 
 As a
result of the above factors, we reported a net income of $1.42 million for the
three months ended December 31, 2010, an increase of $0.64 million or 81.5% from
approximately $785,825 for the three months ended December 31,
2009.
 
 Other
comprehensive income
 
 All of
our operations are in the PRC and the functional currency of our operating
subsidiaries is the RMB.  Translation adjustments resulting from
converting RMB to USD amounted to a gain of $158,601 and a loss of $768 as of
December 31, 2010 and 2009, respectively.  The balance sheet amounts
with the exception of equity at December 31, 2010 were translated at 6.6023 RMB
to 1.00 USD as compared to 6.82702 RMB to 1.00 USD at December 31, 2009. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the periods ended December
31, 2010 and 2009 were 6.6557 RMB and 6.8274 RMB, respectively.
   
 
 Operating
results for the nine months ended December 31, 2010 and 2009
 
 The
results of our operation for the nine months ended December 31, 2010 compared to
the prior comparative periods are as follows:
 
 For
      the nine months endedDecember
      31, 2010
                
                
                December
      31, 2009Revenues
                
                $
                9,782,220
                
                
                $
                5,821,937Cost
      of Sales
                
                
                5,240,369
                
                
                
                3,241,589Gross
      Profit
                
                
                4,541,851
                
                
                
                2,580,348Selling,
      general & administrative expeses
                
                
                729,106
                
                
                
                528,809Other
      income (expenses)
                
                
                (43,280
                )
                
                
                (65,643
                )Provision
      of income taxes
                
                
                1,058,526
                
                
                
                576,993Net
      income
                
                
                2,710,939
                
                
                
                1,408,903Foreign
      currency translation adjustments
                
                
                402,573
                
                
                
                9,870Comprehensive
      income
                
                $
                3,113,512
                
                
                $
                1,418,773
 
 Revenues,
cost of sales and gross profit
 
 Our
revenues increased 68.02% to approximately $9.78 million for the nine months
ended December 31, 2010 from approximately $5.82 million for the nine months
ended December 31, 2009.  The $3.96 million increase was primarily
attributable to the increase in sales of our major products, including
Antihyperlipidemics, Calcium Gluconate Oral Liquid, Anti-bacterial Mouthwash,
and our new product Panax and Radix Polygoni Capsule, supported by our marketing
efforts, increasing brand recognition, effective pricing strategy and our
distribution to previously unaddressed market. For the nine months ended
December 31, 2010, more than 82% of our total sales revenues were generated from
the sales of the above mentioned four products. Approximately 15.32% of our
revenue was generated by our new product Panax and Radix Polygoni Capsule.
Approximately 11.25% of our sales revenue was generated from sales of Yan
Li Xiao Capsule. Due to the termination of the agreement with Sammu, no
sales revenue was generated from Yan Li Xiao since July 2010.
 
 Cost of
sales was approximately $5.24 million for the nine months ended December 31,
2010 compared to $3.24 million for the nine months ended December 31, 2009. The
$1.99 million increase in cost of sales was mainly attributable to an increase
in manufacturing costs which was in line with the increase in the sales, and
which included the costs for our new product Panax and Radix Polygoni Capsule
during the three months ended December 31, 2010 as well as the purchase costs
associated with the Yan Li Xiao product.  Cost of sales as a
percentage of revenue decreased from 55.6% to 53.7% as compared to the prior
comparative period.
   
 
 Gross
profit was approximately $4.54 million for the nine months ended December 31,
2010 compared to $2.58 million for the nine months ended December 31, 2009. The
increase of $1.96 million was mainly attributably to increased sales of our
products. The gross profit as a percent of revenues for the nine months ended
December 31, 2010 increased to 46.43% from 44.32% in the prior comparative
period mainly due to increased sales and relatively stable costs of sales of our
major products.
 
 Operating
expenses
 
 Total
operating expenses increased to approximately $729,106 for the nine months ended
December 31, 2010 from $528,809 for the nine months ended December 31, 2009,
representing an increase $200,297 or 37.8%. The increase in our total operating
expenses was primarily attributable to the write-off of intangible assets
related to Yan Li Xiao’s sales right in September 2010 for which we recorded
general and administrative expenses of $152,401 and the issuance of 250,000
shares of common stock to several employees and consultants under our 2009 Stock
Incentive Plan in the quarter ended September 30, 2010 for which we recorded
general and administrative expenses in the amount of $97,500. In addition, we
also issued 18,182 common shares to our U.S legal consul for services rendered
and we recorded general and administrative expense of $20,000 for these
shares.  The increase in our operating expense was also due to
increased selling and salary expenses incurred to support the sales of our new
product Panax and Radix Polygoni Capsule.
 
 Interest
expense
 
 Net
interest expense, which represented the interest for the loans from related
parties, was $43,280 for the nine months ended December 31, 2010 compared to
$65,643 for the nine months ended December 31, 2009. The decrease of net
interest expense was due to our repayment of portion of related party loans when
cash generated from our operations became available. As the balance of related
party loans decreased, our interest expenses decreased accordingly.
 
 Income
taxes
 
 All of
our net income for the nine months ended December 31, 2010 was generated from
China and is subject to a tax rate of 25% under the Enterprises Income Tax Law
of the PRC. The income taxes were calculated base on the income reported in the
statutory financial statements in compliance with the PRC generally accepted
accounting principals after appropriate tax adjustments.
   
 
 The
income tax expense was $1,058,526 for the nine months ended December 31, 2010.
The increase of $481,533 or 83.4% from prior comparative period was attributed
to the increased taxable income for the nine months ended December 31,
2010.
 
 A
reconciliation of tax at United States Federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
 
 For
      the nine months ended December 31,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)U.S.statutory
      income tax rate
                
                
                35.0
                %
                
                
                35.0
                %Foreign
      tax rate difference between US and China
                
                
                (10.0
                )%
                
                
                (10.0
                )%NOL
      from U.S with 100% valuation allowance
                
                
                3.08
                %
                
                
                4.0
                %Actual
      consolidated income tax rate
                
                
                28.08
                %
                
                
                29.0
                %
  Net
income
 
 As a
result of the above factors, we reported a net income of $2.71 million for the
nine months ended December 31, 2010, an increase of $1.3 million or 92.4% as
compared to approximately $1.4 million for the nine months ended December 31,
2009.
 
 Other
comprehensive income
 
 The
foreign currency translation adjustment which reflects the changes in the
exchange rate of the RMB against the USD amounted to $402,573 and $9,870 as of
December 31, 2010 and 2009, respectively.  The balance sheet amounts
with the exception of equity at December 31, 2010 were translated at 6.6023 RMB
to 1.00 USD as compared to 6.82702 RMB to 1.00 USD at December 31, 2009. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the periods ended December
31, 2010 and 2009 were 6.7491 RMB and 6.82945 RMB, respectively.
 
 Liquidity
and Capital Resources
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
We usually finance our operation and capital expenditures by short-term bank
loans as well as loans from the members of our management group and an entity
owned by our Chairman. As of December 31, 2010, our working capital has improved
to $2,036,845.
 
 Total
current assets increased to approximately $4.04 million as of December 31, 2010
as compared to $1.96 million as of March 31, 2010.  The primary
changes in our current assets during the nine months period were from changes in
cash, accounts receivable, inventory and advance to suppliers. The increase in
cash from $30,066 as of March 31, 2010 to $520,325 as of December 31, 2010 was
because our increased business activities generated more cash to be used in our
operation. The increase of inventory from $109,387 as of March 31, 2010 to
$284,938 as of December 31, 2010 was because we stocked more raw materials to
avoid the potential material shortage in the near future, and stock more
finished goods in support of future sales in the nine months period. The
increase of advances to suppliers from $1,465,713 at March 31, 2010 to
$2.120.470 as of December 31, 2010 was attributed to our financial support to
strengthen the relationship with our raw material suppliers. These advances are
short-term in nature and we believe the risk of uncollectibility was small based
our previous experience.
 
 Our
current liabilities as of December 31, 2010 were $2.00 million as compared to
$1.45 million as of March 31, 2010. The increase in current liabilities was
primarily due to the increase in related party loans from our Chairman in the
amount of $13,184 to fund our working capital need, and an increase in accounts
payable from $101,611 at March 31, 2010 to $125,709 at December 31, 2010 which
represented our purchase of raw materials on account from our suppliers. The
increase in our current liabilities was also due to our increased accrued
expenses which consisted of unpaid legal and accounting fees as of the
December 31, 2010 which were paid in January 2011 and accrued taxes of $805,244
which will be paid in the first quarter of 2011 when we file the tax return with
local tax authority.
   
 
 During
the nine month period ended December 31, 2010, the increase in our long-term
assets was also attributable to the deposit of $1,817,541for land use right
which we acquired.  We are required to pay the purchase price in two
installments. The first installment of RMB 12 million (equivalent to $1,817,541)
was paid in December 2010 and the second installment payment of RMB 8 million
(approximately $1,211,694) will be paid to the third party upon closing of the
transaction which is expected to occur in the first half of 2011.
 
 The
growth of our company will require additional debt and/or equity
financing.  Currently we have budgeted $3.5 million for capital
improvements. We intend to pursue additional debt financing which could be
secured by our property and equipment and approach international equity markets
for additional debt and/or equity financing.
 
 Discussion
of Cash Flow
 
 Comparison
of cash flows results for the fiscal nine months ended December 31, 2010 and
2009 is summarized as follows:
 
 For
      the nine months ended December 312010
                
                
                2009Cash
      flow from operating activities
                
                $
                2,244,754
                
                
                $
                701,643Cash
      flow from investing activities
                
                $
                (1,778,015
                )
                
                $
                (175,710
                )Cash
      flow from financing activities
                
                $
                13,184
                
                
                $
                (353,331
                )
 
 Operating
activities
 
 Cash
flows provided by operating activities for the nine months ended December 31,
2010 amounted to $2,244,754, which consisted of net income of $2,710,939, added
back noncash adjustments of $582,636 which represented depreciation and
amortization expenses of $269,455, accrued interest to related parties of
$43,280 as well as stock issued for services of $117,500, and offset by net
changes in operating assets and liabilities, which primarily included increase
in advances to suppliers of $591,960 to maintain good relationship with the
suppliers and increase in inventory of $168,110 to stock more raw materials to
avoid potential material shortage in the near future and more finished goods in
support of future sales, as well as an increase in our accounts receivables of
$721,922 which represented the temporarily uncollected amounts from our credit
sales.
 
 Cash
provided by operating activities during the nine months ended December 31, 2009
amounted to $701,643, which consisted of net income of $1,408,903, added back
noncash adjustments of $385,827 which represented depreciation and amortization
expenses of $261,847, amortization of stock compensation of $38,250, accrued
interest to related parties of $65,730 as well as stock issued for services of
$20,000,  and offset by net changes in operating assets
and liabilities due to expanded operating activities, including increase in
accounts receivables in the amount of $290,278, increase in inventory of
$298,337, increase in prepaid expenses of $3,900 which represented prepaid rent
expenses for our New York office, increase in advances to suppliers in the
amount of $478,063 to maintain good relationship with the suppliers, as well as
a decrease in accrued liabilities in the amount of $55,808 primarily due to our
decreased tax liabilities and accrued wages and salaries as compared with the
prior comparative period, offset by an increase in accounts payable of $33,299
which represented our purchase of materials on account from
suppliers.
   
 
 Investing
activities
 
 Net cash
used in investing activities for the nine months ended December 31, 2010
amounted to $1,778,015 which represented deposit we paid for a land use
right.  We are required to pay the total purchase price in two
installments. The first installment of RMB 12 million (equivalent to $1,817,541)
was paid in December 2010 and the second installment payment of RMB 8 million
(approximately $1,211,694) will be paid upon closing of the transaction in the
near future.
 
 Cash used
in investing activities amounted to $175,710 in the nine months ended December
31, 2009, which consists primarily of payment to purchase sales right for our
Yan Li Xiao product.
 
 Financing
activities
 
 Cash
flows provided by financing activities amounted to $13,184 in the nine months
ended December 31, 2010, which represented loans from related party to fund our
working capital needs.
 
 Cash used
in financing activities amounted to $353,331 for the nine months ended December
31, 2009, which represented our repayment of loans to related
parties.
 
 Off-Balance
Sheet Arrangements
 
 As of the
date of this report, we do not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors. The term "off-balance sheet arrangement" generally means
any transaction, agreement or other contractual arrangement to which an entity
unconsolidated with us is a party, under which we have: (i) any obligation
arising under a guarantee contract, derivative instrument or variable interest;
or (ii) a retained or contingent interest in assets transferred to such entity
or similar arrangement that serves as credit, liquidity or market risk support
for such assets.
 
 Inflation
 
 Inflation
has not had a material impact on our business and we do not expect inflation to
have a material impact on our business in the near future.
 
 
 
 
 
 ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Not
applicable.
 
 ITEM
4T.  CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
 
 As of the
end of the period covered by this report, the Company carried out, under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) in ensuring that information required to be disclosed by
the Company in its reports is recorded, processed, summarized and reported
within the required time periods.  In carrying out that evaluation,
management identified a material weakness (as defined in Public Company
Accounting Oversight Board Standard No. 2) in our internal control over
financial reporting regarding a lack of adequate segregation of
duties.
 
 Accordingly,
based on their evaluation of our disclosure controls and procedures as of
December 31, 2010, the Company’s Chief Executive Officer and its Chief Financial
Officer have concluded that, as of that date, the Company’s controls and
procedures were not effective for the purposes described above.
 
 Management
is presently seeking to augment the Company’s accounting and financing personnel
resources by retaining more U.S. GAAP knowledgeable accounting staff, which will
enable the Company to potentially implement adequatesegregation of duties and remedy any material weakness in its
internal controls.
  Changes
in Internal Control Over Financial Reporting
 
 Other
than as disclosed above, there were no changes in our internal controls over
financial reporting identified in connection with the evaluation that occurred
during the three months ended December 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
   
 
 PART
II - OTHER INFORMATION
 
 Item
1.     Legal Proceedings
 
 From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. We are currently not aware of any such
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse affect on our business, financial condition or operating
results. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may
harm business.
 
 Item
2.     Unregistered Sales of Equity Securities and Use
of Proceeds
 
 None.
 
 Item
3.     Defaults Upon Senior Securities
 
 None.
 
 Item
4.     Removed and Reserved
 
 Item
5.     Other Information
 
 None.
 
 Item
6.                        Exhibits
 
 (a)  Exhibits
 
 Exhibit
      Number
                Description
      of Exhibit31.1*
                Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2*
                Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1*
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer).32.2*
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer).
  _________________
 
 * Filed
herewith
   
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Tongli
      Pharmaceuticals (USA), Inc.February
      14, 2010
                  By:
                  /s/
      Mingli YaoMingli
      Yao
                    Chief
      Executive Officer
                    (Principal
      Executive Officer)February
      14, 2010
                  By:
                  /s/ Li
      LiLi
      Li
                    Chief
      Financial Officer
                    (Principal
      Accounting
Officer)